Baltimore Is About Economics, Not Racism

Posted on May 5, 2015 by jackheidel

The death of another black man at the hands of the police, this time Freddie Gray of Baltimore, has again set off a national debate about poverty, inequality and racial injustice.
The Washington Post journalist Marc Thiessen wrote about this several days ago in, “The Baltimore Democrats Built,” saying that:

Although 63% of Baltimore residents are black, so are 40% of police officers.
City officials injected $130 million into the Sandtown-Winchester community (where the riots took place) in a failed effort to transform it.
The poverty rate in Baltimore is 24% compared with 14.5% nationally.
The unemployment rate for black men in Baltimore between the ages of 20 – 24 is 37%.
Among the nation’s 100 largest counties, the one where children face the worst odds of escaping poverty is the city of Baltimore.
In 2014, Baltimore public schools ranked third in the country in per-pupil spending, yet 55% of Baltimore fourth graders scored below basic in reading.
In the Sandtown-Winchester community, nearly half of all high school students missed at least 20 days of school in 2011.
This community’s murder rate is double the average for Baltimore, which in turn had the fifth highest murder rate last year among major U.S. cities.

In other words, Baltimore’s problems cannot be blamed on racial prejudice or on a lack of resources to combat poverty and low educational performance. Clearly needed are better schools and more employment opportunities. Better state and local leadership would help in this respect. But what is most needed is faster economic growth for the whole country. There are many things which could be done to accomplish this. It’s a shame that our current political system is too fractured to allow this to happen.

Will Wage Stagnation Continue Indefinitely?

Posted on May 3, 2015 by jackheidel

It is widely deplored that wages for both middle- and lower-income workers are stagnant and have not even recovered from where they were before the beginning of the Great Recession. The latest issue of The Economist explores this problem, “When what comes down doesn’t go up.”
The Economist sees several factors at work:

As the unemployment rate continues to drop, many new jobs are paying less than the old jobs that were lost.
In Germany “mini jobs,” paying under $440 per month, are skyrocketing. In Britain “zero hours” contracts, with no commitment to a fixed number of hours, are becoming more common.
In 2013 Kelly Services, which provides temporary workers, was the second largest employer in the U.S. with a staff of 750,000. 2.9 million temps account for 2% of all jobs in the U.S.

As The Economist points out, if low pay does in fact lock in, inflation will stay low even as the unemployment rate continues to fall. The Federal Reserve will then be likely to keep interest rates low indefinitely as well. But this means there will be far less incentive for Congress and the President to cut back on huge deficit spending because debt is almost “free money” when interest rates are low. Long term, massive debt, is a huge threat to our security and prosperity.
Breaking out of this pernicious low wage trap will require a bold effort by Congress and the President to boost economic growth. By far the best way to do this is with broad-based tax reform at both the individual and corporate levels. As I have discussed in previous posts, what is needed is lower tax rates paid for by closing loopholes and deductions. Hopefully, the new Congress is headed in this direction!

The Social Effects of Income Inequality

Posted on April 30, 2015 by jackheidel

It is well understood that income inequality is increasing in the U.S. for a number of reasons: economic globalization, the rapid development of new technology and the slow recovery from the Great Recession of 2007 – 2009.
The New York Times’ economics journalist, Eduardo Porter, discusses the social effects of this ominous trend in the article “Income Inequality Is Costing the U.S. on Social Issues.” For example:

The U.S. has the highest teenage birthrate in the developed world – seven times the rate in France, for example.
More than one out of four U.S. children lives with one parent, the largest percentage by far amongst industrialized nations.
More than a fifth of U.S. kids live in poverty, sixth from the bottom among the OECD.
Among adults, seven out of every 1000 are in prison, five times the rate for other rich democracies and three times the U.S. rate from four decades ago.
In 1980 the infant mortality rate in the U.S. was about the same as in Germany. Today it is almost twice the rate as for German babies.
American babies born to white, college educated, married women survive as often as those born to advantaged women in Europe. It is the babies born to nonwhite, non-married, non-prosperous women who die so young.

