Relevant and even prescient commentary on news, politics and the economy.

Not So Dumb as Economists, Part 1

I was going to point out that finance people are not so dumb as economists,* but Echidne’s takedown of Gary Becker is so divine it deserves your attention more:

This argument was initially made by Gary Becker, an economist, a very long time ago.** It is not an uncommon argument from conservatives (or from certain types of anti-feminist sites.) That does not mean that it shouldn’t be discussed. So let’s do that by looking at what is unrealistic about the specific conclusions….

In [Becker’s] first model only owner/managers have a dislike towards workers from a particular group. That, my friends, is the model from which the above conclusion comes, though even then it would only work to eradicate discrimination from the whole industry if the industry was essentially a competitive one. If the industry is not sufficiently competitive, the bigoted owner/managers can hang on and practice discrimination.

Becker argues that if the only problem we have consists of some bigoted owner/managers, while everyone else is just so sweet, sufficiently well-lubricated markets can get rid of those nasty bigots, always assuming that everybody knows everything relevant about everyone else.

There are no misconceptions in the model. Even the bigoted owner/managers of a pizza parlor, say, know that Joe and Jane are equally good pizza-bakers. They just hate Jane and are willing to hire her only if they can get her for less money.

This cannot last if we can find at least [one] non-bigoted nice owner/manager.

That’s the background of the old chestnut. Becker, having become immersed in the imaginary world of his simple model, concluded that competitive industries would never exhibit any long-run sex or race discrimination. Only oligopolies or monopolies could survive with at least some bigoted owner/managers. [emphases mine; hers varied]

It is a rare and delightful moment when someone looks seriously at an economic model. Strangely, when you examine the social premises of the mathematics—returning economics to its beleaguered claim to being a social science, as it were—it starts to be clearly why people believe economists are the problem, not the solution. It’s progress to see a blogger destroy an economist this thoroughly.***

*And I may still, using this post by Mish as the springboard, but I think the post leads to that as an inevitable conclusion, so for now I’ll just refer people there.

**1971, apparently, though, iirc, several of the papers are from 1965-1966.

***Yes, I know The Snake Woman is, in real life, a qualified economist. But she’s not being asked to play one on television, like Larry Kudlow, whose degree from WooWoo is patently not in economics, or Megan McArdle, who has an Ivy League degree in English Literature and an MBA.

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Systemic Discrimination is Legal as long as you are Large

Welcome to the New United States.

Trust that Jared Bernstein (if this one shows up, instead of this one) will have more on how much future damage can be done to the economy.

UPDATE: Scott Lemieux weighs in, correctly seeing it as worse than any reasonable examination of the facts would have permitted*:

Systematic discrimination at a large corporation such as Wal-Mart simply cannot be addressed piecemeal. I could have lived with a ruling that focused on the unique facts of this case. But in their broad ruling, the Court’s five most conservative justices have made it much more difficult for civil rights laws to be meaningfully enforced in practice. It will be part of the classic conservertarian bait-and-switch: individuals filing lawsuits will not have enough evidence to prove discrimination, and class action suits that develop systematic evidence will be thrown out for not having enough in common.

Between this and Andrew Samwick’s recent declaration that the rule of law should not apply in the United States, it’s a good week for the youngsters among our readers to check out this site.

*Although, as is becoming far too usual, on par with my cynicism being optimistic.

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Beauty-Scoring Evolution

Despite winning the big prize, evolution scores low on the scale at the Miss USA pageant:

Only Miss Massachusetts and [newly crowned Miss USA, Alyssa] Campanella stood up for Darwin.

Score one for Charles Darwin. Campanella, 21, of Los Angeles, who calls herself “a huge science geek,” says evolution should be taught in public schools.

The good news is that only three contestants were “flat out opposed”:

Miss Kentucky, home state of the Creation Museum; Miss Alaska who assures us “each of us was individually created by God for a purpose;” and Miss Alabama who doesn’t believe in evolution.

Which leaves 45 or so to be confused.

Go read the whole thing. Then make the decision: either (a) emigrate to a country that educates its beauty contestants or (b) ignore them entirely for the sake of your sanity.

(h/t Andrew Verdon—far left of the bottom picture—or available in video here)

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Consumption and compensation: explicit and implicit wealth effects in finance

Readers of this blog know that I am in finance, specifically global fixed income. This blog post covers wealth effects in the financial industry, which is a relatively dominant share of total US compensation, 7.3% in 2009 and likely higher now (data are truncated at 2009). My view is that economists underestimate the wealth effects on consumption in the financial industry, given that financial wealth affects not only portfolio net worth but also the present value of labor income. Therefore, the sell-off in global risk assets may hit consumption more than expected in coming quarters, given that finance is the fifth largest industry, as measured by total compensation, on average spanning the years 1989-2009.

