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Wednesday, September 30, 2009

A Recovery Only Its Mama Could Love

But I think this one is destined to be a foundling laid at the orphanage door.

Chicago PMI - Really worth reading this month. The comments are worth reading. The overall drop from August's 50 to September's 46.1 is of course disturbing. Production dropped from 52.9 to 47.2. Whimper. Inventories are still contracting, but slower, new orders were down sharply (52.5-46.3), backlogs are contracting. It's a grumpy report - the brightest spot is that although employment is contracting, it isn't contracting any faster. Prices are still trying to shift up even if orders and backlogs are contracting, so I would say the Fed had better be thinking about rate hikes far sooner than they now project.

However this sort of thing is not inconsistent with recovery, and has happened before, so don't worry about those numbers. No, no, the thing that ought to worry everyone is the special question, which was:
Your budget or plan for 2010 contains assumptions/forecast of revenue generation. Your answers to these two associated questions provides a context for economic forecast for 2010. 1. What percent growth (decline) in DOLLAR sales/revenue is contained in your company’s baseline plan for 2010? 2. What percent growth (decline) in UNIT sales/revenue?
The answer (see page 5):

I don't wish to render you all as soggy and dispirited as I am, but technically speaking, almost 60% of companies forecasting real flat to declining revenues and over 60% of companies forecasting nominal flat to declining revenue would be a recessionary indicator. It is quite hard to fit into a picture of the growth year after a very sharp recession. Combined with the remarkably poor trends in base-level goods buying, one would suspect that the carrying wave is just not there, unless we add in some putative factor on the theory that consumers will have paid off more of their short-term debt and can get out there and spend. Which is very hard to forecast unless employment picks up more....

However, if I look at the crude inventories report, I see that the gasoline consumption has picked up sharply over the last 6 weeks. There are more jobs out there. This is the indicator that pushed me over to call recovery - last week it was at +4.4%, and this week it is at +5.4%. You always see a sudden pop in gasoline consumption when the job market starts to pick up again. But I believe most jobs are in low-end retail.

ADP employment was not particularly joyous. They have the monthly decline in lost jobs continuing (-254,000 in September), but the pattern of job losses in small businesses (1-49 employees) is disturbing:
Small Business Jobs Gained or Lost: April-May: -172,000 May-June: -160,000 June-July: -131,000 July-Aug: -114,000 Aug-Sept: -100,000 Large Business Jobs Gained or Lost: April-May: -91,000 May-June: -87,000 June-July: -70,000 July-Aug: -57,000 Aug-Sept: -61,000
There are many more total jobs in small businesses than in large businesses. Normally small business employment tends to be less volatile in downturns, but now I am wondering if that will hold. Go to Chart 4 on page 4 of the link and look at the graph and you'll see. Again, the movements themselves are not disturbing, because there generally is a consolidation stage a few months after emergence from a recession, and according to my indicators, we did emerge into a short span of growth around June.

But what is disturbing are the levels. This graph is percent month-to-month change, and the level is generally linked to the 3 month average of the CFNAI. I believe the mechanism of that linkage is through purchases by small business owners. Anyway, see this post of CR's. CFNAI is not reaching points at which one would normally declare that a recession has ended, and in fact CFNAI blipped down in August. Here is the data series. If you look at both CFNAI and CFNAI-MA3 (the 3 month average), you see we are still at levels that do not indicate broad economic growth, although the move upwards over the summer was quite nice.

Now go back and review the 1979-83 period, and you can see how that double-dip looked. Here's a graph, but you really have to split it up to see what's going on:

You will note that we haven't managed to get to zero yet, or even sustain above -0.50.

So then I guess we would come to Greenspan's remarks. It is possible he is looking at data like Chicago PMI and figuring that it will just be a slow, hard slog, but I am looking at data that almost forces another downturn

The wickedest thing about this is that all the push forward I see is coming from deflation of basic costs. Let inflation for food, fuel and clothing kick up significantly, and it's gone. At the beginning of the year, I expected the second half of 09 to be worse than it is going to be, and the difference is that I thought food prices and so forth would deflate much less.

I am using the 08 Census data to rebalance all my models, and I'll try to calculate from there.

PS: Let's say you were recovering from the flu, as I am. You would not want to read this and this from CERF. I did yesterday and just whimpered back under the blankets. I am pretty sure I am going to come out better than CERF. CERF has US GDP going weakly positive in Q3, reverting strongly negative in Q4, and remaining in negative territory all through 2010. Here's hoping old Greenspan is right. If you are from CA, this is really not the thing to read.

Wednesday, September 23, 2009


That's a real recovery. The ugliest little bug of recovery, but it is alive and growing.

The self-sustaining chunk of it is almost all in the lower 2/5ths of the population by income, and it is acutely sensitive to inflation, for one thing. We have to stagger through until next summer without dropping back for it to start forming a chrysalis, but hey, it could happen.

I seem to read nothing but articles state that CARS was a complete waste of money, but IMO, CARS pushed it over. Not only did it move a bunch of stuff around the country for a couple of months, but it also got some vehicles into hands of people who needed them to take up the (mostly lower-end) jobs which are opening up. A lot of people needed reliable transport to get those jobs.

Oh, I am so relieved.

I should point out that there are far more mechanisms by which this thing could be stomped flat than there are ways for it to shift into higher gear, so this could be the short leg of the W. A lot now depends on government policy.

I'm so excited. I'll explain later.

Tuesday, September 22, 2009

The Floggings Will Continue Until Morale Improves

I feel truly rotten, so I will depend upon others for the next step:

Laffer. Reliable fellow. WSJ article summarizing the tax hikes and their contribution to the Great Depression, plus the role of gold:
At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.

The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.
Let's just say that the role of gold then is being split between oil, other commodities and gold now. There are differences and similarities between this period and that period, but moving on to Macro and Other Market Musings, it is notable that velocity is dropping:

Read the whole post, but I quote this:
This figure also shows that the Federal Reserve has been significantly increasing the monetary base, which should, all else equal, put upward pressure on nominal spending. However, all else is not equal as the movements in the money multiplier and the monetary base appear to mostly offset each other. Therefore, it seems that on balance it has been the fall in velocity (i.e. the increase in real money demand) that has driven the collapse in nominal spending.
Theoretically, as long as people are saving their money in banks rather than in coffee cans or mattresses, the banking system recycles the money and prevents your savings from becoming your doom. This greatly simplifies household economics, because the average individual is not well equipped to calculate the relative risks of, say, not having funds for car repairs and therefore not being able to get to work as compared to the risk that saving money for car repairs will contract velocity enough so that our average joe or jane will find himself laid off.

Government guarantees on bank deposits plus high costs of incidental credit have sustained the flow of money into bank deposits currently, unlike the early phases of the Great Depression.

Of course, when the banks are tightening consumer credit there is a much greater need to have money saved. When the flow of money from banks starts to be toward the Treasury and away from lending, money circulation is impaired unless the government is doing something that sustains the flow of money in the marketplace. Thus, the no-stimulus features of the stimulus bill have been a problem. Throwing a few hundred billion into infrastructure would have replaced the funds that are being effectively withdrawn by banks and sent to Treasury or put on deposit at the Fed. Alternatively, the Fed could just hand out money to consumers to extinguish high-margin debt and thus improve their incomes, or could offer low-rate loans to offset high rate loans. That would not have the multiplier of infrastructure spending. Consumers will tighten until they get their economic feet back, and the evidence is that they have not.

Thus, although it is a gentler gradient than during the period of the Great Depression (Praise G_D and pass the ammunition), we have entered a similar dynamic and should feel an impetus to do something about it. We can't really do much about state and local taxation. It is going to have to be fought out municipality by municipality and state by state. States will have to cut spending since lenders are wary of financing state deficits, and the demographic problem of the upcoming retiree benefits is upon us.