In other words, there is huge social disparity between the well-off and the poor in the U.S. and, furthermore, the resulting social breakdown is getting worse. Why has this been happening?
Conservatives say that it is the fault of a growing welfare state which has sapped Americans’ industriousness and sense of self-responsibility. Liberals say that welfare programs arn’t extensive enough to withstand the strict demands of globalization and technological development.
Mr. Porter concludes that, “the challenge America faces is not simply a matter of equity. The bloated incarceration rates, rock-bottom life expectancy, unraveling families and stagnant college graduation rates amount to an existential threat to the nation’s future.”
I tend to agree. Is our democratic political process capable of responding in a satisfactory manner? I will return to this theme often in the coming months!

Globalization Is a Messy Process

Posted on April 28, 2015 by jackheidel

Globalization is having a dramatic effect on income distribution around the world as I discussed in a previous post. Middle incomes in the developed world are stagnating while at the same time they are growing rapidly throughout much of the rest of the world.
At the same time as western world economies are stagnating, turmoil and instability are breaking out elsewhere, especially in eastern Europe, the Middle East and northern Africa. Fortunately the U.S. and its allies are stepping in with military force to help maintain local order in many parts of the world where it is breaking down.
In short, at the same time, whether connected or not, the postwar geopolitical system is breaking down and the economic stability of the Great Moderation has given way to the Great Recession and its aftermath of macroeconomic volatility.
An interesting article by Chrystia Freeland in the latest issue of The Atlantic, “Globalization Bites Back” addresses both of these issues together. She says “I believe that capitalist democracy has proved itself to be the only compelling, universalist vision of how to live the good life. But the stable world order many of us assumed this thesis foretold has not come to pass.”
As the above chart shows, one very positive result of this messy process is likely to occur. The middle class worldwide is predicted to grow from 1.8 billion in 2009 to 4.9 billion in 2030. All of this enormous growth in the size of the middle class will occur outside of North America and Europe.
The implications for the continued prosperity and world leadership of the U.S. are clear. We need to get our own economy back on track, growing at a faster rate. We also need to get our fiscal house in order so that the dollar will continue to be the international currency of choice.
Our dominant role in world affairs is beneficial to all but it is by no means assured without much effort on our part.

One Thing Congress and the President Are Doing Right

Posted on April 26, 2015 by jackheidel

This blog is mostly devoted to a discussion of the big fiscal and economic problems facing our country. A growing and fiscally prudent economy will do the most good for the greatest number of Americans. I have also argued that “A Strong Country Requires a Strong Economy” in the sense that our adversaries take us more seriously because we have the world’s dominant economy.
In addition, I strongly believe that U.S. power plays a critical role in maintaining stability around the world. More bluntly, the world is better off because the good guys are also the strong guys. It is often said that we can’t police the whole world but whether we want to or not we have this role.
In this regard, the Wall Street Journal has just published an informative article, “New Way the U.S. Projects Power around the Globe: Commandos.” The U.S. Special Forces currently has 70,000 people in uniform and an annual budget of $10 billion. Last year they operated in 81 different countries on six continents. For example:

Navy SEALs and Army Green Berets are stationed in the Baltics, training troops from Lithuania, Estonia and Latvia for the type of proxy warfare Russia is conducting in eastern Ukraine.
U.S. forces are helping Filipino forces stymie al Qaeda aligned Abu Sayyaf Group.
The U.S. has trained Columbian troops to fight rebels and drug traffickers.
A Navy Seal raid killed Osama bin Laden in his Pakistani hideout.
U.S. special operators work with Ugandan troops to hunt the leader of the Lord’s Resistance Army.
1,300 troops from 18 western nations are training commandos from 10 African countries to fight extremist organizations such as Islamic Maghreb and Boko Haram.

The world is a messy, chaotic place. Our own wellbeing depends on maintaining at least a minimal degree of stability. We have accepted this responsibility and are meeting it head on. This represents America at its best.

How Can We Achieve a Free Market in Healthcare?