Why US consumption matters. The outlook for the US economy is of utmost importance to that for the world, given that the US will hold an average 22.1% of World GDP through 2016 (measured in $US), according to the IMF April 2011 World Economic Outlook. And the outlook for the US consumer is of utmost importance to that of the US economy, given that personal consumption expenditures hold a large 71% share of 2010 US GDP. Therefore, holding the US consumer share constant, US consumption is expected to be 15% of the global economy on average through 2016.

How wealth usually matters for US consumption. In economics, one of the drivers of consumption patterns ‘now’ is the wealth effect, usually defined as the shift in consumption due to changes in tangible (home values) and intangible (paper assets, like stocks and bonds) net assets.

(click to enlarge)

(Read more after the jump!)
The chart above illustrates the ‘wealth effect’ on consumption as the ratio of net worth to disposable income (blue dotted line) as it’s correlated to the consumption share (outlays really, see table 1 for the breakdown) of disposable income (green line). The consumption (outlay) share is is 100 less the saving rate.

A large part of the Fed’s quantitative easing program (QE) was targeted at stimulating the positive wealth effects on consumption via higher risk asset prices. I would argue that this has been largely successful to date. The two year moving average of the consumption share (green solid line) fell precipitously following the financial crisis, only to generally stabilize since Q1 2009; this is largely coincident with the outset of QE1.

Back to why I brought up finance. There’s another effect in play here, more specifically related to the compensation structure in the financial industry. See, along with the tangible and intangible net asset values, total wealth includes the present value of labor income, i.e., the present value of lifetime compensation.

For all industries except finance, lifetime income is generally not associated with financial markets and risk assets, except via interest payments on fixed income. However, in finance total compensation is directly impacted by asset values via the bonus structure, often a large part of total compensation. Therefore, when asset markets are challenged, this likely affects the present-value of labor income adversely.

There’s an outsized wealth effect of net asset values in the financial industry: the direct wealth channel (net asset worth) plus the indirect channel (present value of labor income) on consumption.

Why is the financial industry important? It’s pretty simple: financial compensation is a large part of total US compensation, 7.3% in 2009, which has grown an average of 6% annually since 1988 in nominal terms. (Note: you can get this data from the BEA’s industry tables).

As financial markets take a turn for the worse – the S&P grew 5.4% December 31, 2010 through March 31, 2011 and is now down 4.1% since March 31, 2011 – the adverse wealth effect is likely to be stronger in the financial industry than in any other industry. For north of 7% of total US compensation, labor income is challenged in expectation, which is likely to drag consumption.

Purely anecdotal evidence. This strong wealth effect exists in my household. Both my husband (equities) and I (fixed income) are in finance; and when markets are challenged, we tend to save more. And it’s not because our stock portfolio is showing holes – actually, we don’t have much of a stock portfolio – it’s because our household income falls in expectation via the ‘bonus’ component of financial salaries.

I haven’t seen any work done on this wealth effect channel – but it does beg the question of whether there will be further downgrades to the US economic forecast if risk assets continue to sell off.

Rebecca Wilder

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Kash is En Fuego Today

Go. Read.

  1. US Bank Exposure to Greece, part 3. The FT lets someone from Nomura argue that Kash’s declaration of U.S. bank exposure to Greek default in Part 2 (referenced here, but just go to Kash’s link for the gist) was overstated.

    Nomura and The FT lose the argument, badly.

  2. Disasters for an economy — either real or financial — are not always disasters for the economy’s currency.”* Good to think of in combination with this piece from Barry Ritholtz.

*I may write up more using this when I can do some charts and graphs. It is starting to appear as if no one other than Dr. Black understands The Whole of The Euro Story.

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McKinsey Thought-Experiment: What If They Are Correct?

I’m not going to do this with graphics (at least for now), but the finger exercise seems intuitive.

Assume—against all evidence—that the “once we educated them, 30% said they would stop offering health insurance to their lowest-paid employees” study is accurate.

How does that, as John Boehner declares, cost America jobs?

From Boehner’s site:

At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

This should be intuitive. If the company is paying $1,000 a month for my family’s health care along with my $800 a month,* it can raise my paycheck by $1,000 a month—employee compensation is employee compensation—and cut back on its health care administration. If I’m not a health-care administrator, it’s win-win.**

Aside: Reality will interfere. If we make the Baumolian assumption that cost of health insurance will continue to grow faster than GDP—at a slower rate, probably, but still faster—I’ll give you odds that the labor share of revenues will decline, cet. par. over time. But we’re talking about jobs, not profits.***

Any economist worth her salt should know that lower costs of employment increase overall employment (assuming there is not a demand-side problem).

