Beyond Economics

The End of Growth and Time for a New Era

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HEALTH CARE: Human Right or Expensive Entitlement?

ECO 140-Sustainability-2017-12-v1.0

NYU-SCPS-Healthcare

Healthcare is both a basic human right and it has also become an expensive entitlement. Therefore, how to deal with it is a great and extremely complicated conundrum for society. (Who knew?)

World GDP on Healthcare comparison 2010

HEALTHCARE AND POLITICS

When it comes to the ACA (Obamacare), neither Republicans nor Democrats can see straight when talking about how to fix it, or what to do about healthcare in general for that matter. Both are now citing cherry-picked numbers to support positions that are often at odds with their espoused philosophies.

First, Democrats don’t want to accept that Obamacare is slowly collapsing or at best not working very well. Among the issues: the young and healthy are not enrolling in sufficient numbers, insurers are pulling out of the exchanges in many states, and costs are going up (albeit less than they might have otherwise). Democrats will also not fully acknowledge how expensive healthcare has become for federal, state, and local governments, both for their pensioners and the general population. With the rising cost of care and aging population, financial distress on many levels is a certainty.

Federal Budget 2013

Second, Republicans should be defending the ACA, since it was based on the conservative principle of an individual insurance mandate originated by the Heritage Foundation. Instead, Republicans have been railing about the “government-imposed” mandate for seven years and are now, in light of the CBO projections for their plan, touting the freedom of choice that Americans will finally have not to be insured.

The Heritage Foundation, in a proposal published in 1989, also points out, quite importantly, that healthcare is fundamentally different from any other market. This is something that Republicans either don’t understand, or do and are pretending otherwise for political purposes. (For the key Heritage Foundation passages, go to the later part of this post.)

So why have Republicans been agitating their supporters for 7 years about the ACA? Besides the obvious opposition to anything associated with Obama, the deeper reason has to do with how the ACA subsidies that expand coverage for those with lower incomes are paid for through various types of higher taxes on corporations and the wealthy. Therefore, the Republican replacement plan eliminates many of these taxes in order to please their higher income donor base, unbeknownst to a large part of their political base of more rural, middle and lower income voters. Now that Republicans are in power, many of them seem to care less about the fiscal deficit implications of anything and will use this argument only when it suits them.

WHAT DEMOCRATS WOULD HAVE PREFERRED

Democrats would have preferred at least a Public Option (a government-run health insurance agency that would compete with private health insurance companies), if not Single Payer (Medicare for all, but with private providers of health care), if not a full government-run national healthcare service (e.g. Great Britain, Canada, veteran care in U.S.). Democrats are pleased that coverage has expanded to more uninsured, including such provisions as no denial of coverage based on pre-existing conditions, children staying on their policies until age 26, etc.

REPUBLICANS SHOULD HAVE LOVED OBAMACARE

Under the ACA, private provision of healthcare and insurance were, for the most part, maintained, along with competition for both in the exchanges. For insurance to remain private, it must be profitable. To be profitable, large risk pools are needed so that the young and the healthy can support the sick and the elderly. This works well for employer-based plans, but not in the individual market. Until Obamacare, conservatives were really bothered by free-riders on the healthcare system, i.e. the poor and uninsured who would use hospital emergency rooms for care, where they could not be turned away. This was thought to be irresponsible and had the effect of raising everyone else’s insurance costs. Enter the insurance mandate, that idea that originated by Heritage and put into practice by Mitt Romney and the Democratic legislature in Massachusetts.

HISTORY REPEATS ITSELF

When Obama took office, he decided to do health care first in order to get on with other things and rammed it through without Republican support, which they weren’t going to give anyway. The Republicans are now doing the same thing. They are rushing through “Repeal and Replace” to get on with their agenda of tax reform (much needed actually) and deregulation (simplification and streamlining is needed, but not slash and burn). The end result is that neither Obamacare nor Trumpcare/Ryancare will be bipartisan or likely to work in the long run. Meanwhile, rebuilding our infrastructure, which everyone agrees needs to be done, will be delayed.