Oil: Oil as a refuge from monetary problems creates a separate economic dynamic, because both PPI and CPI are strongly related to the cost of oil. When oil goes up, they go up until a breaking point is reached and consumer spending on non-necessities is deeply impaired. When that occurs, trade cycles down and money flows are restricted in many channels, employment drops in some, diamonds deflate, etc. Of course, buying gold and storing it in your basement or buying oil and pumping it into storage or keeping it in a tanker temporarily removes money from circulation. It is not trade, but storage of money. When Chinese farmers are stockpiling copper, we can concede that monetary worries are not sequestered in the US and that the US alone will be unable to fight them, but we should do what we can.

US incomes were dropping in 2008 and are surely dropping now. It is not just wages, but returns on investments and interest paid to households. I also have widespread indications of downward trends in rents, etc. Tight incomes combined with inflation are not going to induce a spending dynamic.

Many authorities have encouraged the Chinese to try to boost domestic demand, but so far that doesn't seem to have happened in any structural way, although it is nice to know that Chinese families without electricity or running water have dutifully bought washing machines. Thank you, Mark.. There are many reasons for this. Chinese farmers and other rural workers were hit very hard by previous inflation in China, and so may be wary. The Chinese worker doesn't have much of a social safety network compared to most countries, so naturally they are pushed to save. They don't, for example, have effective hospital insurance.

All of this leads us to the next aspect of the insurance/health care reform discussion. If insurance is failing, one would definitely expect a savings impetus to travel through the economy and consumer spending to retract.

Insurance is really a means of efficiently saving in the aggregate for highly unpredictable individual expenses. It is economically efficient because the average cost is less than the 20% or 30% individual risk Say I have a 20% risk of racking up 600K in hospital bills over my working life. I reasonably have to save for something close to that, because throwing relatively large amounts of money into homes or businesses does not make sense if I may lose them due to the large medical bill. But if I have a 20% risk of 600K in hospital bills, that means that 80 out of 100 households won't have bills anywhere near that. So grouping the risk allows each household to save less individually and overall cover their aggregated risk more efficiently. This leaves the individual households able to spend more money on average on other things (which could include investments, business expansion, education) and boost the economy.

I need to go into the question of efficient insurance in more detail, but I'm running a fever now and after I administer my medication it's going to go higher, so I think that will have to wait.

But the bottom line is that insurance is not an efficient method of paying for highly predictable levels of expenses. Your predictable expenses will always be more efficiently covered by saving for them. When insurance is serving a dual purpose of welfare (redistribution of income from wealthier to less wealthy families who cannot save for predictable expenses) it is inefficient. This does not mean we shouldn't provide for the needs of poorer families, but redistributing income for welfare purposes should be done with direct welfare policies wherever possible.

Having a certain amount of savings, even if those savings were generated for one specific purpose, will lower a household's total payments and therefore maximize that household's real income and economic options over time. Thus saving for predictable expenses is a fundamental feature of household economy, and diverting those savings into medical insurance is going to be a problem over time.

Rebecca wrote a post some time ago speculating that some of the withdrawal of household equity over the last decade had occurred due to medical expenses. I would venture to guess that she is correct, because I would expect that very high medical insurance bills are stripping many households of the ability to save. I've got to find that post.

My belief is that the US has created a situation in which private medical insurance is increasingly inefficient. This offers some hope of reforming the situation in ways which would support economic growth.

And as for the post title, I got a good laugh out of Steven Chu's latest edicts from on high. This is great stuff, and I think he hasn't seen the political temper tantrums begin. Chu needs to be kept with Biden in the basement of doom:
Dr. Chu said he didn’t think average folks had the know-how or will to to change their behavior enough to reduce greenhouse-gas emissions.

“The American public…just like your teenage kids, aren’t acting in a way that they should act,” Dr. Chu said. “The American public has to really understand in their core how important this issue is.”
A couple of weeks ago I went to a supermarket in one of the richest 100 US counties. The store had introduced store brand flour, and 5 lb bags of it were sold out for $1.88. I think Chu greatly misunderstands the situation of the average American.

Monday, September 21, 2009

They Have Not The Common Touch

This post actually is about information in systems, most particularly in political and economic systems. However, I'm going to get there a long way around because I am not sure most people understand the relevance without examples.

So first, we have Dana Milbank's hilarious contemplation of Michelle Obama's yen for organic food (hat tip The Macho Response):
Obama, in her brief speech to the vendors and patrons, handled the affordability issue by pointing out that people who pay with food stamps would get double the coupon value at the market. Even then, though, it's hard to imagine somebody using food stamps to buy what the market offered: $19 bison steak from Gunpowder Bison, organic dandelion greens for $12 per pound from Blueberry Hill Vegetables, the Piedmont Reserve cheese from Everson Dairy at $29 a pound. Rounding out the potential shopping cart: $4 for a piece of "walnut dacquoise" from the Praline Bakery, $9 for a jumbo crab cake at Chris's Marketplace, $8 for a loaf of cranberry-walnut bread and $32 for a bolt of yarn.

The first lady said the market would particularly appeal to federal employees in nearby buildings to "pick up some good stuff for dinner." Yet even they might think twice about spending $3 for a pint of potatoes when potatoes are on sale for 40 cents a pound at Giant. They could get nearly five dozen eggs at Giant for the $5 Obama spent for her dozen.
I am pretty sure the people leaving work would find the inconvenience of stopped traffic outweighed any potential joy gained from organic arugula at $20 a pound. I am also thinking I owe the NY Times reporter an apology for his worries over pricey lettuce. Sir, I apologize.

I read Milbank's article and I thought "The Trianon". It lies outside the scope of this post to discuss the political and economic events that led up to the French revolution, but it included unsuccessful wars and losses of foreign possessions, a government that was tipping into bankruptcy, multiple wheat crop failures, and a ruling class that had gradually split away from the military leaders. The society pancaked when the original hold-them-close strategy of the French royal house finally buckled from the disconnect.

Marie Antoinette's hameau and her habit of occasionally milking cows that had been specially groomed in stables that had been specially cleaned, in a villlage with real peasants which had been specially built, with an artificial watercourse which had been created by diverting water for miles (diverting water from working farms) were just a symbol of the gradual loss of understanding between the people and the royal family. She was used as a rallying cry because it was such an effective way to illustrate the real problem. I am not sure that most people can understand how bitterly offensive the upper middle class, the middle class and the peasantry would have found her behavior, but the milk falling into those royal receptacles was even pricier than $20 arugula. Marie Antoinette found a way to alienate absolutely every group in French society of that time, and although she was not bright, she seems to have been personally a somewhat generous individual. This makes her accomplishment even more notable.

If you are interested, the French text of Madame de la Tour du Pin's memoirs is available on Gutenberg (part 1, part 2). This is one of the most fascinating things I have ever read. There is an English translation, but it is out of print and very hard to find, plus it is under copyright. Her observations about the interactions between court, clergy and the military fascinated me.

Anyway, leaving the guillotines for the moment, let us take a big leap forward in time to our present day, and contemplate two WaPo articles about health care reform.

