Good Governance and Good Health: Big Government vs. Small Government

Those who argue in favor of small, nonintrusive government usually pose their beliefs within the context of a right to freedom to live as one chooses. Data is accumulating suggesting that such liberty is often associated with the tendency to die at an early age.

Certainly in the United States, but also worldwide, even in the developing nations, noncommunicable diseases have become the dominant health problem. These are usually associated with poor health habits—particularly, to poor diet choices. This trend is costly and deadly. Mark Bittman provides some context in a New York Times article: How to Save a Trillion Dollars.

"....Type 2 diabetes is projected to cost us $500 billion a year come 2020, when half of all Americans will have diabetes or pre-diabetes. Need I remind you that Type 2 diabetes is virtually entirely preventable?"

Natalie Wolchover produced an article that illustrates the efficacy of measures taken to encourage better lifestyle choices. Her example is New York City.

"While life expectancy in many parts of the United States is dropping, it has increased by 10 years in Manhattan since 1987. Researchers largely attribute that rise — the fastest in the nation — to a crackdown by the New York City health department on unhealthy behaviors."

The importance of living healthy is also demonstrated.

"Mirroring the national average, some 87 percent of deaths in the Big Apple result from noncommunicable diseases — preventable ailments such as heart disease and lung cancer — but the number of yearly deaths from those causes is steadily falling. The IHME researchers determined that more than 60 percent of the increase in New Yorkers' life expectancy since 2000 can be attributed to reductions in heart disease, cancer, diabetes and stroke."

What steps were taken to encourage better health habits?

"Lead researcher Ali Mokdad said the reduction is largely thanks to aggressive efforts by city health officials to simply take away unhealthy choices from residents. The health department has, for example, banned trans fats, prohibited smoking in public spaces and hiked taxes on cigarettes. It has also rolled out hundreds of miles of new bicycle lanes, mandated the use of calorie labels on menus in chain restaurants and plastered posters up in subways with information about the risks of obesity and the benefits of preventive health services."

A ten year increase in lifespan seems worth such a small infringement on one’s freedom.

It is popular in conservative circles to mock attempts to promote healthy eating habits for our children as silly, worthless, or even tyrannical. Sabrina Tavernise wrote in the New York Times of the effort to limit access to unhealthy foods while at school—an effort that public health experts have been pleading for.

"The study published...in Pediatrics, found a strong association between healthier weight and tough state laws regulating food in vending machines, snack bars and other venues that were not part of the regular school meal programs. Such snacks and drinks are known as competitive foods, because they compete with school breakfasts and lunches."

The study tracked the weight of samples of children in 40 states between 2004 and 2007 as they moved from fifth to eighth grade.

"Students who lived in states with strong laws throughout the entire three year period gained....roughly 2.25 fewer pounds for a 5-foot-tall child, than adolescents in states with no policies."

"The study also found that obese fifth graders who lived in states with stronger laws were more likely to reach a healthy weight by the eighth grade than those living in states with no laws."

The laws limit access to unhealthy food for a fraction of a child’s day over three years of his life. Imagine the benefits that would accrue if limited access persisted over a lifetime.

There are some rather startling data that indicate lifestyle choices can dramatically limit longevity. This source provides a plot of life expectancy at age 50 by county for both women and men.

Life expectancies for men at age 50 vary by about 10 years; those of women vary by about 18 years. The strong regional correlations suggest that there are cultural factors at work, with southern states often indicated to be regions where obesity is high and eating habits are poor.

The sources quoted here indicate that minor changes in lifestyle could add up to10 years to an average person’s lifespan. Government intervention has been shown to be effective in improving health prospects. Unfortunately, the regions most in need of intervention are the ones least likely to welcome it.

Who Kills? Congress Kills: Forbidding Research on Gun Violence

The outrage continues to grow after the Newtown massacre. One might have thought that nothing could top the deranged ranting of NRA officials in attempting to place blame for mass murder on everything and everybody rather than on the easy availability of weapons designed specifically for mass murder. But one would be mistaken. The Talking Points Memo alerted us to the fact that the crazies in the NRA have infected our Congress with similarly demented allies by provided a link to an article in the Journal of the American Medical Association: Silencing the Science on Gun Research.

Discussion of gun control ranges from forbidding possession to total freedom of possession. Neither extreme is practical, but there are many intermediate issues that could lead to controls with minimal impact on gun owners while providing significant reductions in injuries and deaths. The authors, Arthur L. Kellermann and Frederick P. Rivara, are doctors who are disturbed by the actions taken by federal and state legislators to limit not only the study of means to limit violence, but also to limit the collection of data on gun violence. They provide this perspective:

"Injury prevention research can have real and lasting effects. Over the last 20 years, the number of Americans dying in motor vehicle crashes has decreased by 31%. Deaths from fires and drowning have been reduced even more, by 38% and 52%, respectively. This progress was achieved without banning automobiles, swimming pools, or matches. Instead, it came from translating research findings into effective interventions."

Given this potential for "interventions" to limit injuries and deaths associated with firearms, Congress leaped into action to prevent such studies.

"But in 1996, pro-gun members of Congress mounted an all-out effort to eliminate the National Center for Injury Prevention and Control at the Centers for Disease Control and Prevention (CDC). Although they failed to defund the center, the House of Representatives removed $2.6 million from the CDC's budget—precisely the amount the agency had spent on firearm injury research the previous year."

"To ensure that the CDC and its grantees got the message, the following language was added to the final appropriation: ‘none of the funds made available for injury prevention and control at the Centers for Disease Control and Prevention may be used to advocate or promote gun control’."

"Precisely what was or was not permitted under the clause was unclear. But no federal employee was willing to risk his or her career or the agency's funding to find out. Extramural support for firearm injury prevention research quickly dried up."

When other agencies had the temerity to study issues related to gun violence, Congress again responded.

"Two years later, Congress extended the restrictive language it had previously applied to the CDC to all Department of Health and Human Services agencies, including the National Institutes of Health."

Currently, suicide rates among military personnel exceed the rate of death from combat. Nevertheless, the Armed Services had restrictions placed on them that limit the ability to deal with soldiers who might be deemed suicidal.

"Earlier this month, an article by 2 retired generals—a former chief and a vice chief of staff of the US Army— asked Congress to lift a little-noticed provision in the 2011 National Defense Authorization Act that prevents military commanders and noncommissioned officers from being able to talk to service members about their private weapons, even in cases in which a leader believes that a service member may be suicidal."

The good doctors are particularly incensed by the attempts to punish doctors who might be "too aggressive" in dealing with gunshot wounds.

"In 2011, Florida's legislature passed and Governor Scott signed HB 155, which subjects the state's health care practitioners to possible sanctions, including loss of license, if they discuss or record information about firearm safety that a medical board later determines was not ‘relevant’ or was ‘unnecessarily harassing.’ A US district judge has since issued a preliminary injunction to block enforcement of this law, but the matter is still in litigation. Similar bills have been proposed in 7 other states."

And what has been accomplished by Congress effectively forbidding firearm injury prevention research?

"Since Congress took this action in 1997, at least 427 000 people have died of gunshot wounds in the United States, including more than 165 000 who were victims of homicide. To put these numbers in context, during the same time period, 4586 Americans lost their lives in combat in Iraq and Afghanistan."

One of the daft notions being promoted by the NRA is that violence would be limited if more people possessed guns and carried them around; the Newtown tragedy could have been averted by having armed gunman stationed in all our schools—and presumably in all our theaters, restaurants, churches, bars, malls, work places..... This issue was addressed in an article written just before the Newtown event: Guns, Armed Citizens, Crime, and Massacres. In it were data on gun violence that are even more relevant today (provided by the Brady Campaign to Prevent Gun Violence).

The Solar Power Era Has Begun

The potential of renewable energy has seemed always to be something to be realized in the future; not necessarily a distant future, but it has always seemed to be down the road a ways. It appears that while attention has been focused elsewhere, the future has arrived. Wind-generated power has been following an expected slow but inexorable path to greater contributions. Meanwhile, solar power has followed a rather different path.

Cost has always been the issue with solar power. To take hold in this country, costs of solar-generated power would have to become more competitive with traditional sources. Consequently, much research was concentrated on advanced techniques that could prove more efficient and less costly. Meanwhile, China made a big push in renewable energy and provided large sums of money to support the effort. The result was not so much new techniques, as a vast expansion in production capability for state-of-the-art solar panels. This produced a glut of product on the market that drove the prices of panels down considerably. This undercut those research efforts on more advanced techniques, which may have not been a good result, but it also changed the cost equation and made solar power more competitive and more acceptable.