WHAT NEEDS TO HAPPEN

So how does universal healthcare get paid for? Most other developed countries manage do it with 7-10% of their GDP devoted to healthcare, compared to about 17% for the U.S. They don’t all do it with socialized systems or waiting lines either.

This is the subject of another post, but there are several essentials. First, everyone needs to be covered in order to spread the risk. Second, there needs to be greater emphasis and incentives for preventive care. Third, there needs to be an honest conversation about end of life care, which may account for a third or more of total lifetime health care expense. Almost everyone I know says that they do not want extraordinary measures taken, but then that seems to be exactly what happens within families when that time arrives.

Another honest conversation that needs to be had is, if health care is a basic human right, where do we draw the line for what society can or should pay for? For example, does everyone really have the right to multiple organ transplants? When the brain can be augmented by digital implants or the mind of an elderly person can be transferred to an android body, will it be fair or right that only the wealthy can afford immortality?

HERITAGE FOUNDATION PROPOSAL

Finally, the key passage (unedited from their 1989 proposal). Remember, this is a very conservative think tank.

Mandate all households to obtain adequate insurance. Many states now require passengers in automobiles to wear seat belts for their own protection. Many others require anybody driving a car to have liability insurance. But neither the federal government nor any state requires all households to protect themselves from the potentially catastrophic costs of a serious accident or illness. Under the Heritage plan, there would be such a requirement.

This mandate is based on two important principles. First, that health care protection is a responsibility of individuals, not businesses. Thus to the extent that anybody should be required to provide coverage to a family, the household mandate assumes that it is the family that carries the first responsibility. Second, it assumes that there is an implicit contract between households and society, based on the notion that health insurance is not like other forms of insurance protection. If a young man wrecks his Porsche and has not had the foresight to obtain insurance, we may commiserate but society feels no obligation to repair his car. But health care is different. If a man is struck down by a heart attack in the street, Americans will care for him whether or not he has insurance. If we find that he has spent his money on other things rather than insurance, we may be angry but we will not deny him services – even if that means more prudent citizens end up paying the tab.

A mandate on individuals recognizes this implicit contract. Society does feel a moral obligation to insure that its citizens do not suffer from the unavailability of health care. But on the other hand, each household has the obligation, to the extent it is able, to avoid placing demands on society by protecting itself.

Provide help to those who cannot afford protection. A mandate on households certainly would force those with adequate means to obtain insurance protection, which would end the problem of middle-class “free riders” on society’s sense of obligation. But of course there are many lower-income households who could not reasonably afford to meet that obligation and yet are not eligible for current direct assistance programs such as Medicaid.

To an extent, the problems of affordability among these families would be dealt with through the system of tax credits outlined above. The Heritage plan also sees these tax credits as refundable – that is, a check would be sent to the family if the total credit exceeded the tax liability. In t his way, families would receive direct assistance through the tax code to enable them to fulfill the obligation to obtain insurance. Nevertheless, there are certain families for whom even this assistance is not sufficient. Families with a very long history of health problems, for instance, may find insurance prohibitively expensive, even with generous tax benefits. In these cases, the Heritage plan envisions an expansion of subsidized risk pools operated through the states. Many states have these plans, in which high-risk individuals are pooled together, and then insurers are invited to compete to cover the pool with rates subsidized by the government.

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Still Waiting for the Growth that May Never Come

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The well-off are back to partying and politicians are arguing over the bar tab

The U.S. and world economy almost went down the drain in 2008-09, but thanks in part to extraordinary measures by the U.S. Federal Reserve and central bankers around the world, economic collapse was avoided. Although the lights are back on, the rate of economic growth remains below the escape velocity rate needed to move forward. While corporate profits are up and the stock market is at record highs, many on the lower decks are still cleaning up the mess if they are even back on the boat. Perhaps it is time to rethink economics as we know it. (More later.)

In the meantime, let’s look at some key indicators.