Posted on April 23, 2015 by jackheidel

My last post, “Why Is American Healthcare So Expensive?” suggests that we don’t have enough “skin in the game” because most costs are paid for by third party insurance companies. One way to alleviate this problem is to subsidize insurance coverage only for catastrophic care with a high deductible and to encourage health savings accounts to pay for routine healthcare expenses.
But the University of Chicago’s John Cochrane points out in “After the ACA: Freeing the market for health care” that getting to a true free market in healthcare “will be a long hard road” because “both supply and demand must be freed.”

Health care supply. Cost reduction only comes from new entrants into a business, not reform of old businesses. But in 36 states, for example, every new hospital or even major purchase requires a Certificate of Need issued by Hospital Equalization Boards which have explicit mandates to defend the profitability of existing hospitals.
Health care demand. True “need” is simply not a well-defined concept when a third party is paying the bills. The consumer must pay a lot closer to the full marginal cost of healthcare, or perhaps receiving the full financial benefits of any economies which he is willing to accept.

What are the objections to establishing a free market system?

The homeless and mentally ill, etc. Charity will always be needed for those who fall through the cracks. This doesn’t require a nanny state for the rest of us.
Adverse selection. In a free market sick people are more likely to buy insurance and healthy people to forgo it. Sick people would pay more but “health status” insurance and guaranteed renewability will mitigate this problem.
Shopping paternalism, i.e. people faced with serious illnesses are incapable of making cost-based decisions. These people and their families will simply have to learn to shop around. In a competitive market, a hospital which routinely overcharges cash customers will be “creamed by Yelp reviews.”

Conclusion. There are only two ways to get health care spending under control. A single payer system with rigid regulations and severe rationing or else a deregulated free market system where individuals have primary responsibility for their own care. Americans are likely to prefer the second option if given a clear choice.

Why Is American Healthcare So Expensive?

Posted on April 21, 2015 by jackheidel

The U.S. spends almost 18% of GDP on healthcare costs, double what any other developed county spends.
There are many reasons for our excessive healthcare spending. For example:

As illustrated in the above chart, many medical procedures are far more expensive here than in other countries.
Profit levels in the healthcare industry are often very high, for example: 16.4% for pharmaceuticals, health-care information 9.4%, home healthcare firms 8.5%, medical labs 8.2% and generic drug makers 6.5%.
Health insurers, on the contrary, have a very low profit margin, (2.2% in 2009), and so can hardly be blamed for the high cost of healthcare.

The Affordable Care Act greatly expands access to healthcare but does very little to control costs. The Manhattan Institute’s Avik Roy has outlined a plan, “Transcending Obamacare: A Patient Centered Plan for Near-Universal Coverage and Permanent Solvency” which would reform Obamacare by making it more like two very successful and low cost consumer-driven plans, those in Switzerland and Singapore.
These two countries feature government sponsored health savings accounts, backed up by insurance for catastrophic care. What happens is that out-of-pocket spending for healthcare per individual is higher in Switzerland and Singapore than it is in the U.S., as indicated in the chart below.
In other words, the real reason for our high cost of healthcare is that Americans don’t have enough “skin in the game.” We have very little incentive to hold down the cost of our own care because it is mostly paid for by third party insurance companies.
As the cost of healthcare continues to climb, such changes are already beginning to creep into the health insurance market place. Private companies are raising the deductibles on the insurance plans which they subsidize. The bronze, silver, gold and platinum plans on the ACA exchanges differ largely by the level of the insurance deductible.
Avik Roy’s plan referred to above in essence speeds up the process of converting the ACA into an efficient, consumer-driven healthcare system by making it more flexible and therefore more adaptable to market forces.

Providing Regulatory Relief for Main Street Banks

Posted on April 19, 2015 by jackheidel

The major congressional response to the Financial Crisis was the passage of the Dodd-Frank Act in 2010, putting many restrictions on U.S. financial institutions in hopes of ending “too big to fail.” The problem is that the new regulations often apply to the many low risk, traditional, main street banks which did not cause the financial crisis. The new regulations hamper the ability of these smaller banks to lend money to their regular customers, thereby slowing down the economic growth we need for full recovery from the recession.
Thomas Hoenig, Vice Chair of the Federal Deposit Insurance Corporation, has recently made some common sense recommendations for alleviating this problem.
He proposes to provide relief for financial institutions which meet the following criteria:

Banks that hold zero trading assets or liabilities.
Banks that hold no derivative positions other than interest rate swaps and foreign exchange derivatives.
Banks whose total value of all derivative exposures is less than $3 billion.
Banks which have a ratio of equity-to-assets of at least 10%. Most community banks meet this criteria and the number is within reach for those which do not.