For homeowners, there are plans in place where a rooftop system can be installed with little or no upfront cost. The customer essentially buys the system on time with a long-term loan and pays it off with the savings from the electricity bill. The speed with which the investment is covered by savings depends on the local cost of electricity, but terms of 4-5 years are being quoted for breakeven; and from that point on one is turning a profit from reduced energy costs and, perhaps, from excess generation capability.

What is striking is not only the potential for savings for an individual with a rooftop system, but the total amount of energy that could be generated if these systems were to become common across the nation.

A fascinating article was provided in Bloomberg Businessweek by Ken Wells. It details the potential of solar power and discusses some of the difficulties that must be overcome if that potential is to be reached.

"Over the past five years the price of photovoltaic panels has plummeted 75 percent, due largely to a glut of Chinese-made panels. The fall in prices rendered technically advanced photovoltaic panels, like those produced by Solyndra and other U.S. companies, too expensive to compete. But cheap panels have been a godsend for consumers...."

"Nationally, the average cost of residential installations—including hardware, permits, and labor—has plummeted from $9 a watt in 2006 to $5.46. Averaging in commercial industrial installations, the national installed price plummets to $3.45 a watt, says the Solar Energy Industries Association, a Washington-based trade group."

The benefits from solar installations are greater where electricity is expensive. Wells describes the situation facing one homeowner in Hawaii.

"Monthly electric bills for his modest 1,750-square-foot abode run about $400—at 32.6¢ per kilowatt hour, the highest in the nation. With his rooftop system, installed by a third-party contractor, he’ll generate enough of his own power to lower that rate to 7.3¢ per kilowatt hour for the next 20 years. That’s a savings, he says, of $120,000 over that period."

With its high energy costs, regions in Hawaii have been overwhelmed by requests for solar installation permits. This has generated resistance from stakeholders. Utility companies whose profit basis is determined by how much power they deliver have placed limits on how much consumer-generated power they will allow on their grid, claiming that the system could become unstable if limits were not imposed. Government agencies have also added viscosity and expense with complex approval processes for permits. Wells points out that since the US does not have a specific national policy in place

"....the U.S. has more than 18,000 jurisdictions at the state and local level that have a say in how rooftop solar is rolled out, according to the U.S. Department of Energy."

A procedure that could be permitted and installed in days often requires months to accomplish.

Germany has perhaps the most ambitious renewable energy plans in the world, and should serve as an example for our country.

"The hidden costs of obtaining permits and regulators’ approval to install rooftop panels is a big reason the U.S. lags behind Germany, which leads the world in rooftop installations, with more than 1 million. The price of installed rooftop solar in Germany has fallen to $2.24 per watt. In fact, on a sunny day in May, rooftop provided all of Germany’s power needs for two hours. "This is a country on latitude with Maine," says Dennis Wilson, president of the Mid-Atlantic Solar Energy Industries Association, a solar-installer trade group. ‘Germany is showing us what’s possible—if we can just get our act together’."

Other countries have also been investing heavily in solar.

"Worldwide, the picture is even more positive. Australia projects that 10 percent of its 8 million houses will have rooftop systems within the next 12 months—most of that growth coming in the past three years. European rooftop installations continue to outpace those in the U.S., even as some countries begin to pare subsidies that have helped spur a continental rooftop boom. Including residential, commercial, and industrial-scale projects, the world had installed about 67 gigawatts of photovoltaic power at the end of last year—up from just 1.5 gigawatts in 2000."

It is the ultimate potential of solar power that is so intriguing.

"Based on U.S. Census Bureau data, about 100 million U.S. residential units could physically hold rooftop systems one day, generating by one estimate 3.75 trillion kilowatt hours of electricity a year. In 2011, total U.S. electrical generation from all sources was about 4 trillion kilowatt hours...."

The current photovoltaic technology appears capable of providing nearly all of our current electricity needs if it were widely implemented. That has to be exciting to environmentalists, but perhaps not to those who earn a living building and running coal and natural gas fueled generation plants.

How this plays out could become very interesting. Clearly, whatever modifications are necessary to the electrical grid to take advantage of power sources that are variable in both time and location will have to be made. Some backup gas-powered generation will probably be required to even out the power available, but how do today’s big-time operators exist in an environment where they are merely providing a backup capability? And why would anyone still consider making the massive investments required for nuclear energy?

This is the first chapter of a long story. Many issues will arise and require attention. For now let us be comforted by the fact that a future where all or nearly all power comes from renewable sources seems attainable.

A Brighter Future for Manufacturing

The CEO of GE, Jeffrey Immelt, has written on the subject of outsourcing production of goods to other countries that it is:
"....quickly becoming mostly outdated as a business model for GE Appliances."

That rather encouraging remark is provided in an article by Charles Fishman in The Atlantic: The Insourcing Boom. Fishman provides background on GE’s changing views on domestic manufacturing.

GE has had a large manufacturing facility in Louisville, Kentucky called Appliance Park. Begun in 1951, it grew to a peak employment of 23,000 in 1973 before a long downturn began. Hourly workers numbered only 1,863 in 2011. GE had planned on selling the facility along with its appliance business in 2008, but could find no takers. Immelt has clearly had a change of heart since then.

"Just four years after he tried to sell Appliance Park, believing it to be a relic of an era GE had transcended, he’s spending some $800 million to bring the place back to life. ‘I don’t do that because I run a charity,’ he said at a public event in September. ‘I do that because I think we can do it here and make more money’."

GE is in the process of bringing back home products that have been made in other countries.

"On February 10, Appliance Park opened an all-new assembly line in Building 2—largely dormant for 14 years—to make cutting-edge, low-energy water heaters. It was the first new assembly line at Appliance Park in 55 years—and the water heaters it began making had previously been made for GE in a Chinese contract factory."

"On March 20, just 39 days later, Appliance Park opened a second new assembly line, this one in Building 5, to make new high-tech French-door refrigerators....These refrigerators are the latest versions of a style that for years has been made in Mexico."

"Another assembly line is under construction in Building 3, to make a new stainless-steel dishwasher starting in early 2013. Building 1 is getting an assembly line to make the trendy front-loading washers and matching dryers Americans are enamored of; GE has never before made those in the United States. And Appliance Park already has new plastics-manufacturing facilities to make parts for these appliances...."

The reason for this decision by GE is based on its demonstration that these types of goods can be designed and produced better and cheaper in the US.

"So a funny thing happened to the GeoSpring [water heater] on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up."

"GE wasn’t just able to hold the retail sticker to the ‘China price.’ It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299."

More detail on GE’s experiences and Fishman’s description can be found in Manufacturing Returns Home and Companies Relearn How to Make Things.

GE was able to build a better product more cheaply by reintroducing the product design people to the product production people, including line workers. By working together on the design and production they relearned how to make things efficiently.

"GE is rediscovering that how you run the factory is a technology in and of itself. Your factory is really a laboratory—and the R&D that can happen there, if you pay attention, is worth a lot more to the bottom line than the cost savings of cheap labor in someone else’s factory."

Other companies seem to be reaching the same conclusion as GE. For example:

"The transformation under way at Appliance Park is mirrored in dozens of other places, with Whirlpool bringing mixer-making back from China to Ohio, Otis bringing elevator production back from Mexico to South Carolina, even Wham-O bringing Frisbee-molding back from China to California."

The traditional paradigm of focusing on mass production efficiencies and low labor costs had favored remote manufacture in low-wage areas. Product demands are now shifting in a fundamental way that favors local design and production. Low per-unit costs are being superseded by the requirements for rapid design turn around, innovation, and product specialization for specific markets.

"Just a few years ago, the design of a new range or refrigerator was assumed to last seven years. Now, says Lou Lenzi, GE’s managers figure no model will be good for more than two or three years. This phenomenon is not limited to GE. The feverish cycle of innovation and new products beloved in the electronics world has infected all kinds of consumer categories. Products that once seemed mature—from stoves to greeting cards—are being reinvigorated with cheap computing technology. And the product life cycle is speeding up—many goods get outflanked by ‘smarter’ versions every couple of years, or faster."

