Monday, February 29, 2016

Doctors and the Aging Population

The general decline in birth rates coupled with improvements in longevity have led to populations in developed countries where the fractions of elderly are increasing.  This chart from the OECD illustrates this trend.

One consequence of this demographic shift is that healthcare industries must deal with a larger number of aged patients and their associated health issues.  The medical discipline focused on the health of seniors is geriatrics.  One might assume that societies would be preparing for this mission by training greater numbers of geriatricians, but one would be disappointed.  The Association of American Medical Colleges provides this perspective.

“The statistics tell the story: By 2025, the number of Americans over the age of 65 will nearly double, making them the fastest-growing age group in the country. Providing quality medical care for these seniors will require a certified geriatrician population of 25,000 according to The American Geriatrics Society, but as of 2014, there were fewer than 7,500 geriatricians in the United States. Only eight of the country’s 145 academic medical centers have full geriatrics departments, and only 44 percent of the nation’s 353 geriatric fellowship positions are filled.”

We will have far fewer doctors than needed trained to deal with the problems of the elderly.  That means most will be treated by physicians who have little or no training in addressing their special needs.  Since much of the burden of healthcare costs arise from end-of-life medical treatments, this appears to be a rather absurd failure in public policy.

“Older adults soon will surpass pediatric patients in the percentage of practice time devoted to them, and they bring a set of needs that are both specific and highly complex. Currently, however, geriatrics rotations are still elective in most internal medicine, family medicine, and psychiatry programs.”

Atul Gawande, a surgeon, has written eloquently of the special needs and circumstances of the elderly and others whose health has left them in a fragile state in his book Being Mortal: Medicine and What Matters in the End.  He provides this insight.

“Although the elderly population is growing rapidly, the number of certified geriatricians the medical profession has put in practice has actually fallen in the United States by 25 percent between 1996 and 2010.  Applications to training programs in adult primary care medicine have plummeted, while fields like plastic surgery and radiology receive applications in record numbers.”

This is a classic example of market failure.  Doctors expect to make money so they tend to go where the money is.  Dealing with old people is not particularly rewarding financially, nor is it an easy task.

“….incomes in geriatrics and adult primary care are among the lowest in medicine.  And partly, whether we admit it or not, a lot of doctors don’t like taking care of the elderly.”

Gawande quotes the geriatrician Felix Silverstone.

“Mainstream doctors are turned off by geriatrics, and that is because they do not have the faculties to cope with the Old Crock…..The Old Crock is deaf.  The Old Crock has poor vision.  The Old Crock’s memory might be somewhat impaired.  With the Old Crock, you have to slow down, because he asks you to repeat what you are saying or asking.  And the Old Crock doesn’t just have a chief complaint—the Old Crock has fifteen chief complaints.  How in the world are you going to cope with all of them?  You’re overwhelmed.  Besides, he’s had a number of these things for fifty years or so.  You’re not going to cure something he’s had for fifty years.  He has high blood pressure.  He has diabetes.  He has arthritis.  There’s nothing glamorous about taking care of any of those things.”

Most doctors are trained to fix things.  A patient is someone with a problem, and her job is to fix that particular problem.  For a patient aging and approaching end of life, the problems accumulate and interact and the notion that they can be treated individually can lead to disastrous outcomes.  The appropriate skill provided by geriatric doctors is to know how to manage a collection of ailments while still taking into account the continuing quality of life of the patient.

Gawande observed several geriatricians in practice and learned that there is a necessary level of skill required in dealing with the elderly who are in fragile health.  One was named Juergen Bludau who provided valuable insight.

“The job of any doctor, Bludau later told me, is to support quality of life, by which he meant two things: as much freedom from the ravages of disease and the retention of enough function for active engagement in the world.  Most doctors treat disease and figure the rest will take care of itself.  And if it doesn’t—if a patient is becoming infirm and heading toward a nursing home—well, that isn’t really a medical problem, is it?”

“To a geriatrician, though, it is a medical problem.  People can’t stop the aging of their bodies and minds, but there are ways to make it more manageable and to avert at least some of the worst effects.”

Most doctors are trained to take a different approach, as Gawande admits.

“We’re good at addressing specific, individual problems: colon cancer, high blood pressure, arthritic knees.  Give us a disease, and we can do something about it.  But give us an elderly woman with high blood pressure, arthritic knees, and various other ailments besides—an elderly woman at risk of losing the life she enjoys—and we hardly know what to do and often make matters worse.”

Treating each ailment individually rather than as a collection of issues often means utilizing different doctors for each problem, making it difficult for each physician to know of, or to care about, other medications or treatments the patient is receiving.  Also, this approach relieves each doctor of any responsibility for addressing any social or personal issues the patient might be having that could interfere with her treatment.

Gawande tells us of a study performed by researchers at the University of Minnesota on 568 patients who were over age seventy and suffering from health problems sufficiently severe that they were at risk of becoming disabled.

“With their permission, researchers randomly assigned half of them to see a team of geriatric nurses and doctors—a team dedicated to the art and science of managing old age.  The others were asked to see their usual physician who was notified of their high risk status.  Within eighteen months, 10 percent of the patients in both groups had died.  But the patients who had seen a geriatrics team were a quarter less likely to become disabled and half as likely to develop depression.  They were 40 percent less likely to require home health services.”