If the McKinsey “study” were accurate—again, not the way to bet—we should expect overall employment to increase. As with the Earned Income Tax Credit, the expansion of HIEs will benefit firms, allowing them to reallocate capital into more useful areas.

The follow-on effects in that universe: more people joining the HIEs than expected, improvements in the measurement of “real” wage growth, greater transparency in the current health-insurance system, and arguably a larger contingency of workers demanding something closer to a single-payer solution,**** all improve efficiency and provide opportunity for economic expansion.

Which is supposed to mean more jobs, not fewer.

If the McKinsey presentation accurately reflects what companies will do given the opportunity—think the Wal-Mart Effect Writ Large—then the prospects for employment will be, if anything, increased.

Greater political pressure for cost-reduction that leads to single-payer becoming more politically viable is just lagniappe.

*Not the real numbers, of course.

**If I’m a Benefits Coordinator, I don’t lose my job, and I get to spend more time working on ensuring that the firm is competitive in other areas. If I were doing an economic model of this against employment, I would bet that the coefficient would be small but positive, so let’s be generous and assume it’s equivalent to zero, i.e., no effect on employment supply.

As an aside, this was in part the reasoning behind the Bear Stearns “bag of rubber bands, box of paper clips, go buy all your own supplies” thinking. It didn’t necessarily save on corporate expenses directly, but it meant not having to manage that area of inventory.

***If anything, the extra profits, cet. par., facilitate business expansion and more hiring. That the multiplier effect will not be 1:1 simply reflects what a poor social investment private corporations are.

****More people forced to use the HIEs=> more people demanding similar plans across state lines => more demand for a larger uniform baseline (especially as families move from state to state) => more interest in cost controls => greater need to control Administrative expenses => disequilibrium in service demand and supply => demand for service efficiencies that result in either single-payer or, at worst, unified Servicer processing.

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The Medicare Sky Is Falling (Part 2)

by run75441

The Medicare Sky Is Falling (Part 2)

Chicken Little, Courtesy of “EW.Com Entertainment Weekly”

Over at The Health Beat Blog, Maggie Mahar explains why the collapse of Medicare HI is less likely with the passage of healthcare reform. The Medicare “Crisis: A Shaggy Wolf Story.

Potentially heading off the shortfall of Medicare funding is the passage of the ACA which is used by the Trustees to forecast a positive projection to Medicare. Before healthcare reform, Medicare HI would run short of funds in 2016. After its passage, the Medicare Trustees forecasted Medicare HI funding lasting to 2024 if Healthcare Reform program implemented. Why is such a delay in insolvency possible? Elmendorf’s (the same Elmendorf who helped kill Hillary-Care) Congressional Budget Office forecasted a $950 billion generated over the next decade from the passage of healthcare reform. Two areas account for most of the savings and the third area could not be measured:

Medicare will be shaving annual increases in payments to hospitals, skilled nursing facilities, home health agencies and other institutions by 1 percent a year for 10 years. The legislation explicitly exempts doctors, calling for reductions ‘in payment updates for most Medical goods and services other than physicians’ services.’ The CBO estimates that this provision will save $196 billion.

Secondly, the ACA raises another $750 billion, primarily by collecting new fees from the health care industry (which can afford the fees because it will have so many new customers); cutting overpayments to private insurers that are not delivering value for Medicare dollars; raising Medicare taxes for those at the very top of the income ladder; and reducing subsidies to hospitals that will no longer be absorbing the cost of caring for 32 million uninsured.

Additionally, The Affordable Care Act paves the way for Medicare to cut spending further, by proposing deep structural reforms that could, ‘transform’ U.S. health care ‘in both the way that it is delivered and the manner in which it is financed.’ The legislation ‘takes important steps in this direction by initiating programs of research into innovative payment and service delivery models,’ the Trustees explain ‘such as accountable care organizations, patient-centered ‘medical homes,’ improvement in care coordination for individuals with multiple chronic health conditions, improvement in coordination of post-acute care, payment bundling, ‘pay for performance,’ and assistance for individuals in making informed health choices.