The first is about the Mayo clinic, and it critically analyzes the assertion in President Obama's health care speech that the Mayo model can deliver cost savings. Now although the title claims that the jury is still out, it is only out in Washington. The bottom line is that the Mayo clinic does not serve anywhere near a representative slice of the US population:
"It's not [Mayo's] model. It's their patients and money. If you have the money, you can attract good staff, good doctors, good nurses," said Richard A. Cooper, a professor of medicine at the University of Pennsylvania. "You are going to force hospitals to find ways to avoid taking care of poor people just because they are going to be penalized because poor people cost more."
Cooper and others note that Mayo's other facilities, in Jacksonville, Fla., and Phoenix, have total spending rates that are roughly proportional to those in other hospitals in those areas. And across the Upper Midwest, per-patient spending is low, including at centers where doctors are not on salaries.
It's a long article, but the bottom line is that Mayo's efficiencies are gained from keeping their share of Medicaid patients extraordinarily low,
Even in Rochester, a city of 85,000, Mayo serves a higher-income echelon than the town's other hospital, Olmsted Medical Center. Just 5 percent of Mayo's hospital patients receive Medicaid, an exceptionally low figure, compared with 29 percent at Olmsted, where officials say they do more to help people in the community apply for Medicaid.
and for limiting their services to Medicare patients. Mayo doesn't accept Medicare patients from outside the state unless they agree to pay more than Medicare for services. So they are not serving the old and the poor in proportion to the US population, although they do provide excellent medical care to those they do serve. Mayo has a large referral clientele, and it also has a big group of foreign patients. It would be rare indeed to find a hospital that didn't have better outcomes and cheaper services if the hospital's clientele were hugely shifted toward the young and the wealthy.

So perhaps now my readers can begin to understand why my reaction to Obama's speech was so bad. Either he is appallingly ignorant of the facts, or his plan is to strip funding from medical services for the poor and the elderly. The proposal in Obama's speech was to pay more to hospitals like Mayo that have good stats but may have created those stats by not providing services to the poor and the elderly. Is it right that a hospital like Olmstead with 29% of its patients on Medicaid should get paid less to care for those with the more severe problems, whereas Mayo would be paid more to pay for a clientele that has already been sorted to be in the upper socio-economic group?

Anyone who holds traditional democratic values and who understands what is being proposed ought to be just as upset as I am.

Whether Michelle Obama truly believes that the poor will be rushing to the Vermont Avenue organic farmer's market for their double food stamps and whether Barack Obama really desires to defund the medical system for the elderly and poor is a big question. "Dumb or dastardly?" is how I frame it to myself.

Dumb can be fixed, but only if the circle of advisors is changed. It doesn't help matters that President Obama is talking about a recovery when the recovery is increasingly jeopardized. (See this Calculated Risk post, and read on to CR's explanation of how consumer spending and business investment is correlated. I had earlier referred to the same relationship at the end of this post, but CR always has great graphs.) The best, most optimistic picture I can frame to myself is of an administration that has a severe reality disconnect but its heart in the right place. Oh, I want to believe, but this double food stamp stuff for $20 lb arugula is taxing my powers of belief.

This leads me to the second WaPo article discussing the average employee's confusion over what the employee is really paying for health care. The observation is true. The numbers are good - 80 million or so on Medicaid plus Medicare, and about 160 million with private insurance. However there are some gaping holes in the the article, because the high concentration of employment in small-to mid-sized employers is wreaking havoc on the private insurance market.

The primary factors driving the need for health care reform are:
Another way to look at this is that by providing government insurance which does not pay the cost of care, all individuals in the society who are not on government insurance are paying a hidden tax. However the tax is exceedingly oddly distributed in a way that an overt tax never would be distributed. What we are doing now imposes a fearfully high societal cost because it destroys information and price signals.

Just as wacky funny money mortgage lending destroyed price signals and information within the system to produce a seemingly sudden collapse, destroying information in any system will produce sudden collapses.

Since the economic efficacy of insurance involves large pools of people paying average group cost rates, this destroys the fundamentals of the insurance system. Instead of creating a situation in which the maximum number of people can afford to pay the average cost of health care in the form of insurance, we are creating a situation in which it is formidably difficult to figure out what the average cost of treatment is, absolutely impossible to develop strategies to lower the average cost of treatment, and completely impossible for individuals or smaller groups to control their costs. Thus, since have stripped all the real cost information out of the system, insurance groups are competing on the basis of who they can exclude and their ability to negotiate rates with providers. And that is how a person like Mark who is not sick at all (see his comment on the prior post) finds himself shifted into a high risk pool. He is making a rational decision not to participate in that pool, because he is not a high-risk individual. Now when insurance becomes a logistically bad arrangement for a healthy, wealthy person like Mark, it should be obvious that we have a broken system.

So what broke the system?

Costs of treatment have to take into account the cost structures of the hospitals in the areas in which individuals who are insured live. But hospitals no longer bill by treatment, but by negotiated group rate. Hospitals only survive by taking the cost of providing services and allocating different costs for the same services to different groups.

Of course this leaves the uninsured or small-group insured individual in the worst situation, because they will not be paying any average cost of care at all to receive insurance. Instead, the only benefit such small groups or individuals receive from insurance are the negotiated rates.

The fact that size of negotiator has become the primary driver of costs provided to a particular group of insured persons has created a drive toward regional insurance monopolies, which are not a good way to induce economic competition.

The reason why group negotiating power has become the controlling factor for insurance companies is that the government insurance does not pay for the cost of care, especially in hospitals. If you doubt this, you need to read up on Medicare's DRG system, and also look up DRG rates. Here is the 2006 HHS summary for short patient stays by state. Take CA as an example. Medicare reimbursed CA hospital 9.1 billion for 45.8 billion worth of covered charges. You don't make that up by raising the cost of the parking. Medicaid pays less. At a minimum, each hospital has four sets of prices. One is top secret, and only they know. That is the actual cost of providing the service. Then there are Medicare/Medicaid prices, then negotiated insurance prices (which usually vary by insurer), then the price to the uninsured. On average, the price to the uninsured patient will be at least 5 times what Medicare will pay for the same service.

Thus, the cost a patient pays (or an insurer pays on behalf of the patient) at a particular hospital is mostly a function of the patient mix AND NOT THE PER PATIENT COST AT THE HOSPITAL. Consider two examples of a hospital providing services for pneumonia:
Hospital M:
The per patient cost is 5K if 1,000 patients are seen annually (there are fixed costs which are the bulk of the cost, plus per treatment costs.)
Medicaid is paying about .8K. Medicare is paying about 2K. Medicare plus is 3K. If the hospital treats 1,000 patients annually, the cost of care is 5,000,000 or 5 million dollars, which is 5,000K
Hospital O:
The per patient cost of treatment is 3K if 1,000 patients are seen annually. The hospital is spartan, the doctors are paid less, the patients get adequate care for the most part, but it is a very different patient experience from being treated at Hospital M. Hospital O makes up some of its expenses by charging for things that are provided free at Hospital M. Medicaid and Medicare reimbursements are the same. Total annual cost of treating 1,000 patients is 3K X 1,000 patients or 3,000K - considerably less than Hospital M.
That is how you get ridiculous hospital bills such as the one Teri got for her husband's care. Medicare wouldn't have paid more than 25K at most, but she got a $170,000 bill. Note that Hospital O is in a trap. It can't charge very much more than Hospital M for the same service, because insurers will send their patients to Hospital M in preference. But it must get far more of its costs reimbursed from private insurance than Hospital M, because Hospital M is treating a much wealthier group of people who on average pay more.

So which hospital is more efficient at delivering medical care? From an out-of-pocket patient's or a private insurer's point of view, Hospital M is far more efficient. Because they spend more, patients on the whole have better outcomes. The out of pocket cost paid by either a patient or insurer is lower. Thus you choose Hospital M whenever you can if you are one of these groups.

But from the administrative/total cost point of view, Hospital O is far more efficient. To control total costs, you need to get rid of Hospital M entirely, which of course you cannot do. It's a free society. Of course, if everyone is enrolled in the same medical service, Hospital M's seeming advantage is eliminated overnight, and its doctors, administrators and patients are abruptly going to get an unpleasant wake-up call. So are its patients, who have been used to a higher standard of care than they will now be receiving.