The team leader, Chad Boult, and the other geriatric specialists at the University of Minnesota were rewarded for this good work by losing their jobs as the university closed down the division of geriatrics.  The issue was cost.  If these specialists had been making heroic interventions with expensive drugs, devices, and procedures, there would have been no financial problem.  Unfortunately for the geriatricians, but fortunately for their patients, they were doing little of that.

“Instead, it was just geriatrics.  The geriatric teams weren’t doing lung biopsies or back surgeries or insertion of….[devices].  What they did was to simplify medications.  They saw that arthritis was controlled.  They made sure toenails were trimmed and meals were square.  They looked for worrisome signs of isolation and had a social worker check that the patient’s home was safe.”

The Minnesota geriatric team had actually saved the nation money with their efforts, but because of the way Medicare is required to finance healthcare, they received no credit for it.  Medicines, devices, and procedures are reimbursed.  However, cutting back on those types of things and spending more personal time assisting the patients is not.  So although Medicare was being saved money, the university housing the study was losing money.

“Scores of medical centers across the country have shrunk or closed their geriatric units.  Many of Boult’s colleagues no longer advertise their geriatric training for fear that they’ll get too many elderly patients.  ‘Economically, it has become too difficult,’ Boult said.”

“I asked Chad Boult, the geriatrics professor, what could be done to ensure that there are enough geriatricians for the surging elderly population.  ‘Nothing,’ he said.  ‘It’s too late.’  Creating geriatric specialists takes time, and we already have far too few.  In a year, fewer than three hundred doctors will complete geriatric training in the United States, not nearly enough to replace the geriatricians going into retirement, let alone meet the needs of the next decade.  Geriatric psychiatrists, nurses, and social workers are equally needed, and in no better supply.  The situation in countries outside the United States appears to be little different.  In many, it is worse.”

Boult and others believe that the only possible strategy is to make geriatric instruction an integral part of the training of primary care physicians and nurses.

“Even this is a tall order—97 percent of medical students take no course in geriatrics, and the strategy requires that the nation pay geriatric specialists to teach rather than to provide patient care.  But if the will is there, Boult estimates that it would be possible to establish courses in every medical school, nursing school, school of social work, and internal-medicine training program within a decade.”

Gawande warns us that the medical system is designed to support and finance extreme procedures that might make sense for a person who could have decades of life remaining if successful, but it is not designed to assist people who have few years left and might prefer to spend the remainder of their time as comfortable and active as possible.

Most doctors would prefer to encourage the sick to pursue all known options to attack their disease.  They are uncomfortable with the notion of the heart-to-heart talk with the elderly where they ask if they prefer to spend a few of their remaining years in pain, discomfort, and isolation in order to perhaps have a few more if treatment is successful.  The option of foregoing extreme treatments in order to spend whatever time is remaining with family and friends often never gets discussed.  Palliative care is often the best option for patients—if they are given the opportunity to consider it.

“When the prevailing fantasy is that we can be ageless, the geriatrician’s uncomfortable demand is that we accept that we are not.”

Gawande offers his feelings about how medical professionals should approach treatment of the elderly.

“Sometimes we can offer a cure, sometimes only a salve, sometimes not even that.  But whatever we can offer, our interventions, and the risks and sacrifices they entail, are justified only if they serve the larger aims of a person’s life.  When we forget that, the suffering we inflict can be barbaric.  When we remember it the good we do can be breathtaking.”

The specific needs of a growing population of the elderly seem to have been lost in our focus on market-based solutions.  There is much yet to be done in terms of medical training and policy making if we are to be properly prepared for inevitable demographic changes.

Gawande’s book suggested earlier posts that the interested reader might find informative.

Thursday, February 25, 2016

Inequality and Slow Growth: Secular Stagnation

Sometimes economic analyses can be expressed quite simply.  The economy of a society consists of consumers buying things from sellers.  The greater the frequency of these transactions the higher the income of the society and the greater is its GDP.  For the consumers to continue buying, they must have a source of income that matches the rate at which they make purchases.  If the level of income falls below the spending rate then consumers have the option of borrowing money or decreasing their purchase rate.  Borrowing to support consumption merely delays the day of reckoning and makes the slowing purchase rate that much more extreme when it finally occurs.  Nearly all of the economies of developed countries have been experiencing slower than expected growth in GDP since the Great Recession and economists have been wondering why. 

Sometimes economists get trapped within their jargon and their models and are unable to deal with egregious factors.  Larry Summers finally grasped the obvious and explained it in a manner that even other economists could comprehend.  He published his analysis in Foreign Affairs in an article titled The Age of Secular Stagnation: What It Is and What to Do About It.

Economists expected the Great Recession to be followed by a period of healthy growth as economies returned to a “normal” state.  Summers summarizes what actually occurred.

“Almost no one in 2009 imagined that U.S. interest rates would stay near zero for six years, that key interest rates in Europe would turn negative, and that central banks in the G-7 would collectively expand their balance sheets by more than $5 trillion. Had economists been told such monetary policies lay ahead, moreover, they would have confidently predicted that inflation would become a serious problem—and would have been shocked to find out that across the United States, Europe, and Japan, it has generally remained well below two percent.”