"The addition of high-tech components to everyday items makes production more complicated, and that means U.S. production is more attractive, not just because manufacturers now have more proprietary technology to protect, but because American workers are more skilled, on average, than their Chinese counterparts. And the short leap from one product generation to the next makes the alchemy among engineers, marketers, and factory workers all the more important."

It has become dogma in some circles to write off manufacturing as an area for national investment. This viewpoint is based on the ever-increasing productivity that yields fewer and fewer jobs per unit output. If not many jobs can be created, we should invest in service industries because they will ultimately provide greater employment—or so the argument goes.

Laura D’Andrea Tyson provided an excellent counter to that contention in a New York Times article: Why Manufacturing Still Matters.

Not all jobs are created equal. We have lost employment mainly in the mid-level jobs and traded them for lower wages in service areas.

"....on average manufacturing jobs are high-productivity, high value-added jobs with good pay and benefits. Even though the premium on manufacturing wages has been declining over time, it remains significant. Between 2005 and 2010, average weekly earnings in manufacturing were about 21 percent higher than average weekly private non-agricultural earnings."

GE’s experience indicated that by continuing to manufacture in the factories of others they were beginning to lose not only the capability to produce on their own, but also the tools needed for innovation and design.

"....manufacturing matters because of its substantial and disproportionate role in innovation. Few economists dispute the importance of innovation to the growth of living standards, but few acknowledge the strong links between innovation and manufacturing."

"A strong manufacturing sector supports the key building blocks of the nation’s innovation ecosystem — its skilled scientific, engineering and technical work force, its research and development, its ability to identify technical challenges and provide creative solutions."

"Although manufacturing is only about 11 percent of gross domestic product, it employs the majority of the nation’s scientists and engineers, and it accounts for 68 percent of business R.&D. spending, which in turn accounts for about 70 percent of total R.&D. spending."

"American leadership in science and technology remains highly dependent on R.&D. investment by manufacturing companies, and the social returns to such investment are substantial, far exceeding the returns to the companies that fund it."

An article in The Economist also discusses the changes occurring in the manufacturing sector. It provides this chart for perspective.

The claim is made that there is a natural trend towards less manufacturing as a country becomes wealthier. This data is not exactly consistent with that assumption. Countries like Germany and Japan have to be considered wealthy and they have chosen far different paths. Manufacturing moves to lower wealth countries when it is seeking the lowest wage. That trend seems to be over. As the cost of labor becomes less important and technology and innovation become more important, perhaps the manufacturing of the future will be directly correlated with a country’s wealth. We need to be ready to play in that game.

The article also provides us with further insight into the importance of manufacturing to the economy by indicating that we undercount the employment that is associated with that sector.

"If one counts the workers in supporting services and those who provide raw materials, total American manufacturing employment was 17.2m in 2010, rather than the official 11.5m."

We should be doing everything we can to support our manufacturing sector. We must find ways to create higher paying jobs. It is better to create one job that earns $24 an hour than three jobs at $8 an hour that require subsidies from Food Stamps, Medicaid, and the Earned Income Tax Credit for survival.

Manufacturing Returns Home and Companies Relearn How to Make Things

It seems that a number of companies that have been mainly producing goods overseas and shipping them back home for sale are now reconsidering the efficacy of that practice. That is the story that Charles Fishman tells so convincingly in an article in The Atlantic: The Insourcing Boom. Fishman generates interest and enthusiasm with this lede:
"After years of offshore production, General Electric is moving much of its far-flung appliance-manufacturing operations back home. It is not alone. An exploration of the startling, sustainable, just-getting-started return of industry to the United States."

Most discussions of onshore versus offshore manufacturing have focused on the rising wages in China, the falling wages in the US, and the costs of transportation as major drivers. Fishman tells us that there are more fundamental developments at work that that are beginning to favor manufacturing at home.

Fishman claims that the traditional view of manufacturing as an optimization of mass production advantages coupled with minimized labor costs was too simple a viewpoint that neglected consideration of all the costs associated with offshoring.

"Harry Moser, an MIT-trained engineer, spent decades running a business that made machine tools. After retiring, he started an organization called the Reshoring Initiative in 2010, to help companies assess where to make their products. ‘The way we see it,’ says Moser, ‘about 60 percent of the companies that offshored manufacturing didn’t really do the math. They looked only at the labor rate—they didn’t look at the hidden costs.’ Moser believes that about a quarter of what’s made outside the U.S. could be more profitably made at home."

The rush to move production overseas took on the characteristics of a fad where people acted without considering all the issues. The problems with logistics, communication, and transportation where often not properly evaluated as a cost. But Fishman tells us that is not the major issue overlooked by the companies. What they did not account for was the diminished capability that inevitably followed entrusting manufacturing to another entity.

"For years, too many American companies have treated the actual manufacturing of their products as incidental—a generic, interchangeable, relatively low-value part of their business. If you spec’d the item closely enough—if you created a good design, and your drawings had precision; if you hired a cheap factory and inspected for quality—who cared what language the factory workers spoke?"

Fishman provides an exquisite description of this attitude.

"This sounded good in theory. In practice, it was like writing a cookbook without ever cooking."

Fishman uses the experience and conclusions of GE to make his case.

"It happens slowly. When you first send the toaster or the water heater to an overseas factory, you know how it’s made. You were just making it—yesterday, last month, last quarter. But as products change, as technologies evolve, as years pass, as you change factories to chase lower labor costs, the gap between the people imagining the products and the people making them becomes as wide as the Pacific."

"What is only now dawning on the smart American companies, says Lenzi [of GE], is that when you outsource the making of the products, ‘your whole business goes with the outsourcing’."

"In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation."

These considerations lead Fishman to suggest this bold, but inevitable, conclusion:

"....the offshoring rush of the past decade or more—one of the signature economic events of our times—may have been a mistake."

He quotes Jeffrey Immelt, the current CEO of GE, to support a changing view of outsourcing.

"Immelt made a startling assertion. Writing in Harvard Business Review in March, he declared that outsourcing is ‘quickly becoming mostly outdated as a business model for GE Appliances’."

What has changed for GE is that they have demonstrated to themselves that by bringing the manufacturing back home, and by designing the product within the context of having to actually manufacture the product, they can produce appliances that are better and cheaper. Fishman uses their experience in producing a state-of-the-art water heater called a Geospring. This device incorporated a heat pump to partially offset the demand for external energy, but also added considerably to the complexity of producing the water heater. It had been manufactured in China

GE assembled a diverse team to address making the product in their home factories.

"The GeoSpring....had design engineers assigned to it, but also manufacturing engineers, line workers, staff from marketing and sales—no management-labor friction, just a group of people with different perspectives, tackling a crucial problem."

It was soon discovered that the practice of designing at home and manufacturing abroad had created what was described as a "mess."

"It was so hard to assemble that no one in the big room wanted to make it. Instead they redesigned it. The team eliminated 1 out of every 5 parts. It cut the cost of the materials by 25 percent. It eliminated the tangle of tubing that couldn’t be easily welded. By considering the workers who would have to put the water heater together—in fact, by having those workers right at the table, looking at the design as it was drawn—the team cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville."

"In the end....not one part was the same."

"So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up."

"GE wasn’t just able to hold the retail sticker to the "China price." It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299."

GE has an enormous facility in Kentucky where it has manufactured appliances for over 50 years. It was at one time scheduled to be sold off—if possible. Now it is back up and humming.

"Back in the ’60s, Appliance Park was turning out 250,000 appliances a month. The assembly lines there today are turning out almost as many—with at most one-third of the workers."

"GE’s appliance unit does $5 billion in business—and today, 55 percent of that revenue comes from products made in the United States. By the end of 2014, GE expects 75 percent of the appliance business’s revenue to come from American-made products like dishwashers, water heaters, and refrigerators...."

GE is not the only company that has reconsidered its manufacturing strategy.

"Thomas Mayor, a senior adviser with Booz & Company who specializes in manufacturing strategy, says that in industry after industry, he is seeing the same kind of reassessment GE has made."

One thing that is clearly highlighted by Fishman’s account is that for GE to have had the manufacturing successes that it has had, a modern version of union-management interaction had to be in place. The confrontational dynamic so common years ago would not have worked. GE utilized what Fishman referred to as "lean" manufacturing, an approach he attributed to Toyota.

"In the simplest terms, an assembly line is a way of putting parts together to make a product; lean production is a way of putting the assembly line itself together so the work is as easy and efficient as possible."