Of more than 6500 commercial banks, only about 400 do not meet the first three criteria. None of the banks with more than $100 billion in total assets meet these criteria. Banks which qualify could receive relief such as:

Exemptions from Basel capital standards and risk-weighted asset calculations.
Allowing for examiner judgment in eliminating requirements to refer “all possible or apparent fair lending violations to Justice” if judged to be de-minimis or inadvertent.
Exemptions from appraisal and stress test requirements.
Allowing an 18-month examination cycle as opposed to the current 12-month cycle.

Mr. Hoenig’s conclusion: “For the vast majority of commercial banks that stick to traditional banking activities, and conduct their activities in a safe and sound manner with sufficient capital reserves, the regulatory burden would be eased. For the small handful of firms that have elected to expand their activities beyond commercial banking, the additional regulatory burden is theirs to bear.”

Should We Raise Taxes or Cut Spending?

Posted on April 16, 2015 by jackheidel

Tax Day is a good time to remind ourselves about our perilous fiscal situation. With a public debt (on which we pay interest) of $13 trillion and with annual deficits of just under $500 billion adding to the debt each year, we have a huge problem which is not being adequately addressed by Congress. The solution is to either raise taxes or cut spending or do a combination of both.
Is it feasible to raise taxes, presumably on the rich? The problem in doing this is that our tax code is already very progressive as indicated by the above chart. The top 20% already pay 84% of all income taxes. It’s just not feasible to expect to be able to raise their taxes by a very large amount. In addition, Middle- and lower-income people are in a tight fiscal situation, because of the slow economy, and can hardly be expected to see their own taxes increase.
The alternative to raising taxes is to cut spending and there are many opportunities to do this. The organization Citizens Against Government Waste has just identified a collection of government programs whose elimination would save $639 billion in the first year alone. Taxpayers for Common Sense has a long list of potential spending cuts which would save $267 billion in the first year.
Amazingly, neither of these lists of possible cuts includes any mention of entitlement programs. Before very long, major savings in entitlement programs must certainly be achieved in order to put the federal government on a sustainable fiscal course.
In fact, spending should be trimmed all across the board, wherever possible, in order to get our annual deficits on a steadily downward course. It is critical for this process to get under way as soon as possible and to continue until fiscal balance is achieved by entirely eliminating deficit spending altogether.

Are We Doing Enough to Help the Poor?

Posted on April 14, 2015 by jackheidel

Income inequality in the U.S. is getting worse and one reason is that the middle class is being “hollowed out” by a lack of sufficient job opportunities.
The result is more people at the bottom end of the income scale. Not surprisingly, it turns out that many of these low-wage workers are receiving public assistance, as documented by the UC Berkeley Labor Center, and the New York Times.
The authors point out that if these workers received higher wages, they would not require as much public support which, in turn, would save money for the taxpayers. This is a true but not a practical means for helping the poor. Employees are paid what they’re worth based on the law of supply and demand. Companies will pay as much as they have to in order to find and retain well qualified workers. Furthermore, a minimum wage which is too high will simply lead to a higher rate of unemployment.
There is really only one good way to raise the overall wage level, especially at the bottom end of the scale. It is to speed up economic growth, thereby lowering the unemployment rate and creating more demand for workers.
This is exactly what has happened in Omaha NE where I live. The official unemployment rate is 3.2% and there is a labor shortage. A new minimum wage ($8/hour now, $9/hour next January) was approved by the voters last November. But low-skill entry level jobs are paying $10/hour or more because of the scarcity of workers.
There are plenty of opportunities to succeed in Omaha. Support yourself with a low-wage job and go to Metropolitan Community College to learn a high-skill, high-wage trade. Most people are capable of following this route to a better life!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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