In spite of central banks trying to encourage more growth, monetary policies have been ineffective.  And it looks as though low growth is expected to continue indefinitely.

“….it is fair to say that inflation for the entire industrial world is expected to be close to one percent for another decade and that real interest rates are expected to be around zero over that time frame. In other words, nearly seven years into the U.S. recovery, markets are not expecting “normal” conditions to return anytime soon.”

Summers summons “secular stagnation” as the concept required to explain the situation.

“The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates.”

In other words, buyers do not have enough money to create a demand for sellers’ products sufficient to encourage sellers to invest in the means of producing more goods.  Consumers who are not buying or borrowing are said to be “saving.”

Summers makes clear what the problem is with demand.

“Greater saving has been driven by increases in inequality and in the share of income going to the wealthy, increases in uncertainty about the length of retirement and the availability of benefits, reductions in the ability to borrow (especially against housing)….”

Wages for the vast majority of people have been stagnant for decades.  Nearly all the growth of income since the financial collapse has gone to a small number of individuals.  Not surprisingly, wealthy people like to watch their wealth accumulate rather than returning all of it to the economy.  Inequality dampens both demand and investment.

The policies that have led to this long-term slowing of economic activity produce collateral damage.

“More important, these policies are running into diminishing returns and giving rise to increasingly toxic side effects. Sustained low rates tend to promote excess leverage, risk taking, and asset bubbles.”

The major thrust of policy should be to increase demand through fiscal stimulus.

“The core problem of secular stagnation is that the neutral real interest rate is too low. This rate, however, cannot be increased through monetary policy. Indeed, to the extent that easy money works by accelerating investments and pulling forward demand, it will actually reduce neutral real rates later on. That is why primary responsibility for addressing secular stagnation should rest with fiscal policy. An expansionary fiscal policy can reduce national savings, raise neutral real interest rates, and stimulate growth.”

Summers indicates that an aggressive public investment policy is needed to repair our decaying infrastructure and now is an ideal time to move forward on it.

“Fiscal policy has other virtues as well, particularly when pursued through public investment. A time of low real interest rates, low materials prices, and high construction unemployment is the ideal moment for a large public investment program. It is tragic, therefore, that in the United States today, federal infrastructure investment, net of depreciation, is running close to zero, and net government investment is lower than at any time in nearly six decades.”

One should not lose sight of the fact that increasing the income of consumers so that they may spend more and elevate aggregate demand is the crucial need.

“Other structural policies that would promote demand include steps to accelerate investments in renewable technologies that could replace fossil fuels and measures to raise the share of total income going to those with a high propensity to consume, such as support for unions and increased minimum wages. Thus, John Maynard Keynes, writing in a similar situation during the late 1930s, rightly emphasized the need for policy approaches that both promoted business confidence—the cheapest form of stimulus—and increased labor compensation.”

People will argue that debt is already high and assuming more debt is the wrong approach, but history tells us that the best way to diminish national debt is by fostering high growth and modest inflation.  That is the path that led to elimination of the enormous debts accumulated during World War II.  

Summers also reminds us that inequality has social as well as economic consequences.

“Secular stagnation and the slow growth and financial instability associated with it have political as well as economic consequences. If middle-class living standards were increasing at traditional rates, politics across the developed world would likely be far less surly and dysfunctional. So mitigating secular stagnation is of profound importance.”

How true!

Friday, February 19, 2016

The US Moves to the Left Politically

The relentless novelty of this presidential election year has produced a number of articles aimed at explaining just exactly what might be going on in the United States.  A few have even postulated that what we are seeing can be explained as a general move of the nation’s voters to the left.  Given the definite rightward drift of Republican politicians, this conclusion is a bit surprising.  Let us see if this notion makes any sense.

Consider first an article by Stuart Stevens (Mitt Romney’s chief campaign strategist in 2012) that appeared in the New York Times: How Far Left Has America Moved.  Stevens is concerned with big-picture trends in politics.  He begins by pointing out the vast difference between the Clinton presidency and that of Obama.

“Though only 16 years separated the election of Bill Clinton and that of President Obama, the two politicians seemed to represent the same party in name only. The 1992 campaign was dedicated to defining ‘a different kind of Democrat.’ That was basically a nicely packaged phrase to stress that Bill Clinton and Al Gore were not crazy — or weak — liberals like the party’s recent lineup of losers.”

“These new Democrats were for the death penalty and couldn’t wait to get into office to ‘end welfare as we know it.’….The 1992 Democratic campaign was a calculated defense against charges of liberalism. Mr. Clinton defined his candidacy by asserting that Democrats could handle center-right issues like crime and welfare.”

In 2008, Hillary Clinton tried to argue that Obama was too far to the left and that would mean he would lose the election.  But win he did and the pundits had to explain that fact.

“From the earliest days of Barack Obama’s presidency, a comforting assumption developed among much of the center-right political world. The thinking went like this: President Obama was far more liberal than the majority of the country. But given his extraordinary political talents, the fatigue of the George W. Bush years, the economic crisis and the excitement of electing the first African-American president, the country picked him not because of his ideology but in spite of it.”