Such an approach requires the input and cooperation of all involved, including union assembly line workers. Management must welcome that input and workers must provide appropriate advice even if it means eliminating jobs in the process. This is the dynamic that Fishman describes as being in action in the GE plants. This is a manner of doing business that is quite common in European countries, but has been rare in the US.

When Walter Reuther and his United Auto Workers first gained recognition by the auto manufacturers, he set out to establish the principle that union workers had a right to a certain fraction of the income earned by the companies. If that had been agreed upon, both labor and management would have had a stake in manufacturing efficiency and profitability. The automobile companies wanted nothing to do with that and insisted on management autonomy. Consequently, that became the example for other industries to follow and we ended up with decades of unfruitful confrontations between labor and management as each acted in their individual self interests rather than as a single partnership.

If Reuther had succeeded with his initial goal, the history of the past several decades might have been quite different, and we might have found ourselves in a much better place today than we are currently.

The Minimum Wage and Income Inequality

Data coming out of Britain indicates that there is a correlation between an elevated minimum wage and diminished income inequality. This is exciting news.

The continually growing level of income inequality in the United States has become a fundamental challenge for our political and economic systems. At present, it is difficult to envisage a systemic approach that could rapidly reverse this phenomenon. One simple approach that seemed to hold promise was to significantly raise the minimum wage.

Usually, such a move is viewed in terms of keeping the lowest paid above the poverty line. However, it is possible that a significant increase could cause a restructuring of a broad section of the wage structure. The current federal minimum wage is set at $7.25 per hour. If it was raised to $10 then anyone currently making between $7.25 and $10 would see a raise, but they would also be expected to pressure their employers to recognize that their efforts should continue to earn a premium over the minimum. How far such a ripple effect might propagate is unknown. New auto workers have starting salaries of about twice the current minimum. Would the auto companies feel compelled—or actually be compelled—to increase the premium they pay over the minimum? It would certainly be interesting to find out.

Economists stick by the supply and demand curves they studied in school and have assumed that a raise in wages must be accompanied by a fall in employment. But if one considers the economic effects of a raise in pay, the situation is actually quite complex. An employer who is required to pay a higher wage suffers a drop in profit, but the increase in wages of the employees acts as an economic stimulus. How this balances out for the economy as a whole might depend on the size of the wage increase, what businesses are affected, and local economic conditions.

In The Effect of Raising the Minimum Wage: Is There a Market for Labor? we discussed a famous, but controversial, study that indicated raising the minimum wage did not have a discernible effect on the employment level. An article in The Economist discusses the same data and more recent findings and suggests that the conventional wisdom is now shifting in favor of a "reasonable" minimum wage being a good thing.

"Some of the newest studies suggest firms employ a variety of strategies to deal with a higher minimum wage, from modestly raising prices to saving money from lower turnover."

"Bastions of orthodoxy, such as the OECD, a rich-country think-tank, and the International Monetary Fund, now assert that a moderate minimum wage probably does not do much harm and may do some good. Their definition of moderate is 30-40% of the median wage. Britain’s experience suggests it might even be a bit higher."

While economists continue to argue over their numbers and conclusions, Britain has provided some additional evidence that seems to suggest the ripple effect on the wage distribution discussed above is real.

"The most striking impact of Britain’s minimum wage has been on the spread of wages. Not only has it pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality. Wage gaps in the bottom half of Britain’s pay scale have shrunk sharply since the late 1990s. A new study by a trio of British labour-market economists (including one at the Low Pay Commission) attributes much of that contraction to the minimum wage. Wage inequality fell more for women (a higher proportion of whom are on the minimum wage) than for men and the effect was most pronounced in low-wage parts of Britain."

So—raising the minimum wage might have little or no effect on employment, but will diminish income inequality. What then is a "reasonable" minimum wage? The article also provided this chart to further the discussion.

If the US raised its minimum wage to 46% of median like Britain, it would be $8.78. If we copied France and set it at 60%, it would rise to $11.44. Is that an outrageous number? Perhaps not. In Why Not Raise the Minimum Wage to $12 per Hour we discussed a study of Walmart (average wage $8-$9) that indicated the effect of raising the minimum wage for its employees to $12 could be accommodated by a mere 1.1% rise in the cost of its products. Other companies and industries would be affected more or less than Walmart, but the idea of a dramatic rise in the minimum wage is not outrageous.

A significant boost in the minimum wage may be the only leverage we can bring to bear on income inequality.

Guns, Armed Citizens, Crime, and Massacres

Possession of guns and gun control are complex issues because we consist of two nations, culturally and geographically separated. It is not too gross a simplification to address these nations as the rural and the urban. Guns were introduced into cities for the sole purpose of committing crimes. Many residents live in fear as a result. Rural areas have a long history of gun possession and residents have trouble even conceiving that they should be associated with criminality. Instead, guns are viewed as keepers of the peace, and it is assumed that all would be safer if everyone was armed. These diverse and irreconcilable viewpoints were discussed in Two Americas, Two Gun Cultures.

The rural experience with guns may be well-grounded. Where gun possession is common, the incidence of crime might be lower as a result. But does that mean that these traditions and habits might be profitably applied universally? Jeffrey Goldberg attempts to make that argument in an article in The Atlantic: The Case for More Guns (and More Gun Control).

Statistics are the weapons gun-control proponents and gun-rights proponents hurl at each other. Before Goldberg makes a gun-rights argument, let’s provide some data accumulated by the gun-control side.

All the data was obtained from the Brady Campaign to Prevent Gun Violence except for the last entry which was provided by CNN.

Goldberg summarizes his intent with this lede:

"How do we reduce gun crime and Aurora-style mass shootings when Americans already own nearly 300 million firearms? Maybe by allowing more people to carry them."

Goldberg devotes a good part of his article to the mass killings that make headlines. He makes the claim that if firearms were possessed by the potential victims so they could have responded with gunfire, much of the killing would have been prevented. This logic assumes that a large percentage of our population would walk around carrying a loaded weapon and bring it with them into churches, theaters, schools, and every place of work and recreation.

It would seem that such a fundamental change in philosophy ought to be generated by a major change in outcomes. The types of massacres that Goldberg refers to are actually few and far between. There may be a few dozen people killed per year in these dramatic events. The number of guns in the country are many, but the Brady Campaign tells us that only about one-fourth of adults possess a gun. Consequently, to be effective at stopping these rare events a lot more people would have to be carrying around a weapon all the time. If half the adults possessed and carried weapons would that mean that half the massacre deaths could be averted? But does that also mean that the total number of deaths from guns would also go up proportionally. Would 31,593 deaths become 63,186 deaths annually? Probably not, but the increase in deaths and injuries from accidents alone would dwarf any benefit accrued in these isolated events.

Goldberg goes on to argue that armed citizens are less likely to be victims of crime. He suggests that data exists indicating firearms are used defensively up to 100,000 times each year. He implies that this resulted in aborted attempts at crime. It is certainly true that waving a gun at an unarmed assailant would be quite effective. But there are many potential outcomes, and all sorts of data available. The Brady campaign provides its own insight on the matter.

"A 2009 study found that people in possession of a gun are 4.5 times more likely to be shot in an assault."

And what do these possessors of guns do with their time when they are not fending off a potential assault?

"Guns are used to intimidate and threaten 4 to 6 times more often than they are used to thwart crime."

Goldberg attributes a change in the character of home burglaries to the probability that the homeowner might be armed.

"....only 13 percent of burglaries in America occur when the occupant is home. In Britain, so-called hot burglaries account for about 45 percent of all break-ins. Kleck and others attribute America’s low rate of occupied-home burglaries to fear among criminals that homeowners might be armed. (A survey of almost 2,000 convicted U.S. felons, conducted by the criminologists Peter Rossi and James D. Wright in the late ’80s, concluded that burglars are more afraid of armed homeowners than they are of arrest by the police.)"

Again, there is probably some truth in that claim. But, also again, there are many possible outcomes and many sets of data. The Brady Campaign provides this input:

"A gun in the home is 22 times more likely to be used in a completed or attempted suicide (11x), criminal assault or homicide (7x), or unintentional shooting death or injury (4x) than to be used in a self-defense shooting."

Those are not very good odds if one is considering purchasing a gun for self-defense.