If you will contemplate this example, which is pretty close to reality, you'll understand why Mayo is ferociously lobbying against the public insurance option.

Moving back to Hospital M, because I do not want to be sued, why would Hospital M be agitating for higher payments from Medicare based on its (spurious) cost advantage? Aren't they in the driver's seat? Well, Hospital M's budget includes funds for some pretty high-powered actuaries, and Hospital M is well aware that on average, most treatment goes to older patients, and on average, the mix of patients it sees will inevitably shift toward higher percentages of Medicare patients in the years to come. This is a massive threat to Hospital M's finances. In fairness to Hospital M, we should point out that their better care and the lower patient load per doctor/nurse allows them to provide other services to the community and the nation, which Hospital O's spartan existence does not permit. So Hospital M is quite concerned about the following:

Over the next decade the number of individuals who will move onto Medicare vastly exceeds the number of individuals who will exit Medicare. The median householder age in this country is now 49. As of the 2007 ACS, 10.9% of the population was aged 55 to 64, 6.4% of the population was aged 65 to 74, and 6.1% of the population was 75 and over. Assume that all of the older persons die (although they won't), and just take the two younger cohorts. As of 2007 the retired Medicare population was 12.5% of the total population. In 2017, you'd expect over 16.5% of the population to be retired onto Medicare (allowing for some early deaths). And it is the ratios that matter. There is another group of people on Medicare - the disabled. As the center of population ages, the disability rate rises quite dramatically. Thus the Medicare portion (disabled plus retired) is likely to go over 17% of the total population.

To understand the implications for the medical system, you have to realize that older/disabled persons consume a much higher proportion of medical services than their proportion in the population. Thus below cost Medicare reimbursements will rapidly drive up the individual cost for service on the rest of the population. Compare the cost sharing for Hospital O and M to see how that might work out.

Adding more people to Medicaid is not helping. Although children have overall low medical costs, many of the SCHIP recipients added most recently were shifted from private insurance to government insurance. So the net load of total costs the private and uninsured population is carrying has escalated and will continue to escalate.

Further, private insurance provided through employers must go up proportionally to age of the insured population plus percent of costs picked up by private insurance from those insured in government programs, and as the ratio of the employed/total population drops, things are going to get very frightening very fast:

The recessions induce distortion, but if you look at the interims, we have been on a downward slope since 1999 or so. Mind you, most households with the householders under 75 STILL have one working person in them, and almost half of the income of such households derives from wages, salaries, and proceeds from self-employment.

Therefore any chittering about raising the retirement age is as dumb as $20 arugula with double food stamps and expecting that building 90,000 Mayo Clinics around the country is going to cut your medical costs.

In fairness to the Dems, at least they are trying to discuss reform. After his election, President Bush threw everything he had into trying to address this problem, and the Republicans in Congress wouldn't touch it. There is a reason why we now have a Democratically-controlled Congress, and it is a good reason. The results are not thrilling, but I personally don't think the Republicans would be willing to discuss the problem if they were in power at this time. In part, that might be due to Pelosi's drivel about mythical trust funds, but in part it was due to idiocy.

This post is awfully long already, but I have much more to discuss. It will have to be tomorrow, I suppose. One of the topics I want to address is the economic efficacy of insurance and what type of growth impact it can have.

Wednesday, September 16, 2009

Democrats ARE Stupid (on Healthcare)

This is driving me nearly nuts, but I am laughing at the same time.

First we've got the wild claims that anyone who is not for Obama's healthcare plan is racist. Shrinkwrapped gives an explanation, which may well be true, because according to this Rasmussen poll only about 12% of voters really think most the opposition is racist.

In the meantime, this raft of racism accusations are beginning to frazzle some Obama voters. Ann Althouse seems to be in the frazzled group, observing that a president that we are not allowed to criticize is "revolting". Any moment now the woman will be photographed wandering around waving teabags, wearing a "Don't Tread On Me" t-shirt and brandishing a rifle. This is what happens when you marry a guy who works for a living and suddenly spend a lot of time outdoors.

Now we move on to the ?racists? at DU, who are completely horrified at Baucus' plan. They do not want mandated coverage. They mostly want universal health care, but they generally do not want to pay for universal health care. They want it free, or for maybe 5% of their incomes. Or maybe Warren Buffett should pay for most of it, and Bill Gates should cover most of the rest.

Here's a DU thread that asks people if they would pay 13% of their incomes in order to get on Medicare:
66. As a singe person with no dependents, I have paid almost nothing at most employers during my career.

The employer has paid the whole premium for the employee, and then the employee pays for dependents. Or I have paid a small amount, like up to $60 a month for one employer. 13% would come out to about $540 a month (if you take it out of the gross pay). That woud be a HUGE bill to suddenly have when I have been used to paying much less or nothing. So, I would repeat what others have asked... would this be assuming the employer will pass on the savings to me, so whatever was being paid toward my benefit I can now turn around and put toward that 13%? If not, then I would probably have to sell my house, because I can't afford a new $540 per month bill.
Some people are just so clueless that they have never understood any of this. Here's one:
10. Isn't it like 2% now? A 600% increase seems a tad steep.
Some persons just seem confused about percents:
18. Let's assume for the moment that you don't have health care through your company. That's the situation for a lot of small business owners and their employees, not to mention independent contractors (construction to software).

Your take home pay (after federal and state and local taxes) is likely $3500 a month, so we are talking about 1/4 of the after tax income. That's what most people in that income range will pay for rent or the mortgage ( they might be at, say $1200/month for that). Combined, it would take over half of their income, leaving $1500 a month for utilities, car payment, gas, car insurance, clothing, and food.
73. No my employer pays 100% of my insurance premium. I pay 10% of my bills up to a yearly maximum of $1000.
Another set of posters still think they are in an anti-Vietnam march, chanting "Hell no, I won't go".
76. Hell no. Insurance is a lot cheaper.
78. I guess they'll do anything not to disturb the rich...Fuck No ! I won't pay.
39. It would not be 13% if paid for under a progressive tax system
Yet another benefit of tax-funded single payer.
No one can convince this last person that in fact a payroll tax is a progressive system - right now, with employer-funded healthcare, the employer is basically paying the same for everyone as a cost of employment, which is the same as wages to the employer. Therefore, the low-income person relatively pays more. The attempt to explain is made, but fails.

Okay, but some people are a little more clued in, and realize this isn't going to be a bad deal:
32. In a heartbeat!
Right now, I'm paying about 18% for a catastrophic policy.
36. Yes. My husband would probably end up with an increase in pay
Right now my husband's share of our health insurance is about 7% of his monthly income. I am sure that his employer pays a far higher percentage of his wages per month for their share. If the employer's share were part of my husband's income, 13% for Medicare would likely give him a net increase in take home pay.

When he paid into COBRA in 2002 while between jobs and while not covered with one job, the monthly payment was 50% of his previous take home. I don't even want to think what COBRA would cost these days. Probably more than he'd get from unemployment.

We would not have to worry about that if we were covered by Medicare. No worry about losing coverage between jobs, or paying massive amounts for COBRA, or being denied coverage, or being turned down for a job because of his age and how that would increase the insurance payments for the company.
Unfortunately, these people are a minority, and then some have other problems (as explained by SW):
31. I think Medicare is not accepted by my doctors.
so no.
37. Same here
Our docs don't take Medicare, Medicaid or TriCare
62. Wow! Do these people have any idea how hard it is to survive
on low paying jobs that don't qualify for any assistance? I work as a nurse aide. Government says I make too much money to qualify for a grant towards furthering my education. In fact, on my job the healthcare cost way too much for me to afford.... about the 13% we're talking about. I had to choose between healthcare or an apartment to live in. I choose not to be homeless. The plan my employer has is with Grouphealth... a co-op! Now they want to take that choice away from me a force me to either take on a roommate or take to the streets? What the hell kind of choice is that?
Well, you will be alive, unless you pick your roommate unwisely, but I guess this person has already made the choice. It's no.