Obama produced—or tried to produce—a number of left-favored programs: universal healthcare, Keynesian stimulus, a cap and trade energy bill, market interventions….  This was far different from the center-right mimicry of Bill Clinton.  And Obama was reelected in 2012.  As he nears the end of his second term, his own party seems to view him as someone who should have been even more aggressive in pursuing the demands of the left.

Stevens addresses Obama’s potential legacy with this comment.

“One point up for discussion: whether the president pushed the country left, or whether he was just in step with how people felt. He passed the Affordable Care Act, announced support for same-sex marriage, and has argued passionately (if unsuccessfully) for more gun control.”

A good argument can be made that the Democratic Party is moving to the left, but what about the Republicans.  The Republican Party has evolved to an unstable structure in which a few wealthy donors have struggled to control the mass of less-than-wealthy voters they need to show up at election time by pandering to their cultural issues.  It seems that mass of voters, who actually despise the elites, no longer wishes to be controlled. 

“But so far into the 2016 election, conservatives are on the run. Democrats are battling over who can really move the country left. And the leading Republican candidate is a man who has previously praised Canada’s single-payer health care system and described himself as ‘very pro-choice’.”

The biggest fear on the part of the wealthy elite is that the Republican masses are not as dependably “small government” as they would wish.  Republican voters tend to like their existing social programs; they just don’t like to admit that they need new ones. 

Stevens believes that fundamental changes are taking place.

“It’s happening elsewhere. Canada has turned left, and a socialist, a long way from the days of Tony Blair, leads Britain’s Labour Party. In this global economy that everyone talks about but no one seems able to define, maybe larger forces are nudging the United States left. Unemployment is low and yet only 23 percent of the country believes we are headed in the right direction. Something clearly is wrong.”

“Perhaps the reality of the new American economy is becoming too exhausting.”

Stevens finishes with a conjecture.

“’Keep your government hands off my Medicare,’ opponents of the president’s health care bill once demanded. Like that confused, plaintive cry, will this be the election cycle when voters in both parties accept that they want a growing benevolent government, as long as they don’t have to admit they need it?”

Peter Beinart believes he has the data that indicates what Stuart Stevens only suggests.  He lays out his case in an article that appeared in The Atlantic: Why America Is Moving Left.

Beinart covers the re-liberalization of the Democratic Party in some detail.  He, in fact, pinpoints when the pivot occurred. 

“If the lesson of the Reagan era had been that Democrats should give a Republican president his due, the lesson of the Bush era was that doing so brought disaster. In the Senate, Bush’s 2001 tax cut passed with 12 Democratic votes; the Iraq War was authorized with 29. As the calamitous consequences of these votes became clear, the revolt against them destroyed the Democratic Party’s centrist wing.”

“By the time Barack Obama defeated Hillary Clinton for the Democratic presidential nomination in 2008, in part because of her support for the Iraq War, the mood inside the party had fundamentally changed. Whereas the party’s most respected thinkers had once urged Democrats to critique liberal orthodoxy, they now criticized Democrats for not defending that orthodoxy fiercely enough. The presidency of George W. Bush had made Democrats unapologetically liberal, and the presidency of Barack Obama was the most tangible result.”

The disasters of the Bush presidency had another epochal effect: it caused at least a generation of the young to break away from the voting pattern of their elders and look for more liberal options.  Consider this chart from a Pew Report analyzing voting patterns in the 2012 election.

Up until the 2004 election, the young followed closely their parents’ in voting.  From that point forward they have been reliably more liberal.

Beinart recognizes the crucial role the Bush debacle played in forming attitudes.

“Millennials are not liberal primarily because they are young. They are liberal because their formative political experiences were the Iraq War and the Great Recession, and because they make up the most secular, most racially diverse, least nationalistic generation in American history. And none of that is likely to change.”

On issues that have defined the differences between liberals and conservatives, the younger voters are pushing politicians to the left.

“In 2014, Pew found that Americans under 30 were twice as likely as Americans 65 and older to say the police do a ‘poor’ job of ‘treating racial, ethnic groups equally’ and more than twice as likely to say the grand jury in Ferguson was wrong not to charge Darren Wilson in Michael Brown’s death. According to YouGov, more than one in three Americans 65 and older think being transgender is morally wrong. Among Americans under 30, the ratio is less than one in five.”

“Millennials—Americans roughly 18 to 34 years old—are 21 percentage points less likely than those 65 and older to say that immigrants ‘burden’ the United States and 25 points more likely to say they ‘strengthen’ the country. Millennials are also 17 points more likely to have a favorable view of Muslims. It is largely because of them that the percentage of Americans who want government to ‘promote traditional values’ is now lower than at any other time since Gallup began asking the question in 1993, and that the percentage calling themselves ‘socially liberal’ now equals the percentage calling themselves ‘socially conservative’ for the first time since Gallup began asking that question in 1999.”

The young voters also seem to have little of the fear of big government that Republican Party leaders are so desperate to generate.

“According to a July Wall Street Journal/ABC poll, Americans over 35 were four points more likely to say the government is doing too much than to say it is doing too little. Millennials, meanwhile, by a margin of 23 points, think it’s doing too little. In 2011, Pew found that while the oldest Americans supported repealing health-care reform by 29 percentage points, Millennials favored expanding it by 17 points. They were also 25 points more likely than those 65 and older to approve of Occupy Wall Street and 36 points more favorable toward socialism, which they actually preferred to capitalism, 49 percent to 46 percent. As the Pew report put it, ‘Millennials, at least so far, hold “baked in” support for a more activist government’.”