Housing

HousingBubble-2014

During the credit and housing bubble of the 2000s, people wanted to believe that rising home prices (values) were real and behaved as if they would continue indefinitely. It is obvious from the chart that home prices could not keep increasing at an exponential rate and that this was a bubble. The collapse in housing prices has stabilized at about trend level, yet some areas are starting to show signs of above-trend growth and certainly everyone who owns a home would love to see the values at the peak of the bubble and then go up from there. But how good would that be? The question is:

How and when do you get out of a bubble? What will be the next one?

Employment

EmployAug2014

This graph (above) shows the the net nonfarm payroll jobs added each month from the federal government’s Establishment Survey of businesses. While we have substantially recovered since the depths of the Great Recession, keep in mind that:

  • Job growth at current rates is barely enough to keep up with population growth from births > deaths and immigration (125-150k/month)
  • Job losses from the recession need to be made up in order to return to a prerecession “normal”
  • Job looses during the depths of the recession were even greater than it might first appear since the 125-150k jobs not added to keep up with population growth were also lost in addition to the actual losses

Comments and graphs from August’s employment report at Calculated Risk can be found here and here.

Economic Growth

Q2 growth of 4.2% (annual rate) is encouraging but may be a bounce back from the Q1 drop which has largely been attributed to weather. 3% is considered to be the “normal” or trend economic growth rate for the U.S. After a recession, there needs to be a rebound above trend to make up for lost growth and bring back lost jobs. The recovery that we have had has required extraordinary fiscal and monetary stimulus (see next chart).

What if the new normal without support is only 1-2%?

The Stock Market and the Fed

Stock Market vs Fed Balance Sheet

Mish – Global Economic Analysis (2013)

The Fed Balance Sheet (monetary base) is now just over $4 trillion as the Fed winds down QE (printing more money) by the  end of the year. In addition the Fed Funds interest rate (the rate that underlies all other rates) has been at near zero since 2008. It suggests that there is something fundamentally wrong.

Without these extraordinary steps, where would the stock market and economic growth be?

Federal Deficits and Debt

The first chart illustrates the demographic challenge posed by the baby boomers’ retirement, which they have neither saved nor taxed themselves enough to pay for.

Population by age

The second chart illustrates the resulting financial challenge.

From Concord Coalition based on CBO prjections

Peter G. Peterson Foundation – http://www.pgpf.org/archive/charts

Federal debt results from federal spending exceeding federal revenues (taxes) over the long run. The largest components of federal spending are defense, Medicare, and Social Security. The latter two will grow substantially as the baby boomers retire. Federal debt has two components:

  1. Debt held by the public: money the government borrows on the open market from domestic or foreign investors
  2. Intra-governmental debt: money the government owes itself, as in the Social Security and Medicare trust funds

This chart (above) shows only the public debt. The Social Security and Medicare trust funds are empty and will also need to be paid back by taxpayers. As the debt grows, so too will the interest. Interest rates are now at history lows due to Fed policy (see previous section on the Stock Market and the Fed). Currently the deficit situation is slightly better. As more and more baby boomers retire, spending (and debt, absent increased taxes) will rise. As the Fed winds down and reverses QE (money printing), interest rates will rise. Higher interest rates on more debt will compound and become completely unsustainable.

Another Key: Energy (Oil) Prices

Inflation_Adj_Oil_Prices_Chart_small

The economic growth of the 50s and 60s and the American dream of suburbia may have depended, in large part, on low energy prices, especially oil. High oil prices in the 70s and resulting high inflation were the result of disruptions in the Middle East and OPEC embargoes. This time is different:

  • OPEC realized that they would be better off in the long if the world became addicted to oil
  • However, beyond the Middle East, the “low-hanging fruit” of cheap and easy oil is used up
  • Oil prices only fell in 2008-09 as a result of the economic crisis
  • OPEC has actually been helping to stabilize oil prices from going up (to avoid another world recession) and from going down (because they need the revenues)
  • In addition, the oil we must now get from the Arctic, deep-sea, Tar Sands, and fracking requires oil to be $90-100 to be profitably worthwhile (3-4 times more costly than the economy is designed for)

Capitalism and a growing world population (that wants at least an American middle-class lifestyle) needs more growth than is now possible at today’s energy prices. This may not end well.