Germany's current system is transitioning to a central fund, and the ongoing payroll tax is supposed to be close to 16%. We couldn't possibly do it for less, and in fact it would cost more. For one thing, we'd definitely have to raise a lot of Medicare reimbursement rates. Plus, Medicare is 80/20 coverage, with a premium of about $100 monthly and another premium of about $30 monthly for partial prescription coverage. It costs hundreds more a month if you want expanded coverage over that. Also, 75% of SMI is paid for through general tax revenues, so it would be more like a 20% payroll tax. Right now less than 1/6th of the population is covered by Medicare, so obviously it will cost a great deal to add everyone to Medicare.

The bottom line is that most people don't want to pay more than they are paying now, so the only people really supporting the universal coverage stuff are those who don't realize what it will cost or who are already paying more now.

Under these circumstances, it is unlikely that reform will succeed, because the end result is that the Ann Althouse bracket is going to wind up paying considerably more for their coverage than they do now, either in the form of premiums, or in the form of much higher income taxes.

Actually, the single-payer payroll tax would be much fairer than the proposed system. For example, under the proposed system illegal aliens still get covered but basically don't have to pay. They can't get fined, either. And if they don't have insurance and show up at an emergency room, they will get treated anyway, because that is what the law requires. If it's funded through a straight payroll tax, they'll be paying what they can afford to pay, like everyone else.

Does everyone understand how Medicare is funded? It is completely busted. This is the 2009 full report on Medicare (pdf, 245 pages). If you don't understand, go to page 11 of this file.

Part A (hospital insurance) is paid for by a wage tax of 2.9%. There is no limit on the wages. If you earn 2 million, you pay the 2.9% on all 2 million. In 2008 that payroll tax brought in 198.7 billion. Other payments were taxation of benefits (11.7 billion plus premiums of 2.9 billion for non-qualified retirees). Benefits cost 235.6 billion. The general fund (income taxes) had to pay for the difference which was about 16 billion. Every year that gap will grow.

Parts B and D physican, outpatient and partial drug coverage(or part C, which replaces them, also known as SMI) are supposed to be funded about 25% by enrollee payments and 75% by the general fund (income tax). In 2008, total premiums were 50.2 billion for part B (that about $100 premium paid each month) and 5.0 billion for part D. States paid 7.1 billion, and the general fund paid 146.8 for Part B and 37.3 billion for Part D.

So, total Medicare costs were about 468 billion, and the share paid by income tax was about 200 billion and the share paid by Medicare payroll tax was about 200 billion. .

In 2008, about 45 million people were enrolled. Long term disability recipients also receive Medicare - slightly less than 38 million people were retirees. Total cost per enrollee was about $11,000. Mind you, this is for 80/20 coverage and partial drug coverage only. Most retirees pay additional premiums to cover other expenses, or they pay those expenses out of pocket.

What would it cost to extend Medicare to everyone?
The US population is around 300 million people. Younger people are cheaper, but many of the individuals in their 50s or 60s are not, and Medicaid recipients are often pretty expensive. There are also high costs in maternity, and sick infants can be incredibly expensive. Let's say the average cost per younger enrollee was $6,000 a year. (The average employer plan is well over 10K a year now for a family, so we are not far off, because these are the healthier persons on average).

That is still over 250 million new enrollees, or 250,000,000. 250 * 6,000 = 1,500,000 million, or $1,500,000,000,000. That is an additional cost of 1.5 trillion. Now if you add 1.5 trillion plus .47 trillion ( the 468 billion cost for the current recipients), you get 1.97 trillion. Q2 09 annualized GDP was around 14.2 trillion, so we are looking at about 13.8% of GDP for insurance costs, but the average recipient would be paying considerable dollars out of his or her own pocket (over $1,200 in SMI, plus drug costs, plus the 20% that Medicare doesn't pay. So we are right back at 16-17% of GDP, which ought to clue everyone in right away that universal coverage is not going to lower our medical costs. You can forget about that. It's complete BS.

Mind you, as our population increases the average cost per person increases, so we would expect the percent of GDP to move higher.

The next question is how much would this cost per person who was paying? Obviously you are not going to be charging the children, although they would be covered. Therefore you are somehow going to get it out of payroll (wage tax) or income taxes. Sooooo, the easiest way is to induce the wage tax percentages from the current costs.

In 2008 a wage tax of 2.9% brought in about 199 billion, total premiums for SMI were about 55 billion, and the balance (468 billion - 255 billion) was about 213 billion. The balance came from the general fund, i.e. income taxes. We need to raise another (gasp) 1.5 trillion in revenue, but remember, most employers are paying a lot for insurance now, so it is not as bad as it sounds. Also, we can take back somewhere around 300 billion that is spent on Medicaid, so that helps; it brings it down to 1.2 trillion. There are about 150 million workers. If each of them paid $100 a month in premiums, that is $1,200 a year * 150 million or 180,000,000,000 or 180 billion. Plus we are going to charge maybe another 18 billion for the drug coverage, so that takes us to 198 billion. Let's call it 200 billion. Okay, we are are still looking for 1 trillion.

Now here Richard Cohen, who does not dilly-dally with algebra and who believes writing is the highest form of reasoning, would be flat stumped and resort to writing a column on racism to demonstrate his complete lack of confusion and overall intellectual superiority. (I like Cohen, but I don't understand how one survives without fractions and percentages. How do you even figure out which food container is cheaper, or whether a sale is a good deal?) One suspects that the same process produced the string of Salon articles mourning our collective racism. But we, the cretinous racist math nerds causing Salon so much angst (and epistemological confusion, because so many of us are people who are not Caucasian), are not stumped.

If 2.9% of X wages brought in 200 billion, and 200 billion is one-fifth (20%) of 1 trillion, we redneck gun and slide-rule toting racists know that 5*2.9% in wage taxes is going to net us a trillion. We be brilliant! We can even multiply 2.9 * 5 to get 14.5%, which means our new, universal Medicare wage tax will be 14.5% plus 2.9% or 17.4%. Hokey dokey. If half is paid by the employer, and half is paid by the employee, the new Medicare tax is going to be 8.7% or thereabouts.

Here is where we truly begin to grasp the reason for all of the confusion. We know that the government would be quite happy to get their hands on this extra trillion, but they have so many brilliant plans for it, and yet the cretinous racist math nerds of the nation are going to expect medical care. That alone is reason to obfuscate the issue. And then there is the problem that professors earning 100K and upwards a year would be paying considerably more for less benefits. 8.7K annually plus a $100 monthly premium for 80/20 coverage would be a real comedown for so many higher-paid workers. The employer share would not be a problem, because the employer is probably paying that or more already.

Nonetheless, at this point one begins to suspect that Ann Althouse can handle percents and kind of has already guessed this, and therefore finds the healthcare bills truly confusing and not very inviting, because of course she is going to wind up paying for this.

And then there is another problem, which brings us back to the Shrink's post on McGovern's idiotic proposal to just open up Medicare to everyone. As SW writes:
Yesterday George McGovern solved the healthcare crisis, obviated the need for any further debate, and simplified the entire problem to one line:
It's Simple: Medicare for All
Why didn't I think of that? How obvious, take all that money being wasted on insurance company profits, do away with the middlemen, and "voila," problem solved. Perhaps because Senator McGovern does not work in the Medical field or think too deeply about what he is writing about, such a simple and obvious solution seems plausible. A few points that the good Senator misses should be incorporated into his thinking since the details make all the difference.