Even the young who identify as Republicans are straying from the revealed truth.

“The press often depicts American politics as a battle pitting ever more liberal Democrats against ever more conservative Republicans. Among the young, however, that’s inaccurate. Young Democrats may be more liberal than their elders, but so are young Republicans. According to Pew, a clear majority of young Republicans say immigrants strengthen America, half say corporate profits are too high, and almost half say stricter environmental laws are worth the cost—answers that sharply distinguish them from older members of the GOP. Young Republicans are more likely to favor legalizing marijuana than the oldest Democrats, and almost as likely to support gay marriage. Asked how they categorize themselves ideologically, more than two-thirds of Republican Millennials call themselves either ‘liberal’ or ‘mixed,’ while fewer than one-third call themselves ‘conservative.’ Among the oldest Republicans, that breakdown is almost exactly reversed.”

Couple the liberal tendencies of the millennials with that of minorities, and conservatism has a dim future on the national stage.

“When Bush won the presidency in 2000, very few Millennials could vote. In 2016, by contrast, they will constitute roughly one-third of those who turn out. In 2000, African Americans, Hispanics, and Asians constituted 20 percent of voters. In 2016, they will constitute more than 30 percent.”

And how important are these demographics?

“Whit Ayres, a political consultant for the Rubio campaign, calculates that even if the 2016 Republican nominee wins 60 percent of the white vote (more than any GOP nominee in the past four decades except Reagan, in 1984, has won), he or she will still need almost 30 percent of the minority vote. Mitt Romney got 17 percent.”

Can anything be more representative of these changes than the surprising credibility of Bernie Sanders as a candidate for the Democratic nomination and for the presidency?  His opponent, Hillary Clinton, once banked the legacy of her husband as president, but now her association with the past is more a burden, one threatening to sink her candidacy.

We are indeed living in interesting times.  Given this leftward trend, and the apparent disassembly of the Republican Party, it is unlikely that politics in our country will ever be the same.

Monday, February 15, 2016

Will Economic Inequality Be Reversed?

The increasing concentration of wealth in the hands of a small minority seems to be an inevitable consequence of capitalism as it is currently practiced.  Given that wealth and power are related, how likely is it that the trend towards ever-growing inequality can be reversed?  An somewhat optimistic assessment is provided by Ronald Inglehart in an article in Foreign Affairs: Inequality and Modernization: Why Equality Is Likely to Make a Comeback.  He sees a reversal as inevitable; it is only a question of when.

Inglehart reminds us that inequality was reversed in the postwar years, both in the US and in Europe.  The reversal was partly because of the tumult of World War II, but it was also due to the increased political power acquired by wage earners relative to the owners of capital.

“What most analyses of the subject miss, however, is the extent to which both the initial fall and the subsequent rise of inequality over the past century have been related to shifts in the balance of power between elites and masses, driven by the ongoing process of modernization.”

Economic evolution produced changes that facilitated the creation of an effective working class.  Increased urbanization concentrated workers into environments in which shared experiences nurtured bonding.  Better education led to improved literacy and more efficient expressions of political goals.  Unions won the right to bargain collectively and provided a platform for projecting political power.

“The expansion of the franchise gave ever more people the vote, and leftist political parties mobilized the working class to fight for its economic interests. The result was the election of governments that adopted various kinds of redistributive policies—progressive taxation, social insurance, and an expansive welfare state—that caused inequality to decline for most of the twentieth century.”

However, the nature of the economy and of society itself changed.  The idea of a society consisting of economic classes dissipated, along with the political power associated with that thinking.  The issues that created political passion changed, forcing realignment of voters between the two political parties.

“The success of the modern welfare state made further redistribution seem less urgent. Noneconomic issues emerged that cut across class lines, with identity politics and environmentalism drawing some wealthier voters to the left, while cultural issues pushed many in the working class to the right. Globalization and deindustrialization undermined the strength of unions. And the information revolution helped establish a winner-take-all economy.”

The political power of those who would promote redistribution diminished to the point of ineffectiveness, allowing the wealthy to take advantage of their power.

“The rich, in turn, have used their privilege to shape policies that further increase the concentration of wealth, often against the wishes and interests of the middle and lower classes.”

“Today the conflict is no longer between the working class and the middle class; it is between a tiny elite and the great majority of citizens. This means that the crucial questions for future politics in the developed world will be how and when that majority develops a sense of common interest.”

Inglehart supports the notion that society can be divided into a tiny elite and everyone else with this chart.

The median income by level of education suggests that higher levels of education pay off with higher income, but even the most highly educated, the doctors, lawyers, and scientists, are not sharing in the nation’s increase in wealth.  Gross domestic product, GDP, is essentially a measure of national income.  While it has grown since 1991, earnings for everyone but a few have remained stagnant.  The nation’s new wealth is being accumulated by that “tiny elite.”

“….even highly skilled jobs are being commodified, so that even many highly educated workers in the upper reaches of the income distribution are not moving ahead, with gains from the increases in GDP limited to those in a thin stratum of financiers, entrepreneurs, and managers at the very top.”