There is Also Climate Change

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Much more in a future post.

Is There Hope for a Sustainable Future?

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While politicians rearrange deck chairs on the titanic economy of the past, some entrepreneurial visionaries are laying the foundation for a new era. Will green shoots like this develop fast enough to save us from the economic distress of a shrinking economic pie or climate chaos?

The Future of Economics and Society as We Know It

Richard Heinberg delivers a clear and powerful message on the urgent need for the world to begin the transition to a sustainable future. He takes a big picture perspective on the interconnectedness of economics, energy, the environment, and society.

We are, and will be, seeing a cavalcade of environmental and economic disasters, not obviously related to one another, that will stymie economic growth in more and more ways.

Each will be typically treated as a special case, a problem to be solved so that we can get “back to normal”.

In September 2008, the global financial system nearly collapsed. The reasons for this sudden, gripping crisis apparently had to do with housing bubbles, lack of proper regulation of the banking industry, and the over-use of bizarre financial products that almost nobody understood. However, the oil price spike had played a critical (if largely overlooked) role in initiating the economic meltdown.

The end of growth is a very big deal indeed. It means the end of an era, and of our current ways of organizing economies, politics, and daily life. Without growth, we will have to virtually reinvent human life on Earth.


Interview of Nate Higgins on ChrisMartenson.com

So I’m not necessarily calling for a stock-market crash in the next decade, but I am calling for within the decade we probably won’t have a stock market. That’s a scary thing to contemplate, but this entire system is based on more every year, and we’ve extended the system by a decade or more by little bells and whistles and allowing people to buy houses with no money down and the repeal of Glass-Steagall.

And since 2008, the crash in private and household credit has been made up by government stepping in and providing 11% of our GDP just from deficit spending. And that bullet has now been spent. So the whole thing starts to unravel once they’ve spent all the bullets they have. And I don’t know that it really matters, really; stocks go down 10% or 50% or 100%, we have to restructure the way that we think about society.

Competing for nominal, digital wealth is going to go away as the main cultural objective. 

This is a fascinating, in-depth discussion of our economic, environmental, and societal predicament. If you have the time, this really ties it all together. Until recently, Nate Higgins was lead editor of The Oil Drum, one of the most popular and highly-respected websites for the analysis and discussion and global energy supplies, and the future implications of the energy decline that we are facing. He holds a Master’s Degree in Finance from the University of Chicago and recently completed his PhD in Natural Resources at the University of Vermont. Previously, he was President of Sanctuary Asset Management and a Vice-President at the investment firm Solomon Brothers and Lehman Brothers.

Nate Higgins Web Site

Additional Resources on Peak Oil

Post Carbon Institute
Founded in 2003, Post Carbon Institute is leading the transition to a more resilient, equitable, and sustainable world.

The Oil Drum
The Oil Drum seeks to facilitate civil, evidence-based discussions about energy and its impacts on the future of humanity, as well as serve as a leading online knowledge-base for energy-related topics.

“A Game-Changer” for the U.S. Auto Industry

One of every three Motor Trend magazine covers over the last year featured a Mustang. The last two issues showcased the Volt. The staff of Motor Trend are mostly muscle car guys but they were gaga over the Volt. Has the transition to the era of the electric car finally arrived? The Volt is technically classified as an extended-range EV (electric vehicle) in that it has a small gas engine to provide range beyond 35-50 miles, but it will be the first car that Americans will plug in.

“This is a fully developed vehicle with seamlessly integrated systems and software, a real car that provides a unique driving experience. And commuters may never need to buy gas!”

As one of the consultant judges on this year’s COTY panel, Chris brought the deep insight and professional skepticism you’d expect of someone who’s spent his entire working life making cars. But our 2011 Car of the Year, Chevrolet’s ground-breaking Volt, has blown him away. Like all of us on the staff at Motor Trend, Chris is an enthusiast, a man who’ll keep a thundering high-performance V-8 in his garage no matter how high gas prices go.