It is the third point which was not included in Elmendorf’s projection of savings. By overhauling the healthcare delivery model, the Affordable Care Act through Medicare will reduce the healthcare industry cost inflationary cycle by changing how healthcare is delivered to patients and directly impacting the fees paid today. Instead of rewarding for volume of services delivered, the approach is to reward for value “by encouraging integrated, coordinated care that leads to better outcomes at a lower price. These are unprecedented reforms that have never been tried on a national scale (but have been implemented by the VA) which the CBO did not try to estimate just how much these structural reforms might save. As often is the case, over the long term what cannot be counted may count the most. Note that money saved from this change in services rendered will be above and beyond the $950 billion the CBO did score. These are dollars that could be used to cover the 2024 shortfall.”

Without such a change in the delivery of healthcare, the cost spiral will continue. In Phillip Longman’s “The Best Care Anywhere,” the success achieved in healthcare delivery at the VA has not been rivaled anywhere in the private sector. In a fee for services scenario, the change does come at a loss of profitability when the switch is made to one based on better outcomes at lower costs. Phillips gives one hospital’s experiment in the private sector with integrating quality into its healthcare delivery:

Indeed, any health-care provider in the private sector that holds itself out as providing high-quality care for chronic conditions risks financial ruin. That’s a lesson Beth Israel Medical Center in Manhattan learned after it opened a new diabetic center in March 1999. To publicize the new venture, Beth Israel convinced a former Miss America, Nicole Johnson Baker, herself a diabetic, to pose for promotional pictures wearing her insulin pump. She also posed next to a man dressed as a giant foot, a dark reminder of how poorly managed diabetes often leads to amputation.

To avoid amputation and other dire outcomes, such as blindness and renal failure, the new center adopted a model of diabetic care that rivaled the VA’s in its quality. Highly coordinated teams taught patients how to check their blood sugar levels, count calories, and find the discipline to exercise, all while undergoing prolonged and careful monitoring. Within months, the center succeeded in getting the blood sugar levels of 60 percent of its patients under control — a stunning result that brought it national attention.

But the idealists who conceived this program forgot the business they were in. Health insurers would pay only piddling amounts to cover the cost of a diabetic patient seeing a podiatrist, for example, though such care is essential to reducing the risk of amputation. And insurers would pay even less same time, as word of the center’s excellence in diabetic care spread, patient volume increased by 20 percent a month. Soon the center was running a large deficit, and Beth Israel administrators felt compelled to shut it down. Between 1999 and 2006, three similar centers in New York folded based on the same model of care, and for the same reason. Quality doesn’t pay.

Any change in today’s healthcare delivery reducing the patient/client base and their need for medical services takes from the bottom line. The ACA under Medicare’s tutelage takes on fee for services directly and looks to change it to greater quality and better outcomes. If anything, the experiment at Beth Israel was successful for the patient/client base.

Maggie goes on to pick apart the arguments of the doomsday predictors and naysayers. Holding payment adjustments to a 2% yearly increase over a decade, Medicare will bank on expected productivity gains at hospitals, skilled nursing care facilities, etc. Comments of withdrawal from Medicare by providers and doctors are hollow threats (as doctors are exempted) as > than 50% of hospital revenue comes from Medicare. What hospital is going to withdraw? But, what types of productivity gains are implied?

Having supplies and equipment available on demand at the point of usage for nurses. If this does not sound like making CNC tools resident to the Cell, I don’t know what does. This cuts down on wasted movement.

· Proper inventory control to prevent the over buying of equipment by hospitals. One example cited a $20 million purchase of smart heart pumps over time because the inventory could not be found. Sounds familiar to industry also.

· By having accurate inventories and supplies at the point of usage, a nurse’s time is freed up from looking for supplies that are lost or missed placed and farther away from the patient. In the end a nurse’s time is spent as direct labor in delivering a product to the customer rather than Overhead and indirect labor.

· Fixing the mistakes and errors (most are preventable) being made in hospitals today through error proofing. An Office of the Inspector General, Department of Health and Human Services study found 1 in 7 Medicare patients suffer at least 1 adverse effect from hospitalization. This equates to 1.6 million per year and of that number ~180,000 die. The checklists used by pilots today before take- off could help hospitals and staff lower the incidence of mistakes in hospitals. “Adverse Events in Hospitals: National Incidence Amongst Medicare Beneficiaries”


Each of these productivity gains has an impact on the costs of operation within a hospital, a direct impact on the quality of the product rendered, and ultimately reducing the amount of time spent in the hospital. While a large part of medical expense is Labor, another part is the ineffective use of resource, assets, and inventory. Looking for the root causes in the end Medicare costs decrease as hospitals become more efficient.

(Rdan…formatting corrections made 6/17)

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