The highly-touted “knowledge economy” has been a disaster in terms of inequality.  It creates very few high-tech jobs and seems determined to turn the nation into a vast reservoir of contingent employees—people with no job security and few of the benefits that the laboring class fought so hard for a century ago.

“The rise of the postindustrial economy narrowed the life prospects of most unskilled workers, but until recently, it seemed that the rise of the knowledge society would keep the door open for those with sophisticated skills and a good education. Recent evidence, however, suggests that this is no longer true.”

“As expert systems replace people, market forces alone could conceivably produce a situation in which a tiny but extremely well-paid minority directs the economy, while the majority have precarious jobs, serving the minority as gardeners, waiters, nannies, and hairdressers—a future foreshadowed by the social structure of Silicon Valley today.”

Inglehart believes that political forces can once again intrude upon the oligarchy and tame it, as it did in the postwar years.

“Market forces show no signs of reversing these trends on their own. But politics might do so, as growing insecurity and relative immiseration gradually reshape citizens’ attitudes, creating greater support for government policies designed to alter the picture.”

Surveys of attitudes in developed countries, including the United States, suggest belief in a need for increased government action to counter inequality is growing.  It is likely to continue growing.  Inglehart believes that the conditions for the formation of a political “movement” are not yet in place, but they will be and action could follow quickly.

“In today’s postindustrial society, however, a large share of the population is already highly educated, well informed, and in possession of political skills; all it needs to become politically effective is the development of an awareness of common interest.”

“Will enough of today’s dispossessed develop what Marx might have called ‘class consciousness’ to become a decisive political force? In the short run, probably not, because of the presence of various hot-button cultural issues cutting across economic lines. Over the long run, however, they probably will, as economic inequality and the resentment of it are likely to continue to intensify.”

For those depressed by the current state of affairs, recall how quickly changes in attitudes and legal standing came for same-sex marriage.  Remember that in the United States there are three arenas in which political activism can be effective: local, state, and federal governments.  If stymied at the federal level, go to work at the city or state level.  That process has been relatively quickly successful in waging campaigns for a higher minimum wage.

A few months ago the common wisdom assumed a 2016 presidential campaign between Hillary Clinton and Jeb Bush.  Now we face the distinct possibility of a duel between Bernie Sanders and Donald Trump.  Who says change can only come slowly?

If we don’t make bold proposals, bold things can never happen.  If we don’t vote in support of our economic self-interest, we will lose our economic standing.  It is as simple as that.

Wednesday, February 10, 2016

Beware of Tech Company Valuations and IPOs

The unicorn is a mythical creature that has been much talked about but rarely, if ever, actually observed.  Apparently someone applied the label to what was once equally rare: the tech startup with a valuation of over $1 billion.  At present, they seem to be everywhere.  The magazine Fortune maintains a list of unicorns (a total of 172 at present) along with their valuation as determined by the willingness of venture capitalists and others to invest in them.  At the top of the list is Uber with a valuation of an incredible $62 billion, even though it is currently a money losing operation.

Venture capitalists don’t invest in companies like Uber for the long term.  They don’t wish to wait many years while a business establishes itself, gradually becoming profitable.  Their goal is to find the next big thing and quickly cash in their investment by seeing the company go public and selling their shares at a profit.  To successfully pull that off depends on generating an enthusiasm among traditional investors to not only buy those shares, but to pay a premium for them.  They must be convinced that the shares will rise in value.

An article in Fortune by William D. Cohen, Silicon Valley’s $585 Billion Problem, suggests that all those Unicorns will have a difficult time providing their investors a way to get their money back, let alone hit the jackpot. 

“It appears that a reckoning is coming in the tech world. The combined value ascribed to the 173 unicorns by their investors is a stunning $585 billion—an especially astonishing figure given that so many of them aren’t even close to profitable. Sky-high valuations—driven in part by unicorn mania and an influx of money from nontraditional (and less disciplined) venture investors—have limited the number of potential acquirers for a lot of the buzziest companies.”

He claims that traditional investors have been fooled too many times in the past and the Initial Public Offering (IPO) pipeline is drying up.

“Time and time again during the current IPO cycle, Wall Street underwriters—egged on by ambitious CEOs, hungry venture capitalists, and favored institutional investors—have hyped one technology IPO after another. The bankers price the offerings for perfection, watch them soar on the first day of trading to deliver the coveted first-day spike, and don’t stick around to offer an explanation after the shares plunge below the first-day price.”

“Welcome to the world of zombie tech stocks—once-highflying IPOs wandering aimlessly in the wasteland of the public equity markets and understandably unloved by investors. Many have familiar names, such as Zynga (down about 75% from its IPO price), Twitter (down 30%), and Groupon (down 85%). Online craft marketplace Etsy recently traded 56% below last year’s price at IPO and 77% under its first-day close. Others that are less well-known—like Nimble Storage (67% below IPO price)—have been just as disappointing.”

If you are one of the frustrated investors who bought into the hype and are wondering what happened to your money, or if you are merely one of those who believes the markets are manipulated by the insiders to their advantage, then stay tuned.  Cohen explains how the IPO process actually works.