“I expected a science fair experiment. But this is a moonshot.”

In the 61-year history of the Car of the Year award, there have been few contenders as hyped — or as controversial — as the Chevrolet Volt. The Volt started life an Old GM project, then arrived fully formed as a symbol of New GM, carrying all the emotional and political baggage of that profound and painful transition. As a result, a lot of the sound and fury that has surrounded the Volt’s launchhas tended to obscure a simple truth: This automobile is a game-changer.

Motor Trend: Car of the Year (feature story)

How the Volt Works (more technical)

Motor Trend vs. Rush Limbaugh
Why the right-wing can’t stand the Volt

For a truly revolutionary approach to our automotive future, see Shai Agassi’s TED presentation. More to come about this in a future post.

“I expected a science fair experiment. But this is a moonshot.”Read more: http://www.motortrend.com/oftheyear/car/1101_2011_motor_trend_car_of_the_year_chevrolet_volt/index.html#ixzz17fy1HNoL

Unconventional Natural Gas: A Game Changer?

Perhaps. You may have heard about hydraulic fracturing (“fracing”, pronounced “fracking”) and horizontal drilling, a technique to release natural gas trapped in hardy shale-rock formations. These sources of natual gas around the world have been known about for some time but not thought to be economically viable. This article from The Economist has major implications for geopolitics, climate change, and energy independence based on both the quantity and location of these unconventional reserves.

NIMBY and environmental concerns may be a contraint. The Comments at the bottom are worth reading and provide both support and skepticism.

An Unconventional Glut
Newly economic, widely distributed sources are shifting the balance of power in the world’s gas markets
Mar 11th 2010 | HOUSTON | From The Economist print edition

The availability of abundant reserves [of unconventional natural gas] in North America contrasts with the narrowing of Western firms’ oil opportunities elsewhere in recent years. Politics was largely to blame, as surging commodity prices emboldened resource-rich countries such as Russia and Venezuela to restrict foreign access to their hydrocarbons. “The problem is, where do you go? It’s either in deep water or in countries that aren’t accessible.” This is forcing big oil companies to get gassier…The oil majors watched from the sidelines as more entrepreneurial drillers proved shale’s viability. Now they want to join in.

[One] idea that would have ramifications for the global oil sector is to gasify transport. T. Boone Pickens, a corporate raider turned energy speculator, has launched a campaign to promote this, and has support from the gas industry. All this is some way off. The coal industry will not surrender the power sector without a fight. The gasification of transport, if it happens, could also take a less direct form, with cars fuelled by electricity generated from gas.

A gasified American economy would have profound effects on both international politics and the battle against climate change. Displacement of oil by natural gas would strengthen a trend away from crude in rich countries, where the IEA believes demand has already peaked as a result of the recent spike in oil prices.

But two factors could reverse the picture again. The first surrounds the uncertainty about how fruitful shale exploration will be outside North America. Second, there are reasons for caution above ground, too. Despite natural gas’s greener credentials than oil’s or coal’s, shale drilling has critics among environmentalists, who worry that water sources will be poisoned and landscapes despoiled.

Compensation Gone Wild

If we don’t pay them enough, they will leave and then who will run our company and the world economy into the ground?
Take Citigroup. Why would you go to all the effort of running a company for $38.2 million while mere traders at your company are guaranteed as much as $100 million? Poor Vikram Pandit. (Note: Pandit was brought in after much of the damage was done.)
Top 15 Highest Paid CEOs of 2008 (slide show)
Notice how the compensation is structured. Since salary income above about 300K is taxed at 35%, the bulk of the compensation is in stock and options (basically a guaranteed, i.e. risk free stock price) that are taxed at the capital gains rate of 15%. These CEOs have a much lower effective tax rate than their secretaries. As for the traders, they sometimes get their commissions up front as soon as the deal is done, years before the value of the deal is determined. Wonder what kind of risky behavior that incentive system leads to.