Goldberg’s contention that we might be safer and have less crime if more people had guns and were walking around with them loaded and ready to fire is not very convincing. His adoption of this stance seems to be driven by the notion that the number of guns continues to grow therefore it is no longer possible for gun control to be effective. While it is true that the number of guns in circulation continues to increase, the fraction of the population that owns a gun has been falling. The Brady Campaign provides these facts:

"The percentage of American households with a gun has been steadily declining over time, (from a high of 54 percent in 1977 to 32 percent in 2010)."

"Household gun ownership may be declining even though millions of guns are sold each year in part because gun owners are adding more guns to their collections. The average number of guns per owner has increased from 4.1 in 1994 to 6.9 in 2004."

The decline in gun ownership is surprising and encouraging. One has to wonder if it is merely a function of an increase in urban population relative to rural.

In any event, it is inappropriate to give up on gun controls (Goldberg does not suggest that). When more toddlers are killed by guns than police officers in the line of duty, there is something terribly wrong in this country. When more children are killed by guns in this country than are soldiers in two theaters of war, something must be done.

China: A Famine, a Bubble, and Dysfunctional Governance

I recently read two accounts of events in China. The first was a discussion of the Great Famine that occurred in the late 1950s to early1960s and took an estimated toll of at least 36 million lives. The second article was a description of the current real-estate bubble in China.  Each was interesting in itself, but what was striking is the similarity in the manner in which Chinese governance failed in both instances. China may be modernizing its society as rapidly as humanly possible, but ancient societies can have ancient behavioral patterns—and they need not be healthy ones.

Ian Johnson provided an article in the New York Review of Books titled China: Worse Than You Ever Imagined. His article is mostly a review of a book by Yang Jisheng Tombstone: The Great Chinese Famine, 1958-1962.

"....the Chinese journalist Yang Jisheng’s epic account of the worst famine in history. Yang conservatively estimates that 36 million people died of unnatural causes, mostly due to starvation but also government-instigated torture and murder of those who opposed the Communist Party’s maniacal economic plans that caused the catastrophe. Its epicenter was Xinyang County, where one in eight people died from the famine. The sixty pages Yang spends on Xinyang are a tour de force, a brutal vignette of people dying at the sides of roads, family members eating one another to survive, police blocking refugees from leaving villages, and desperate pleas ignored by Mao Zedong and his spineless courtiers. It is a chapter that describes a society laid so low that the famine’s effects are still felt half a century later."

What makes this famine unique is that it was not associated with drought or any other catastrophe; it was initiated and propagated solely by administrative actions.

When Mao gained power he took the land from the landlords and distributed it among the peasants. This, of course, made the peasants happy, but Mao soon became impatient with the growth in productivity and decided on a course of action referred to as the "rash advance." This involved collectivization and taking the land back from the farmers and putting it under the control of the government.

It is inevitable that productivity lagged under these conditions. But what is a local governor to do? Tell Mao he made a mistake? Tell the truth and suffer the consequences? Perhaps some did, but enough chose to invent progress in order to protect themselves—and they were believed.

"The problem took a deadly turn when Mao began to endorse opportunistic officials who boasted that the communes had created ‘Sputnik harvests.’ Henan, where the first communes had been formed in 1958, later that year began claiming wildly exaggerated yields....fanciful numbers that defied common sense and science. Local governments began to outdo one another trying to offer the biggest harvests, which they had to deliver to state granaries. Often, these were nothing more than mounds of husks covered with a thin layer of grain, but once-skeptical officials....endorsed these magical results during public inspection tours. Local officials began sending all their village’s harvests to granaries to meet these impossible targets, leaving villagers with nothing to eat."

When it became unavoidably obvious that many people where dying, some had the courage to suggest that the collectivization experiment be reversed. Mao continued to believe that his theoretical construct had to work unless it was being sabotaged. Those who spoke against the scheme were punished, sending a message to all other government officials.

"Chastened officials returned to the provinces eager to save their careers...."

"Officials launched campaigns to dig up grain that peasants were allegedly hiding. Of course, the grain didn’t exist, but anyone who said otherwise was tortured and often killed. That October, the famine began in earnest in Xinyang, accompanied by the murder of skeptics of Mao’s policies."

The details of what ensued make worthwhile but grisly reading. Here we are more interested in this insight provided by the author Yang.

"In a political system such as China’s, those below imitate those above, and political struggles at the higher levels are replicated at the lower levels in an expanded and even more ruthless form."

Let us move to the present day and an article in Foreign Affairs by Lynette H. Ong: Indebted Dragon: The Risky Strategy Behind China’s Construction Economy.

"Visitors to Beijing, Shanghai, and other major Chinese cities are quickly awed by impressive skyscrapers, glittering shopping malls, new highways, and high-speed rail lines, all of which leave the impression that China is a developed economy -- or at least well on its way to becoming one. Even in some smaller cities in inland provinces, government buildings make those in Washington and Brussels appear meager. In an area of Anhui Province that is officially designated an "impoverished county," the government office block looks exactly like the White House, only newer and whiter."

Some of this construction is in response to a rapidly growing economy, but some of it takes place in order create evidence of growth in the economy. If the central government wants growth, then growth will have to be delivered.

"....local Chinese officials are evaluated for promotions and other rewards based on how well the economy they manage performs. Construction and real estate activities are among the most straightforward ways to stimulate growth. White-elephant construction projects thus offer eager officials a perfect opportunity to impress their political superiors, even if massive developments do not necessarily make any economic sense. Take, for example, the city of Ordos in Inner Mongolia: Its elaborate urban infrastructure and its sea of new flats and office blocks are nearly all unoccupied, making it China's largest ghost city."

The central government was apparently so satisfied with this "growth" that they decided to secure some of the local tax revenues for their own purposes. This left local officials committed to delivering ever more economic activity, but with fewer resources.

"In the wake of the tax reform, sales and business taxes on construction, real estate, and other service industries became the main source of tax revenue for municipal governments. Not surprisingly, in the 1990s, local authorities started to engineer real estate and construction booms. According to Chinese law, collectively owned farmland must be converted to state ownership before it is leased to private developers. Local governments were thus able to expropriate farmland from villagers and then rent it to private commercial ventures such as factory owners and real estate companies."

And how do the officials finance the conversion of farm land into a business opportunity?

"Governments borrow money using land as collateral and repay the interest on their loans using funds they earn from selling or leasing the same land. All this means that the Chinese economy depends on a buoyant real estate market to keep grinding. If housing and land prices fall dramatically, a fiscal or banking crisis would likely soon follow. Meanwhile, local officials' hunger for land has displaced millions of farmers, leading to 120,000 land-related protests each year."

The bankers are in collusion with the developers.

"On the surface, banks' balance sheets have remained healthy despite these debts, since banks tend to roll over or ‘ever green’ loans by issuing new loans to help borrowers ‘repay’ old ones....The banks' accounting tricks treat only a symptom of the problem. Eventually, banks will become unable to roll over loans because they will run out of fresh money. And officials' ability to pay off loan interest depends on the continued rise of real estate prices and a buoyant economy, neither of which can be taken for granted."

If this reminds one of a Ponzi scheme, it should. Ong discusses in more detail the ramifications of this construction-driven economy and its effects on the poor Chinese citizens. Let us stop here and consider what has occurred.

Once again central authorities made a demand and local authorities believed it was necessary to use any means possible to deliver what was demanded, or at least its appearance. They were quite willing to harm the local population, and were willing to risk the economy of their country in order to secure their own reputations. While mass starvation and cannibalism are unlikely occurrences, China is still a poor country with over a billion people who will suffer when this bubble bursts.

I believe there is a lesson to be learned from these two instances but I am not sure exactly what it is. It could be that there is a cultural defect, developed over centuries, that persists in Chinese society to this day; or that centralized government is unable to manage as large and diverse a nation as China; or that a meritocracy inevitably breeds cheating and other bad behaviors. Or, perhaps, all of the above are true.

One thing I do know is that when I consider the unruly and cantankerous contesting over power and jurisdiction between our regional governments and our federal government I will have more tolerance for the system. It could be a lot worse.

Healthcare: Protocols and Evidence-Based Medicine vs. Intuition

Healthcare in the United States faces critical challenges. Science and engineering have provided great advances in knowledge about the human body and its conditions, and provided numerous new treatments for illnesses. These advances have not simplified the job for dispensers of healthcare; rather, they have made it more complex—perhaps too complex for isolated individuals to deal with. Atul Gawande, a surgeon and writer, provided this perspective in a commencement address at Stanford University.
"Half a century ago, medicine was neither costly nor effective. Since then, however, science has combated our ignorance. It has enumerated and identified, according to the international disease-classification system, more than 13,600 diagnoses—13,600 different ways our bodies can fail. And for each one we’ve discovered beneficial remedies—remedies that can reduce suffering, extend lives, and sometimes stop a disease altogether. But those remedies now include more than six thousand drugs and four thousand medical and surgical procedures. Our job in medicine is to make sure that all of this capability is deployed, town by town, in the right way at the right time, without harm or waste of resources, for every person alive. And we’re struggling. There is no industry in the world with 13,600 different service lines to deliver."