The first step is an agreement between the outfit wishing to go public and a financial firm or firms (think Goldman Sachs) willing to underwrite the sale of shares—usually for a fee that is a percentage of the value of the shares offered.  Underwriters assume responsibility for the shares and will possess them should they go unsold.  This financial stake by the underwriters leaves them to act in their own self-interest, which is not necessarily that of the company offering the shares, nor that of the investing public.

“The system has long been designed to benefit the Wall Street underwriters and their favored clients—venture capital and buyout firms, as well as the big institutional buyers of IPOs—at the expense of individual and retail investors, who have been brainwashed into thinking they are getting their hands on the Next Big Thing.”

It is the desire of everyone involved in the deal to price the offered shares at a value such that demand will drive the share price up after the initial offering.  This increase is referred to as the “pop.”  Company investors wish to sell some shares to get some immediate return on investment, but they don’t wish to flood the market with so many shares that supply might be greater than demand.  An agreement with the underwriters determines the number of shares to be offered (referred to as “the float “).  It is usually 10-15% of the total number of shares.  There is also a “lockup” period in which the company’s existing investors agree to not sell any additional shares.

“The big Wall Street underwriters set the rules of the game. “Morgan Stanley and Goldman Sachs will tell you it’s not a successful IPO unless there’s a 20% to 30% pop,” says John Buttrick, a partner at Union Square Ventures. ‘That’s the way they get graded with their clients: Did the stock trade up after pricing? Much of the IPO machine is focused on generating a sugar-rush spike in the trading price during the two to four weeks after IPO. After that, the market takes over: ‘Sorry, not my problem.” They profess to take a long-term view, but the data shows post-IPO stocks are very volatile in the case of tech IPOs, and that is not a problem the underwriters try to address’.”

It must be remembered that the underwriting firms also have allegiances to those on the buying side of the deal.  The big investing institutions look upon an IPO that is going to provide shares that will increase at least 30% in a few weeks time as a fantastic deal.  They know the way the game is played and buy and hold only long enough to enjoy the “pop,” before putting the shares back on the market—and help bring the pop to an end.

“Another important constituency for IPOs is the big institutional buyers of them—mutual fund firms such as Fidelity, T. Rowe Price, and the Capital Group. They like the first-day pop too, because that means they make money instantly. Twenty-five years ago Peter Lynch, when he was running Fidelity’s Magellan Fund, used to refer to IPOs as ‘sunset stocks’—as in, ‘the sun never sets on an IPO in my portfolio’.”

There is another factor that stock investors should recognize before they buy into this manufactured “pop.”  The lockup period may be only a few months.  After it ends the market continues to react to changes in supply and demand, but the supply might suddenly become quite a bit larger—yet another factor capable of driving the value of the newly acquired shares down.

In summary, the tech IPO process has involved overvaluing a company in order to make a profit for institutional investors on the pre-IPO side, for the financial firms underwriting the deal, and for the institutional investors who are fed the initial shares.  All of this depends on being able to lure unsuspecting investors into a deal in which they are likely to lose money.

A few of these tech firms actually make a go of it and prove to be beneficial to their post-IPO investors, but not enough to hide the fact that most have been a bad deal except for the insiders.

Even the firms with a good business plan are hurt by a process in which their shares are greeted with unhealthy exuberance followed by a plummet in value.

So—if you are an investor who feels the market is rigged against you—you are probably correct.

Wednesday, February 3, 2016

Comparing Animals and Humans: Blindness and Echolocation

We often place ourselves at the apex of evolution and view ourselves, humans, as unique creatures against which all other species are found wanting.  The result of this perspective is smugly satisfying, but it causes us to miss the rich and complex lives that other animals around us are living, and to denigrate their actions based on emotion or intelligent reasoning as being merely instinctual.  Carl Safina wishes to disabuse us of such fantasies in his book Beyond Words: What Animals Think and Feel.  He uses detailed studies of the lives of elephants, wolves, killer whales, and dolphins, coupled with an amazing collection of anecdotal experiences to convince us that we are more similar to other animals than we might wish to believe.  Or, if one prefers, he convinces us that animals are similar to us.

Safina’s constant message is that we will learn more about other species and more about ourselves if we focus more on the similarities and less on the differences.

“If you imagine the very slow changes over millions of years that turned some mammals into apes and others into whales, we seem to have grown very distant indeed, almost estranged.  But is that really a long time, or a big difference?  Take the skin off, and the muscles are much the same, the skeletal construction nearly identical.  The brain cells, under a microscope, are impossible to distinguish.  If you imagine the process very much sped up, you see something real: dolphins and humans, both having already shared a long history as animals, vertebrates, and mammals—same bones and organs doing the same job, same placenta and that same warm milk—are basically the same, in merely shape-shifted proportions.  It’s a little like one person outfitted for hiking and another for scuba diving.”

“Whales are nearly identical to us in every way except their outer contours.  Even their hand bones are identical to ours, just shaped a little differently and hidden in mittens.  And dolphins still use those hidden hands for handlike gestures of touch and calming reassurance.  (In any group of spinner dolphins, at any given time one-third are usually caressing with flippers or making bodily contact, a bit like primates grooming.)”

Even our human brains, of which we are so proud, are quite similar in structure and function to that of other animals.