First, and most obvious, Medicare is going broke. The current set-up is unsustainable. If we extend it to everyone, it will go broke more quickly. However that is really the least of the problems with the idea. The fact is that the only reason Medicare works for most people over 65 is because private insurance, private payers, and private Doctors all offer the Medicare recipients a hidden subsidy.
So we are going to be raising Medicare provider premiums (if we want to see doctors and have actual hospitals). Perhaps I have enough in my 6K premium per new enrollee to cover it. Perhaps not. I suspect not, after reading the full 2009 Medicare Trustees report linked above. From the introduction:
The SMI trust fund is adequately financed over the next 10 years and beyond because premium and general revenue income for Parts B and D are reset each year to match expected costs. However, further Congressional overrides of scheduled physician fee reductions, together with an existing “hold harmless” provision restricting premium increases for most beneficiaries, could jeopardize Part B solvency and require unusual measures to avoid asset depletion. Part B costs have been increasing rapidly, having averaged 7.8 percent annual growth over the last 5 years, and are likely to continue doing so. Under current law, an average annual growth rate of 5.5 percent is projected for the next 5 years. This rate is unrealistically constrained due to multiple years of physician fee reductions that would occur under current law, including a scheduled reduction of 21.5 percent for 2010. If Congress continues to override these reductions, as they have for 2003 through 2009, the Part B growth rate would instead average roughly 8.5 to 9.0 percent. For Part D, the average annual increase in expenditures is estimated to be 11.1 percent through 2018.
In any case, we already know that people just don't want to pay even 13% of their incomes, so it is clear there is not really popular support for this measure. This was an exercise in futility.

We are not gonna drown the old people. We are going to pay the doctors. If we are not willing to pay for universal coverage, we are not willing to do it. We should find another way to improve the system, but regardless, we are going to be paying higher tax rates because as the retiree/worker benefit enlarges, the share of costs shifted to the private sector will have to drop and we will be paying relatively more for each retiree as well as having more retirees.

The estimate in the Trustees report is that the 2.9% payroll tax needs to go to 3.88% to cover the HI deficit. We will have to raise premiums to cover the SMI deficit, and make the premium structure even more progressive than it is now. It's doable. And we will have to constrain costs somewhat, but we aren't going to be able to take it out of the doctors' pockets. They're pretty much down to their underwear already.


Take a look at this sword of Damocles, featured at MSNBC. It's an US interactive map of banks ranked on troubled assets. You can click on any state and see the worst, the middlin' and the best. You can also go to the state and look up banks by city.

We feel a bit mournful in Georgia that we have not quite reached first in the nation, but many are sure that we will make it next quarter. I don't think Nevada really deserves the top listing. Oh, yeah, they have 17.9% of banks with troubled assets over 100%, but the whole blinkin' state only has 39 banks headquartered there. GA has 17.6% over 100% but we have 323 banks. Oops, 321 banks. Oops, 297 banks. Oops, 292 banks. And so it goes.

Florida is technically better than Georgia because they only have 15% holding the coveted loony loan officer's coveted 100% troubled assets laurel crown. Moreover, they only have 114 banks at 50% (38%), whereas Georgia has 127 at 50%, or 39% of all banks.

In fairness, Florida would have topped the nation if so many of the banks hadn't sold.

It is fortunate that Florida is so far from Canada, because many Canadians are armed and dangerous. Commerce bought a lot of Floridian bad banking apples right before the bust and then sold out to TD Bank Financial, a huge Canadian banking group. In the US it operates TD Bank.

One suspects that there may be a little northern heartburn going on. At a financial conference the Toronto-Dominion CFO just commented that returns from the US were disappointing. Fortunately it is a huge operation and can well absorb the losses, which must be there, because TD had to dump a billion into TD Bank.

Needless to say, the GA economy is suffering. Some quite conservative local banks are getting taken out by their participation loans. In the final run-up, there was nothing good to loan on, so the only thing they could do was participations. Back then treasuries weren't really an option. There may be entire communities with no banking services in another year. I can't figure out who would move in under the circs.

The dominoes are really starting to fall over.

Well, It IS Later

Sorry for not posting earlier, but I have been very busy. Also I have been trying to calm myself down. I watched Obama's health care speech, and I was furious by the end. He was lying. He is promising stuff we cannot deliver, and the end result will be to greatly impair the health care system. Camille Paglia is right (see NOFP, Maggie's Farm):
Why has the Democratic Party become so arrogantly detached from ordinary Americans? Though they claim to speak for the poor and dispossessed, Democrats have increasingly become the party of an upper-middle-class professional elite, top-heavy with journalists, academics and lawyers (one reason for the hypocritical absence of tort reform in the healthcare bills).
But affluent middle-class Democrats now seem to be complacently servile toward authority and automatically believe everything party leaders tell them. Why?
Ooooh, oooh! I can answer this one. It is because Obama is telling them what they want to believe - that they can have guaranteed freedom from high medical bills, plus great medical care, without paying for it. The current leadership of the Democratic party is trying to turn itself into a European-style socialist protect-the-cadre party. This is setting the Democratic party at war with itself, because in the US there is strong populist support for the Democratic party. Assistant Village Idiot commented to this:
We have an entire political party with father issues.
It only looks that way if you live in some urban, coastal areas. Elsewhere, the bedrock of the Democratic party is a very different social component. The catch here is that what Obama proposed would be lethal for the Democratic party in those areas, because Obama is really proposing a shift in medical spending away from the poor and the aged toward the upper middle class. This is not going to be an electoral winner over the long term, as Paglia notes:
(Who is naive enough to believe that Obama's plan would be deficit-neutral? Or that major cuts could be achieved without drastic rationing?)

By foolishly trying to reduce all objections to healthcare reform to the malevolence of obstructionist Republicans, Democrats have managed to destroy the national coalition that elected Obama and that is unlikely to be repaired.
I fail to understand Paglia's willingness to blame Pelosi and excuse Obama. Obama did not give that speech at gunpoint. Anyway, we are now going to see just how stupid the American voter is, and the economic backdrop for this electoral drama is not favorable for Obama.

In a highly compressed fashion, here's the deal:
1) Warren Buffett is wrong - the economy has improved over the summer. We are not just flat - we have turned in some measly growth.
2) Since June, inland water, rail, truck and ports all showed a real move upwards. Also hiring in low-end/economy retail improved.
3) The biggest factor in producing actual growth appears to have been the Cash for Clunkers thing. I suspect it might continue on with a toe, but it will not even be limping along on one leg.
4) The increase in home sales is purely an artifact of the tax credits and loose underwriting, and has no legs. Unfortunately, an historically disproportionate portion of people who used the tax credit as a downpayment are going to default within the next 4 years, which is going to cost the taxpayers a lot of money. In the annals of stimulus programs, this will prove to be one of the worst ever - we have just killed off Fannie and FHA.
5) The underlying growth trend, which is slow, low and vulnerable to dollar weakness is a slackening of inflation for basic needs.
6) The underlying collapse trend is a drop in real incomes for higher-end and retired persons. This has legs. Eight or nine of them.
7) Anyone who isn't watching H.8 Assets and Liabilities is kind of missing the main drama. Over the last few months we have entered a deflationary spiral. It is remarkably evident in stores. What is occurring is that big banks are levering up, constricting lending, and replacing the lending with Treasuries.
8) You can see the effect in part in Treasury yields, which are now showing lower growth over the next two years. The one year trend ought to panic anyone who thinks we are shifting into high growth. The mechanism that throws the signal is both government and bank buying. However the shift from banks lending to banks constricting credit (assets) and shifting to buying Treasuries is most definitely a down signal for the economy after the next few months. Between August of last year (the onset of severe recession) and spring of this year, Loans and Leases grew or remained stable. Over the summer that trend shifted abruptly downward. If anyone truly believes that taking over 250 billion out of Loans and Leases (Feb 7,182.5; Aug 6,886.2) is not a downward signal which greatly overcomes any stimulus the government is throwing out there, I've got some really nice second liens to sell them.
Over the last six weeks, my indicators have shifted so sharply negative that I am awed and horrified. I can hardly stand to write about this.