Gawande was making the case for utilizing a systematic approach to medicine, such as using protocols with checklists and other aids to ensure that proper steps were being taken and nothing was overlooked.

"Diagnosis and treatment of most conditions require complex steps and considerations, and often multiple people and technologies. The result is that more than forty per cent of patients with common conditions like coronary artery disease, stroke, or asthma receive incomplete or inappropriate care in our communities."

Gawande was referring to situations where a known set of procedures are to be followed, but avoidable mistakes are made. To put the importance of this in perspective, the number of people who die from infections and other avoidable mishaps in hospitals each year is about 200,000. We have discussed Gawende’s presentation in more detail in Medical Care Is a System—It Should Be Subject to System Design and Analysis.

Gawande also touches on a second aspect of the exploding complexity of healthcare: the role of the individual physician.

"Why does anyone receive suboptimal care?....This can no longer be a profession of craftsmen individually brewing plans for whatever patient comes through the door. We have to be more like engineers building a mechanism whose parts actually fit together, whose workings are ever more finely tuned and tweaked for ever better performance in providing aid and comfort to human beings."

David Leonhardt provided an article in the New York Times that addressed this issue and posed it properly as whether or not we should be determining evidence-based procedures or depending on doctors’ intuition for diagnosis and treatment. The traditional method is the latter.

Evidence-based methods utilize data on various methods of diagnosis or treatment as well as the eventual outcomes. With a large enough data set most effective approaches will emerge. A group of experts evaluates the data and makes a tentative recommendation in the form of a protocol to be followed to attain best results. This is clearly an iterative process that has to be updated as more data becomes available. Physicians are expected to use this as a guide but need not follow it slavishly if there are counter indications that suggest a better approach. The deviations and outcomes are to be reported and become part of the data set.

Decisions based on physician intuition are educated guesses. In many instances these are quite satisfactory, but as was argued above, the field is just too complex to expect any one individual to always have at their command all the information needed.

Leonhardt uses the experience of Brent James, chief quality officer at Intermountain Healthcare, a network of hospitals and clinics in Utah and Idaho, as an example of how the evidence-based methods are developed and applied. The history described by James began with one doctor trying to make sense of how to treat a particular condition over 20 years ago. Individual doctors were taking different approaches and there was no way to know which methods worked best. It was basically a plea to standardize on parts of the procedure that were well established so that focus could be provided on the aspects that were more important. Other doctors gradually began to collaborate and a protocol was developed. This particular condition being studied had a patient survival rate of 10% in a national study. Under the protocol at Intermountain the survival rate was 40%.

This experience led the Intermountain system to utilize the same approach for the treatment of other conditions and to distribute the developed protocols throughout the network.

"Intermountain has reduced the number of preterm deliveries, as well as the number of babies who must spend time in the neonatal-intensive-care unit. So-called adverse drug events, which include overdoses and allergic reactions, were cut in half in the mid-1990s. A protocol for dealing with one broad category of pneumonia cut its mortality rate by 40 percent over several years. The death rate for coronary-bypass surgery was cut to 1.5 percent, from the national average of about 3 percent. Medicare data on heart-failure and pneumonia patients show that Intermountain has significantly lower-than-average readmission rates. In all, James estimates that the changes have saved thousands of lives a year across Intermountain’s network. Outside experts consider that estimate to be fair."

When James was asked about critics of his approach who think it is too restrictive and can be bettered by the individual physician he provided this response.

"The human mind can sometimes do a better job of piecing together amorphous bits of information — diagnosing a disease, for example — than even the most powerful computer. On the other hand, human beings can also be unduly influenced by just a few experiences, like the treatment of an especially memorable patient. As a result, different doctors frequently end up coming up with different answers to the same question. Cardiologists in Davenport, Iowa, are quick to insert stents; cardiologists in Iowa City and Sioux City are not. They can’t both be right. Some people with heart disease are getting the best treatment, and some are not. The same is true of debilitating back pain, various cancers and even pregnancy."

Leonhardt references Jerome Groopman, a Harvard doctor, as a prominent critic of evidence-based methods and protocols. Groopman claims the approach is too limited in application and too limiting to the physician who often can do better on his own. He recognizes the problem the mind has with biased memories and claims that this difficulty can be overcome.

"To Groopman, a fundamental problem with ‘systems analysis,’ as he calls it, is that it discourages doctors from considering a wide-enough array of possible treatments. He also worries that if doctors are judged based on how well they follow a protocol, they may follow it even when they are correctly skeptical of it. Groopman says that the proper solution to misdiagnosis instead lies with individual doctors. If they are taught the ways in which their instincts can lead them astray, and if they reflect on their previous mistakes, they can avoid some of the pitfalls of intuition. They can become more self-aware."

Fortunately, data is accumulating on the efficacy of the data-based and the intuitive approaches.

"The researchers say that Groopman is right to highlight examples of human judgment being just as good as data. There are many of them. Still, the overall record of decision-making approaches that are based mostly on intuition is far weaker than the record of decisions based mostly on data. To give just one example, an article in the journal Psychological Assessment, analyzing dozens of studies that compared clinical judgments with data-based diagnoses, found that clinical judgments were better in only a few instances. The two approaches were equally accurate about half of the time, but the data-based diagnoses substantially outperformed human judgment in nearly half of the studies. And with data collection becoming ever cheaper, Kahneman says that the number of occasions in which an intuitive approach beats a systemic one is getting smaller all the time."

This summary seems to indicate that the data-based approach and the subsequent protocols are superior when the data base is sufficiently robust and inclusive to allow accurate conclusions to be drawn. That makes sense.

Groopman’s suggestion that it is better to let doctors learn from their mistakes rather than be directed to learn from the mistakes of others is ridiculous.

The fact that evidence-based approaches are controversial at all is absurd.

We will never have a cost-effective system that provides quality care and avoids killing large numbers of patients until we begin to use the knowledge and skills of the individual physician in the most efficient manner. We are not there yet.

Developing Economies: Will They Ever Catch Up?

Economists enjoy taking recent data and projecting it far into the future in order to draw grand conclusions. Such exercises lead to warnings that the doddering western countries will be economically overwhelmed in an Asian future, for example. Ruchir Sharma is the latest to take offense at this type of forecasting in an article in Foreign Affairs: Broken BRICs: Why the Rest Stopped Rising. Sharma addresses the prospects of the BRICs (Brazil, Russia, India, and China), but also looks at the broader issue of whether or not the class of emerging economies are gaining ground on the developed economies.

Sharma points out that it is a mistake to take the rapid growth rates from the past decade and assume that they can be projected into the future.

"....it is hard to sustain rapid growth for more than a decade. The unusual circumstances of the last decade made it look easy: coming off the crisis-ridden 1990s and fueled by a global flood of easy money, the emerging markets took off in a mass upward swing that made virtually every economy a winner. By 2007, when only three countries in the world suffered negative growth, recessions had all but disappeared from the international scene. But now, there is a lot less foreign money flowing into emerging markets. The global economy is returning to its normal state of churn, with many laggards and just a few winners rising in unexpected places."

The data supports the notion that the last decade was an outlier and fails to support the assumption that a convergence between developed and developed countries has been taking place.

"The notion of wide-ranging convergence between the developing and the developed worlds is a myth. Of the roughly 180 countries in the world tracked by the International Monetary Fund, only 35 are developed. The markets of the rest are emerging-and most of them have been emerging for many decades and will continue to do so for many more. The Harvard economist Dani Rodrik captures this reality well. He has shown that before 2000, the performance of the emerging markets as a whole did not converge with that of the developed world at all. In fact, the per capita income gap between the advanced and the developing economies steadily widened from 1950 until 2000....It was only after 2000 that the emerging markets as a whole started to catch up; nevertheless, as of 2011, the difference in per capita incomes between the rich and the developing nations was back to where it was in the 1950s."

The BRICs were to be the countries in line to overtake the western economies.