“If you look at side-by-side drawings of human, elephant, and dolphin brains, the similarities overwhelm the differences.  We are essentially the same, merely molded by long experience into different outer shapes for coping with different outer surroundings, and wired inside for special talents and abilities.  But beneath the skin, kin.”

The misunderstanding of our common origin has produced tragic misconceptions.  For many years people believed animals could not experience pain or possessed no emotions at all, leading to horrible abuses.

“Elephants and mice might not tell us what they are thinking.  But their brains can.  Brain scans show that core emotions of sadness, happiness, rage, or fear, and motivational feelings of hunger and thirst, are generated in ‘deep and very ancient circuits of the brain,’ says the noted neurologist Jaak Panksepp.”

“Rage, for example, gets produced in the same parts of the brains of a cat and a human.”

“Under stress, other animals’ blood carries the same hormones that the blood of stressed-out humans does.”

And our emotions are also associated with the same chemical drivers.

“Complex animals have inherited very ancient emotional systems.  The genes that direct our own bodies to create the mood-making brain hormones oxytocin and vasopressin, for instance, date back at least seven hundred million years.  They ‘likely arose when animals became mobile and started to make experience-based decisions’.”

Emotions that we take for granted as being genetic in origin are, but the activation is via the programmed release of hormones and other chemicals.  What we describe as “maternal instinct,” and the much less potent “paternal instinct,” are chemically aroused states.  And the mechanisms that generate them are shared with other animals.

“Oxytocin drives bonding, and it makes elephants and many other species act social or sexual.  Block the hormone; many mammals and birds lose interest in socializing, pairing, nesting, and contact.  Oxytocin and opiod hormones create sensations of pleasure and social comfort in many species, including humans.”

New mothers are doused in oxytocin to encourage them to care for their infant.  It isn’t possible to determine what would happen if mothers were deprived of the chemical.  However, fathers evolved in such a way that oxytocin levels are naturally low.  It is ethical to experiment with men whose oxytocin levels are artificially increased.

“Given a sniff of oxytocin, human fathers get more playful with their babies, increase eye-to-eye gazing, and show greater interest in the child.  This is the chemistry of bonding.”

Safina goes to great lengths to demonstrate the lives of the animals he has studied mirror in many ways the lives of humans in terms of both intellectual and emotional drivers.  He reaches a firm conclusion: animals are not “its” they are “whos.”  Each member of a species is a unique individual.

“’Who’ animals know who they are; they know who their family and friends are.  They make strategic alliances and cope with chronic rivalries.  They aspire to higher rank and wait for their chance to challenge the existing order.  Their status affects their offspring’s prospects.  Their life follows the arc of a career.  Personal relationships define them.  Sound familiar?  Of course.  ‘They’ includes us.  But a vivid, familiar life is not the domain of humans alone.”

Safina succeeds in demonstrating the connection between humans and other animals, mostly by describing animal behaviors that we can recognize as familiar to humans.  However, he also provides a fascinating example of how the human-animal similarity can be demonstrated in human activities.

Consider dolphins.  Like many sea animals they must live in a world where light makes visualization important.  However, they must also live at depths where light does not penetrate and they must resort to sound to navigate.  They produce bursts of sound and sample the reflected waves: echolocation.

“Dolphins using sonar can detect a ping-pong ball one hundred yards away, a distance at which many humans would fail to see it.  They can track rapidly swimming fish well enough to capture them, meanwhile avoiding obstacles while travelling at high speeds.  They click fast: each click last ten millionths of a second, and they make up to four hundred clicks per second.”

Dolphins evolved this capability by adapting the same basic brain structure that they share with humans.  Eyes do not capture images and pass them on to the brain.  They are sensors that respond to perceived energy signals.  These sensations are passed on to the brain where very complex logic is used to construct an image from them.  Could it be that this same logic can be used to interpret sonic signals?  And could humans learn to use it in that manner?

Safina introduces us to Daniel Kish

“Perhaps the most amazing practitioner of echolocation among humans is Daniel Kish, blind since he was one year old, who early in life discovered that making clicking noises helped him get around.  Much of his brain must be reassigned to sound, because he uses his own clicks to navigate.  He can ride a bicycle in traffic (hard to imagine), and he has founded World Access for the Blind to teach other blind people to use their own sonar—to summon, as it were, their inner dolphin.”

Kish can’t compete with a dolphin. He would have to develop a more powerful and more rapid sonar system to acquire greater accuracy and function at larger distances, but what he can do is still astonishing.

“Sounds from his tongue clicks, he explains, ‘bounce off surfaces all around and return to my ears as faint echoes.  My brain processes the echoes into dynamic images….I construct a three-dimensional image of my surroundings for hundreds of feet in every direction.  Up close, I can detect a pole an inch thick.  At fifteen feet I recognize cars and bushes.  Houses come into focus at about 150 feet’….’Many students are surprised at how quickly results come.  I believe echolocation capability is latent within us….The neural hardware seems to be there; I’ve developed ways to activate it.  Vision isn’t in the eyes; it’s in the mind’.”

Perhaps we could learn more from our animal relatives if we would stop trying to render them all extinct.  Safina provides an apt summary for the discussion of ourselves and our cousins.

“There is no other animal like us.  But don’t forget, there are no other animals like each of them, either.”

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