CR is getting worried, although he wrote last night that he still thinks the economy has over a 50% chance to grow. Rebecca is not blind to the trend.

I have shifted to trying to find out if there is any possible path for any sort of sustained growth. Both Rebecca and CR are much more optimistic than I am. I certainly hope they are right.

In order to try to figure out whether there is any way out of this, I am trying to do something new. I am using the latest census, inflation, population, employment and tax data to try to induce a threaded population model split on demographic lines and run a set of simulations. I have done a smaller, less complex version of this sort of thing for local areas in the past with high success over a period of years to assess the likely effect of lending programs and possible default risks. How well it will work on the national level I do not know.

The income data coming out of BEA over the last few months is not indicative of what is really happening. The real incomes of the higher-end consumers are falling much faster than the real incomes of the lower-end consumers are rising. Further, incomes of retirees in everything but the highest bracket are still being eroded by inflation. Thus, the only possible way to get a fix on consumer spending and non-credit-fueled expansionary capacity is from trying to simulate it and figure out what is possible.

In general, over 90% of my economic extrapolations are based on figuring out what is not possible and what is highly unlikely, and that is usually based on analyzing possible money flows. I do conceive of the economy as a dynamic system constantly in motion.

So what I want to determine is whether it is possible that lower-end resurgence, which is happening, has any chance to offset the higher-income negative trends. The CW answer is that no, it is not, but the CW answer may be wrong. Lower end and younger people spend a disproportionate amount of their total incomes, and they have less of an overall credit drag. Further, spending in this group has the potential to create more lower-end jobs, which can create a subsegment of a growing economy.

What worries me so is that the trend in higher-income households is going to be durable for two segments - government and education/health. That is a big group.

I'll probably rip myself out of the programming to post some more on health care economics over the next few days. It is all about the art of the possible. I recommend Shrinkwrapped's post and this NOFP post for some reasonable perspectives (I got into dogfights in the comments on both.) Also see NOFP's post today for more perspective.

There are two issues here. The first is level of funding, which the current administration has decided is too high. The second is method of funding. These two debates should be separate rather than conflated.

However, regardless of the method of funding healthcare, we cannot cut costs when our population is rapidly aging unless we really denigrate medical treatment. There is no easy answer. On average, shifting an older person from hospital treatment to a hospice at the end of their lives doesn't save much, because they frequently live longer in hospice. It might surprise you, but some people recover and go home from hospices! Especially the old - they are the hardest patients to predict in many cases.

The only way to save money bigtime on treatment for the elderly is to do what most socialized health care systems do - they give minimal treatment to the old. If you are in your 70s, you won't get cancer treatments most of the time. If you are in the 60s and experience organ failure, you may not even get dialysis, and you certainly won't get an organ transplant. At one point, the unwritten rule in the UK was that patients in kidney failure over 55 didn't get dialysis. Since treatment options have been greatly liberalized due to public pressure, so now they deny care to the sickest patients, who might well get much longer lifespans, but who would be consistently high draws on the NHS.

For what it is worth, possible health care reform trajectories do have significant effect on likely economic trends. However, picking the option which would provide the most economic growth over the next ten years is:
A) Not on the table in Congress,
B) Going to cost the upper middle class a boatload of money, which
C) Brings us back to Camille Paglia's comments, because,
D) What the current debate is all about is not about providing medical care, but about ways for the upper middle class not to pay for medical care while having economic security from the effects of severe illness, which is
E) Impossible, because only the middle class has the money to provide a system in which we both get high-quality medical care and ensure economic security from the costs of health care, so
F) The current debate is insane or murderous, take your pick.
I'm not going to be polite about this any more. I think health care reform is necessary, because our current system really doesn't provide insurance to anyone in their 50s who becomes severely ill. It does, however, provide very good medical treatment to people in all walks of life. If we are not willing to fund the medical system, we are inflicting worse damage upon the very ill than they now bear. This will not turn out to be an improvement.

Also, I highly recommend the Covert Rationing blog. It is written by a doctor and I recognize a person both in contact with reality and able to maintain a moral stance with respect to reality. Maybe he had a good relationship with his father.

Thursday, September 10, 2009

More Later

Initial claims (NSA = non-seasonally adjusted) came in at 460,516. SA claims were 550,000.

Since 8/1, NSA; SA claims:
08/01: 466,695; 554,000
08/08: 482,590; 561,000
08/15: 457,985; 580,000
08/22: 457,269; 574,000
08/29: 456,682; 576,000
09/05: 460,516; 550,000
Just a sideways pattern, really. Most often initial claims peak late in the game. I'm finding these reports puzzling, because they seem to indicate that seasonal patterns aren't holding? By next week all of the school systems across the country will have reopened, and it will be interesting to see the results for the rest of September.

The continued claims numbers keep dropping, but that seems to be split between finding jobs and people dropping off the rolls after benefits expire.

My belief is that hiring in some segments of retail is really picking up, but some segments of retail are also folding. I guess we will have to wait for another few months to see.

There's a lot about current data I find puzzling, and I could be wrong. With that caveat, my belief is that for the lower 25% of workers (based on average wages by industry), the economy has bottomed and is picking up across the majority of the US with the exception of the biggest housing boom areas and very rural areas. However, at the same time, wages and jobs in most higher-end employment are still declining across the majority of the US. That presents interesting bank challenges, since much more credit is outstanding on the higher end.

I feel another big bank bailout coming on.....

Wednesday, September 09, 2009

Citizens United v. FEC

I haven't posted today because I am listening to the oral argument before the Supreme Court on the rehearing of Citizens United v. FEC. It is here on C-Span.

More about the case. Oyez. ABA list of briefs, including the awesome list of amicus briefs.

For you, bro, here's the NRA's contribution. Among the authorities listed are de Tocqueville and two Federalist papers. It begins:
The Government has had an epiphany in response to the Court’s request for supplemental briefing: despite arguing to the contrary in case after case before this Court, the Government has now decided that nonprofit advocacy corporations whose “operations are financed ‘overwhelmingly’ by individual donations” – like Citizens United and the NRA – are, after all, “distinctly atypical” corporations when it comes to regulating their political speech. Supplemental Br. for the Appellee (“FEC Suppl. Br.”) at 2-3 & n.1. One might have hoped that the Government would confess error and join Citizens United and its brethren in their struggle to recover their political voices, lost since passage of BCRA. But, no – that would mark a substantial inroad into Title II in favor of core political speech, and so the Government instead only pays lip service to speech by nonprofits for the sake of keeping them mute.
Also I am in a bad mood because of this DU thread advocating that Obama just issue a proclamation to extend Medicare eligibility to everyone. Despite creditable efforts to convince the board that this was beyond any president's constitutional authority, many on the board are unswayed. It was a dispiriting experience on several levels.

Tuesday, September 08, 2009

I Wondered

Rather an amazing G.19 Consumer Credit Outstanding issue for July. Total consumer credit drops 10.4% (annualized basis, seasonally adjusted).

Revolving drops 8%. Non-revolving, which is mostly car loans but also stuff like student loans, drops 11.7%. This release does not include debt secured by real estate or home loans.

On a currency basis, revolving credit stood at 897.9 billion, which is back to 2006 levels. Non-revolving stood at 1559.7 billion, which is back to 2007 levels. [Edit: These are non-seasonally adjusted numbers. SA numbers are 905.6 billion and 1,566.5 billion. But needless to say, seasonal adjustments don't mean that much right now on the debt topic.]