"As with previous straight-line projections of economic trends, however-such as forecasts in the 1980s that Japan would soon be number one economically-later returns are throwing cold water on the extravagant predictions. With the world economy heading for its worst year since 2009, Chinese growth is slowing sharply, from double digits down to seven percent or even less. And the rest of the BRICs are tumbling, too: since 2008, Brazil's annual growth has dropped from 4.5 percent to two percent; Russia's, from seven percent to 3.5 percent; and India's, from nine percent to six percent."

This source provides the most recent data on GDP growth: China 7.4%, India 5.5%, Russia 2.9%, and Brazil 0.5%.

Historically, high rates of growth have been difficult to maintain.

"Over the course of any given decade since 1950, on average, only a third of the emerging markets have been able to grow at an annual rate of five percent or more. Less than one-fourth have kept up that pace for two decades, and one-tenth, for three decades. Only Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong have maintained this growth rate for four decades. So even before the current signs of a slowdown in the BRICs, the odds were against Brazil experiencing a full decade of growth above five percent, or Russia, its second in a row."

Sharma concludes that it is foolish to project more than two business cycles into the future (five years per cycle). That allows him to make some of his own predictions.

"Among countries with per capita incomes in the $20,000 to $25,000 range, only two have a good chance of matching or exceeding three percent annual growth over the next decade: the Czech Republic and South Korea. Among the large group with average incomes in the $10,000 to $15,000 range, only one country -- Turkey -- has a good shot at matching or exceeding four to five percent growth, although Poland also has a chance. In the $5,000 to $10,000 income class, Thailand seems to be the only country with a real shot at outperforming significantly."

Finally, there is this somewhat gloomy conclusion.

"Although the world can expect more breakout nations to emerge from the bottom income tier, at the top and the middle, the new global economic order will probably look more like the old one than most observers predict. The rest may continue to rise, but they will rise more slowly and unevenly than many experts are anticipating. And precious few will ever reach the income levels of the developed world."

The OECD is one organization that is prone to making the projections that Sharma was warning us about. It has produced a report that projects economic growth out to the year 2060. It has assumed that in the 2011-2030 period the BRIC countries will have the following GDP (PPP (purchasing power parity)) growth rates: China 6.6%, India 6.7%, Russia 3.0%, Brazil 4.1%. These are numbers that Sharma would find puzzling. Growth rates drop off considerably in the 2030-2060 interval with the rate of drop off seemingly dependent on the working-age demographics in each country.

An article in The Economist provided an interesting synthesis of the conclusions in the report. It produced a plot of per capita GDP (PPP) for a range of countries as a fraction of US per capita GDP. Data was provided for 2011 and the projected numbers for 2060.

It is perhaps not too surprising that there is little relative change predicted for the developed countries because the same economic and demographic models probably apply closely to all. What is a bit surprising is the lack of progress that the developing countries make over the 50 year period, given the rather optimistic growth assumptions.

Perhaps 50 years is just a small period in terms of economic growth. Growth will have phases and transitions that must occur in order to get to the next phase. These steps can be difficult and require the development of new technical and social infrastructure to support them.

The developed countries had centuries to reach their current status so a little patience may be required.

RUCHIR SHARMA is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management and the author of Breakout Nations: In Pursuit of the Next Economic Miracles.

Moving to a National Retirement Plan

The nation seems to be lumbering into a retirement crisis. Social Security is intended to provide a significant fraction of preretirement earnings for only the lowest income seniors. Others require additional funds if they are to maintain anything like their preretirement standard of living. The 401(k) fund was intended to provide a mechanism by which a wage earner could manage a savings plan to provide for retirement. The 401(k) (403(b) for nonprofit organizations) was used to replace defined-benefit pension plans. It is referred to as a defined-contribution plan on the assumption that employees and employers would both contribute to it. In reality, many companies have not chosen to institute such a plan, and those that have contribute very little. The burden falls on the employee, assuming he/she has access to one, to manage it wisely and maintain a high level of contributions over the working career. A combination of unwise investment decisions, a dreadful economic environment, and stagnant or falling wages have made it difficult for saving to occur at an appropriate level. We have large numbers of young workers struggling to gain entry into the work force, while we have large numbers of senior citizens who can’t afford to retire and leave the work force.

A New York Times article by Steven Greenhouse provides an excellent summary of the situation and describes a number of proposed corrective measures in Should the 401(k) Be Reformed or Replaced?.

"But many investment experts and economists give the 401(k) system low marks. They note that fewer than half of the nation’s private sector workers are in 401(k) plans and that nearly a quarter of businesses with more than 100 employees do not offer 401(k)’s. Moreover, many Americans put only 3 percent of their earnings into 401(k)’s when investment experts often recommend saving 10 or even 12 percent."

"The typical worker age 55 to 64 had just $54,000 in a 401(k) in 2010, according to a new report by the Center for Retirement Research at Boston College, and households with workers in that age group had $120,000 in retirement savings on average, if the money rolled into I.R.A.’s was included. That $120,000 is less than one-fourth the savings recommended by many retirement experts. Moreover, the center calculated, that $120,000 would provide an annuity of a paltry $7,000 a year."

The current system has many defects that seem fixable. An improved approach would make a plan available to all, remove the need for individuals to make investment decisions, encourage people to invest more, and provide some sort of guarantee that there will be a return on their investment and that income will be maintained until end of life.

One of the financial experts queried about ways to improve the 401(k) system was John C. Bogle. He provides a lengthy discussion of his suggested approach in his book The Clash of the Cultures: Investment vs. Speculation. His proposed plan addresses most of these issues in a compellingly straightforward manner.

Bogle would keep Social Security as is except for modest changes to increase revenue. His idea is to replace the 401(k) and all other retirement savings options encouraged by the tax code with a single, national plan managed by a federal commission. This commission would delegate management of the assets to a non-profit entity to avoid the exorbitant fees that financial firms now charge when they control investors’ funds. Bogle would set up two indexed funds in which to invest. One would be a broad market stock fund and one would be a broad market bond fund. The use of indexed funds that follow the entire market simplifies management and guarantees that investors will do as well as the markets do. An investor’s funds would be invested mainly in equities when young and gradually emphasize bonds more as he/she ages. This would all be automatic based on an algorithm. Bogle addresses the issue of longevity by suggesting prospective retirees switch at least a portion of their accrued savings to an annuity.

Bogle’s idea provides a healthy core for a viable national plan, but there are modifications that would make it more effective.

Teresa Ghilarducci has been promoting what she refers to as a "Guaranteed Retirement Account." Her notion would add a federally provided guarantee that funds would earn at least 3% above inflation, a number chosen to correspond to the anticipated growth in GDP over the years. She would offset this potential fiscal burden on the government by eliminating the various tax breaks that shelter retirement savings now. She indicates that would provide almost $200 billion in new revenue. Ghilarducci also recommends converting funds to an annuity on retirement, perhaps through integrating with Social Security.

The addition of a guarantee that there will be a return on their investment might be critical in encouraging people to save more for their retirement.  Ghilarducci's 3% above inflation seems excessive, but guaranteeing a return equivalent to the return on investments in treasury bills could be a reasonable approach.

The most contentious issues would be the degree to which the program is voluntary for the employee and for the employer. Bogle would make all contributions voluntary; Ghilarducci prefers a plan where both employer and employee contribute 2.5% of income automatically. A 5% contribution is minimal in terms of covering preretirement earnings so, presumably, employees could contribute more and employers would match the first 2.5%. A limit on how much could be contributed would also limit the potential fiscal burden of the earnings guarantee.

Asking employers to contribute a few percent of income to a retirement plan does not seem an unreasonable burden. Many that are now offering 401(k) plans are already making similar contributions plus suffering the administrative burden of carrying the plan. The simplicity of the proposed retirement system should be attractive to those with current plans and not unduly burdensome on those who do not.

Combining Bogle’s investment ideas with Ghilarducci’s concept of a guaranteed return would provide the core of an effective retirement plan. There are many details that would have to be worked out. For example, since it is a savings plan, should people be allowed to extract funds? And under what circumstances?

There do not seem to be any issues that can’t be resolved, other than dealing with the inertia built into out legislative system. The only way to overcome inertia is to start pushing. The time to begin is now.

Mutual Funds: Investors Beware

There was a time when an investor would purchase a share in a publicly traded company and assume that share’s price was a reasonable representation of its actual value. The investor could expect the value to increase or decrease as the business fortunes of the company increased or decreased as it used the funds from that share creation to further its interests. The situation today is much more complex. John C. Bogle provides insight into what the world of investing has become in his book The Clash of the Cultures: Investment vs. Speculation. Most investors enter the markets via mutual funds and pension plans. Mutual funds will be the principle topic here.

Investment has long been beset by agency issues. The rise of public corporations meant that an agent had to be hired to manage the enterprise. These agents could have agenda’s that were not in alignment with the best interests of the corporation and could use their positions to enhance their own wealth at the expense of the corporation and its investors. This agency problem was supposed to be controlled by holding directors responsible by means of tying compensation to performance. Influential economists created the notion that the best indicator of performance should be maximizing the wealth of the corporation. Given perfect markets, that wealth would be represented by the share price. Executives had marching orders to maximize the share price, and it was assumed that shareholders would keep them and their Boards of Directors honest. The use of potentially volatile share prices as a measure of wealth, and as a determinant of executive compensation, forced attention on meeting short-term market expectations. This could be accomplished by financial engineering if necessary, even if at the long-term expense of the company.

In the days when shares were mostly owned by individual investors, the assumption was that the investors were in for the long haul and expected the company to be focused on long-term growth and prosperity. The ability of these individuals to impact company policy was always minimal, but the rise of institutional investing created another agency issue. About 70% of corporate shares are now owned by institutional investors, mainly mutual funds and pension plans.

Bogle describes how the mutual fund industry evolved from one focused on investing for long-term gains, to one more interested in attaining short-term gains. He describes developments over the 60 years of his experience in the business:

"During that long span, fund assets increased by nearly 5,000-fold—from $2.5 billion to $12 trillion. A profession once focused largely on investing became a business largely focused on marketing. Of course such growth makes change inevitable. But the counterproductive form of change that developed was fostered by a sea-change in the industry’s culture, from private ownership to largely public ownership and the near pervasive control of fund managers by financial conglomerates. For fund shareholders it was a tragic change."

The new mutual fund environment also focused on short-term gains, and as principal "owners" of corporations, this view supported the short-term focus of company executives.

"Together, these two sets of agents came to an apparent, if tacit, understanding that the principle focus of corporate accomplishment is ‘creating shareholder value.’ That’s a fine goal, of course, but their shared definition of value focused on the short-term, evanescent, emotion-driven price of the stock, rather than the long-term, solid, reality-driven intrinsic value of the corporation."

Bogle refers to this conspiracy between corporate management and institutional investors as a "double agency" problem. Indeed, his description of the mutual fund industry as it exists today suggests that there is a third agency issue, one critical to fund investors.

"Today, among the 50 largest mutual fund complexes, 41 are publicly held, including 33 held by conglomerates. Only eight remain private....All of the public fund management companies have external owners, and thus a second master to serve."

If fund managers were compensated based on a metric dominated by fund performance, then a long-term approach to investment for consistent gains could be appropriate. But that is not the way the system works. Fund managers are paid according to how much money they control. A typical fee is about 1.5% annually on all funds under management; and that is independent of performance. The focus of managers then is to use fund performance as a marketing tool to attract more money. Fund performance is the bait for attracting more investors, but it drives the funds into a highly speculative mode in order to better the competition. This doesn’t, and can’t work in the long term, and investors suffer the consequences.

Fund managers require money to pay themselves lofty salaries, to cover the transaction costs involved in churning stocks in order to try to gain that extra advantage, and money to pay for the marketing required to attract more money. If publicly owned, the fund manager must also extract funds from its investor-clients to provide profit for its investor-owners. How about that for a conflict of interest?

As mentioned, fees have grown to average about 1.5%. A fund portfolio that actually increases in value by 5% annually, would deliver only 3.5% annually to the investor. The difference between 5% compounded annually and 3.5% compounded annually becomes enormous over the years.

To Bogle, the system is not only wasteful, but also shameful.

"But do these costs enhance returns to shareholders? It’s simply not possible. Since fund managers, in essence are the market, how could they—as a group—beat the market? (Or, for that matter, lose to it?) But when they are the market, the gross returns of investors must match those of the market, but net returns after fund expenses must inevitably fall short."

"Such enormous costs seriously undermine the odds in favor of success for citizens who are accumulating savings for retirement. Alas, the investor feeds at the bottom of the costly food chain of investing, paid only after all the agency costs of investing are deducted from the markets’ returns...."

Bogle is famous for having invented the index fund which tries to track an entire market or market segment, thus avoiding speculation and guaranteeing gains equal to the market. Such a construct has no justification for high fees and can be found in the range of 0.25% or less. As an exercise try compounding money at 4.75% rather than at 3.5% over an investment lifetime.

More on Bogle’s book and his investment advice can be found in Investing in Wall Street’s Casino: The House’s Take.

Life Expectancies and Social Security and Medicare Eligibilities

Paul Krugman has never been one to shy away from making bold expository statements. And his track record seems to be excellent in terms of accuracy. He recently took on what he referred to as the misleading conclusion that since life expectancies have been rising, then it is advisable to raise the eligibility age for Social Security retirement and Medicare in response.
"America’s political landscape is infested with many zombie ideas — beliefs about policy that have been repeatedly refuted with evidence and analysis but refuse to die. The most prominent zombie is the insistence that low taxes on rich people are the key to prosperity. But there are others."

"And right now the most dangerous zombie is probably the claim that rising life expectancy justifies a rise in both the Social Security retirement age and the age of eligibility for Medicare. Even some Democrats — including, according to reports, the president — have seemed susceptible to this argument. But it’s a cruel, foolish idea — cruel in the case of Social Security, foolish in the case of Medicare — and we shouldn’t let it eat our brains."

Krugman justified his argument about Social security by pointing out that while life expectancy at birth has risen considerably, the more relevant number is life expectancy at age 65. This number has increased much less over the years. Let us look at some numbers to justify Krugman’s conclusion. This source provides us with data.

 The numbers chosen are for the total population. The gain in life expectancy at age 65 (5.3 years) was about half that at birth (10.3 years) since 1950. Which number one chooses makes a significant difference when the fiscal ramifications are considered.

Different values exist for men, women, blacks, Hispanics, and Native Americans. Consequently, it can be misleading to apply a single set of numbers to an entire population. Krugman suggested that the most significant discrepancy hidden by the overall numbers are the differences between the wealthy and the poor. This source provides us with an indication of how great that effect can be.

These numbers are based on Social Security Administration data. It is rather startling to realize that there is a difference in life expectancy at age 65 of over 5 years that has developed, depending on whether a person is in the top or bottom half of the income distribution. And that is a rather crude delineation. One has to wonder what the distribution would look like if it was broken down into finer groups such as quintiles.

There is another set of data that takes a different approach in delineating life expectancy. Data exists at the county level that would indicate regional effects, and, indirectly, illuminate effects of poverty. This source provides more startling data by plotting life expectancy at age 50 by county for both women and men.

Life expectancies at age 50 can vary by over ten years depending on the location. There are undoubtedly multiple factors at play in determining these numbers, but it is hard to avoid the conclusion that much lower life expectancy is associated with the lower-income southern states where poverty is often endemic.

One can find locations where the life expectancy at birth does not even attain the current Social Security retirement age. This source tells us that in Quitman and Tunica Counties in Mississippi the life expectancy at birth is a mere 66.1 years. Raising the retirement age or the Medicare eligibility age in locations such as these would have a devastating effect.

We are a diverse population. Attempts to capture the reality of our condition in averages and other global representations can produce false impressions and lead to bad policy decisions.

The data presented here supports Krugman’s statements and suggests that he may have been uncharacteristically timid in formulating them.

"This means that any further rise in the retirement age would be a harsh blow to Americans in the bottom half of the income distribution, who aren’t living much longer, and who, in many cases, have jobs requiring physical effort that’s difficult even for healthy seniors. And these are precisely the people who depend most on Social Security."

"What would happen if we raised the Medicare eligibility age? The federal government would save only a small amount of money, because younger seniors are relatively healthy and hence low-cost. Meanwhile, however, those seniors would face sharply higher out-of-pocket costs. How could this trade-off be considered good policy?"

"The bottom line is that raising the age of eligibility for either Social Security benefits or Medicare would be destructive, making Americans’ lives worse without contributing in any significant way to deficit reduction. Democrats, in particular, who even consider either alternative need to ask themselves what on earth they think they’re doing."