Off hand I would say that some persons took advantage of the cash for clunkers program to trade in an older expensive car with high outstanding loan balance for a cheap new car which qualified, and in the process reduce their auto loan outstanding. Of course, there is always the BK route.

These releases can be revised quite a bit, but the movement in this one was so big that it's hard to think it isn't very real. Maybe we should rename that cash-for-expensive-used-cars program.

PS: This calls for a soundtrack, and the best I can think of is Chris Rea's "Working On It"

Sunday, September 06, 2009

US August Employment, More Comprehensive

I don't want to increase everyone's stress levels, and there are ways out of this economic mess. But before I discuss remediation I would like to write about where we actually are, and unfortunately, some rather ominous signs popped up in this employment report.

So here goes:

1) The establishment survey is quite unreliable at this point. You have to use the household surveys. Mind you, the establishment survey will still be unreliable when things finally start to improve. There are two reasons why the establishment figures can be (temporarily) so far off during times of rapid economic change. The first is that the basic methodology of the Birth/Death assessment is always about 3/4s of a year behind. To assess the relationship of business expansions and new businesses as a ratio of business closures and contractions, BLS uses the Business Employment Dynamics survey. Here is the most recent, and it covers the last quarter of 2008. Note the sudden pop in job losses. BLS revises the establishment survey for a very long time. Even when business conditions haven't shifted that much, the first two months of the establishment survey are based on partial returns (see technical note), and the rest is imputed. The establishment data gets much better the third month, and then after about a year it gets considerably better. The second reason that the establishment survey can be off is that if a person is working two part-time jobs, the person will get counted twice. At this stage, many persons are doing just that, so there should be an upward bias in the establishment survey.

2) The household survey is a very good survey, but it too becomes far more reliable over two months. Only gross changes in monthly employment (over 430,000) pass the 90% confidence level. Here is an explanation from the technical note:
Suppose the estimate of total employment increases by 100,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -330,000 to 530,000 (100,000 +/- 430,000).These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the "true" over-the-month change lies within this interval. Since this range includes values of less than zero, we could not say with confidence that employment had, in fact, increased.
If you take rolling two month summaries for any period during which the employment numbers change by less than 350,000, you will have a much better feel for what the household survey is conveying. Smaller samples (such as unemployed totals) have an even wider confidence range. So it is better to assess short-term trends by what is happening with overall employment rather than looking at the unemployment rates.

3) It is well to read the monthly report in combination with the weekly insured unemployment report, which gives us week by week estimates of initial claims. Through August the rolling four week average of initial claims showed a troubling upward trajectory, ending over the 570,000 level.

4) When reading the household survey, Table A-5 breaks down total employment by ag and nonfarm, as well as by wage and salary vs self-employed. These convey a hint of trends that may be meaningful, and in August, the numbers were both in the 90% confidence range and quite intimidating. The numbers following are SA (Seasonally Adjusted) except as noted:
At this point one must interpret a bit. One could, if one were to be polemical, argue that the self-employed worker expansion means that the economy is improving so much that contracting jobs are easier to get and highly lucrative. However, I find that completely implausible in view of the massive drop in wage and salary employment, which has never in our experience been a sign of an improving economy. If wage and salary employment were stabilizing, one might indeed expect to see casual contracting picking up, and indeed, at some point this will happen. Companies are extremely loathe to hire in first stages of economic recoveries.

Instead, what I think we are seeing is the first group of long-term unemployed who are losing unemployment benefits and scratching a living. You only have to be employed one hour of one day of the reference week in order to be classified as employed.

A further comment about the government employment - because of the steadiness of government entities, these numbers are generally pretty reliable in both surveys. It is, however, a rather large drop in view of expanded federal employment, especially the census workers, and likely indicates the depth of the state and local combined tax/retirement problem. The combined impact will only increase for years to come.

Considering that the ADP employment survey has shown a pronounced shift in employment losses from large to small firms, I think we are seeing the collapse of small businesses, especially small retail, as well as hefty drops in hospitality employment.

However my own private data indicates that many small service businesses are considering shutting down because they are nearing the end of their rope. It is one thing to stop taking a salary for a few months. It is another to go into personal debt to keep the business open when you are losing hope, have no access to business credit and revenue continues to drop. This is the duration effect to which I have been referring. Most owners of small businesses are adjusted to surviving six months to a year of slack business, but not to two years.

On a YoY basis (non-seasonally adjusted, i.e. the Year Over Year change from August 08 to August 09):
These are numbers to make a strong banker cry. That's over 9 million people who are likely to default on their debts. There are many others with reduced incomes who are still working, but there's hope for most of those.

You might also want to see Table B-1, which gives the establishment survey breakdown by employment type. There are particularly hefty cuts in state and local government education. Also see temporary help services, which have stopped bleeding out but continued to slowly drift down by 6 or 7 thousand jobs a month this summer. Right now the absolute numbers for most of these categories are probably unreliable, but the direction is probably pretty reliable.

I will end this post with one final comment about the "almost recovery" theory: This is the real retail sales series (through July) from St. Louis Fed:

I want you all to open your little, non-polemical-because-non-government-employed eyes wide and stare at the trajectory before both of these recessions. See the flattening of real retail sales? In the US, we cannot go sideways. Real retail sales must increase more than the rate of population increase, or we wind up in a recession. This is why, from my perspective (as I wrote years ago), the 2001 recession began at the end of 1999, and the current recession began in 2006.

What happens when real retail sales consistently go sideways for a time is that profit margins drop because per-capita retail sales are dropping, which means that consumers and/or small businesses are squeezed. Because profit margins are squeezed, there are marginal effects on retail and business profits which add up to a slow erosion of jobs/incomes, the recent practical effect of which you can clearly see in the business inventories/sales ratios report:

See that slow drop beginning in 2006? Once that really sets in, gross private domestic investment starts to be constrained:

If that continues for long enough, you get a bad recession. My dad taught me the fundamentals of this method of business cycle forecasting when I was a kid, and it really works. His macro from micro method still forms the fundamentals of mine. He was a very high-end electrical engineer, and he had a manufacturing business. Btw, he died in 1991, but before he did, he predicted that Ford was the auto company which would be left standing. PDG performance!!! But I'm not surprised.

When my brother was getting his PhD in physics, he came home discussing a very interesting aspect in physics research.
Not only did my dad know about it, but he knew more than my brother and the current research did. (Dad spent his evenings reading physics and math texts. He got bored easily.) My brother was astounded, and wondered out loud just when he would ever surpass my dad in knowledge. Well, TechnoBuddha, you're not the only one. When I really am confused about some aspect of the economy, I sometimes resort to modelling it with circuits.

But I digress. The best way to track real inflation is to use state and local government expenditures on stuff. The official CPI is pretty bogus. An alternate way aside from real retail sales is to use sales taxes, which will give you a similar trajectory. Sales tax receipts (adjusted for taxation changes) must increase at least 1% above the population increase or you are getting into recessionish territory, and if they stick below 1.5% over population increase for lengthy period of time you'll fall into a recession regardless. These slow small consistent changes are what generate the big changes over time. In growth recessions, the economy is limber enough to adjust on its own.

Of course, all those sources of data are always behind the trend, so the best real-time indicators by far are trends in grocery stores. Changes in grocery store stocking and pricing often will give you an indication 2 years before an official recession or a growth recession begins, and always more than a year before it does, which is very helpful indeed if you are a bank or a manufacturer.

What I am trying to explain is that by all the robust methods of economic forecasting I understand, this current adjustment (a recession is an adjustment) is not over. That's the sting in the tail of the scorpion. The underlying forces that control the economy have not reached a stable point from which consistent growth can rebound.

Next, the grocery/retail trends.

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