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

Less money to spend

From the Washington Post:

Recession’s pain reaching deep into the economic recovery–The buying power of Americans continues to be weaker than it was when the recession ended four years ago, underscoring the lasting damage wrought by the downturn, according to a report released Wednesday. Inflation-adjusted median household income has declined 4.4 percent, to $52,098, since June 2009, the official end of the recession, said the report by Sentier Research, an Annapolis data-analysis firm headed by two former Census Bureau officials. Although Americans’ average income has been recovering from its recent low point in August 2011, it remains 6.1 percent below where it stood when the country toppled into recession in December 2007. By Michael A. Fletcher

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Republicans’ “Market-Oriented” Health Care Reforms Won’t Work, Part 1

Republicans’ “Market-Oriented” Health Care Reforms Won’t Work, Part 1

This has been a week of Republicans saying they have actual ideas for replacing Obamacare, rather than just repealing it. The centerpiece has been an article by Karl Rove in the Wall Street Journal (paywalled) detailing all the swell ideas Republicans have. In addition, a non-blogger friend points me to an earlier analysis based ultimately on a group called Docs 4 Patient Care that sounds essentially identical to Rove’s article.

Before I get back to Rove, let’s talk first about the  earlier analysis, which highlights two supposed alternatives: selling alternatives across state lines, thereby increasing competition in the health insurance market; and tort reform. These sound like great ideas in theory, but in practice both are deeply flawed. Today I’ll take on selling insurance across state lines, while my next post will go on to tort reform and beyond.

Selling insurance across state lines: Aaron Carroll points out that this is a funny point for people so frequently protective of “states’ rights” to be making. That’s because the essence of this proposal is to end states’ current right to regulate their insurance market. He predicts, on the basis of what happened in the credit card industry, pointing to this piece at Salon, that insurance companies would only sell policies from states with the weakest consumer protections. This race-to-the-bottom dynamic is one we see in in my work on competition for investment, and I’m quite sure Carroll is right. Moreover, he points out that some insurance companies do sell policies in many states; they just have to make sure they comply with each state’s regulations.

But there’s another reason to doubt that increasing competition in the insurance industry will reduce health care spending. We have data! We live in the industrialized world’s biggest experiment in market-oriented health care and, rather than being cheaper, it’s the most expensive in the world by far. Here are the figures for per-capita health care expenditures from the Organization for Economic Cooperation and Development’s great online database, OECD StatExtracts (

Top 5 Countries in Per-Capita Health Care Spending, 2011

United States     8174.9
Switzerland       5642.6
Norway             5458.0
Netherlands       4737.0
Germany           4346.2

Data are in U.S. dollars at purchasing power parity
Source: OECD StatExtracts, then select Data by Theme, then Health, then Health Expenditure and Financing, then Main Indicators, then Health Expenditure Since 2000, then in the table change the Unit to “PPPPER: /capita, US$ purchasing power parity.”

To top it all off, in a post yesterday, Aaron Carroll (h/t Paul Krugman) reports that Singapore has just reformed its health care system to look a whole lot like…Obamacare, individual mandate, no discrimination for pre-existing conditions, subsidies, and all.

The bottom line is that competition does not work in the health care area; simplistic economic models are not enough to understand the unique economics of health. America’s long experiment with a market model has been a stunning failure costing over $2500 per person per year more than the next most expensive country.

Next up: Tort reform.

Cross-posted at Middle Class Political Economist.

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Recycle reuse reduce?

by David Zetland from Aguanomics:

Recycle reuse reduce?

When it comes to consumer goods, reduce-reuse-recycle makes lots of sense. Don’t buy that bike if you’re not going to use it. If you are going to use it, then reuse a used one. Once you’re done using it, recycle it instead of dumping it into a canal (the Dutch option 🙂
That consumer-centric logic may make sense for private goods, but it may not make sense with water, a collective good for which “use” has a larger definition.

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Behavior of capital income is a precursor to a recession

A precursor is something that signals the arrival of something else. There are precursors to a recession. The trick is finding them. I want to show a precursor to the 2007 recession looking at the spending behavior of capital income.

Let’s look at a flow chart for the 1st quarter of 2007.

CF 07-1Q

Graph of 2007 flow chart

Now we look at the flow chart for 1st quarter 2008. The recession actually started in 4th quarter 2007 (December). Between the first graph and the second graph here, the recession formed and then started. Somewhere between these two graphs is a precursor to the recession.

CF 08-1Q

Graph of 2008 flow chart

I want to attract your attention to some numbers.

  1. Investment as a percentage of GDP dropped from 17.9% to 16.9%.  However, investment stayed at 18% through the 3rd quarter of 2007, so we cannot call it a precursor.
  2. Now look at capital consumption as a percentage of income. It dropped from 14.3% to 0.1%. Was it a dramatic drop in the 4th quarter? First realize that this capital consumption rate was running between 11% and 16% from 2004 to 2007. It reached its peak in 2006. Here is how capital consumption fell during 2007. (1st quarter=14.3%…. 2nd quarter=12.3%… 3rd quarter=9.0%… 4th quarter=3.6%… 1st quarter 2008=0%) By 1st quarter 2009 one year later, capital consumption had inched back up to 2.1% of its income.
  3. There is another number that is not seen directly in the flow charts and has to be calculated. The percentage that labor saves to the total gross saving. In the chart, it is… “(Saving/Imports)/Gross $$ Saving. (Saving is not divided by imports. Just use the value in the box labeled “Saving/Imports” in the labor income section.) This number was running at 55% during 2006 until the 1st quarter of 2007. Here is how it fell during 2007. (1st quarter=55%… 2nd quarter=53%… 3rd quarter=51%… 4th quarter=50%) The number eventually kept falling to its current level of around 48%, which has held since 2009.

The idea is that we could use the capital consumption rate and labor’s percentage of gross saving as precursors to a recession, because they start dropping months in advance of the actual recession.

When capital starts consuming less a couple of quarters before a recession, they see the writing on the wall that there is trouble. They tighten their spending or are forced to tighten their spending. Capital sees this trouble before the general public and changes their behavior. Capital starts saving money instead of using it for consumption. Once the recession began, capital income stopped being used for consumption.

2001 recession (started 1st quarter 2001)

Capital consumption rate (1stQ 1999=12.3%…  4thQ 1999=5.8%…  1stQ 2000=0%…  2ndQ 2000=3.9%…  3rdQ 2000=2.0%…  4thQ 2000=1.1%…  1stQ 2001=0.5%…  1stQ 2002=3.1%…  1stQ 2003=7.2%) We see the same behavior. Capital consumption was falling at least a year before the recession. It finally reached a capital consumption rate near zero for the quarter when the recession started. Then two years after, it had climbed back up to 7.2% on its way to 16.4% in 2006.

(Note: Do you find it interesting that the capital consumption rate fell from 5.8%% to 0% from 4th quarter 1999 to 1st quarter 2000? It seems capital had its hopes up to make money off of Y2K. When the problems didn’t appear, capital didn’t consume. Capital income consumed again in 2nd quarter 2000, but then decreased its consumption until the recession.)

The key to these numbers is to see them as guidelines showing the behavior of capital consumption. In the case of 4th quarter 2000, a 1.1% would have signaled major problems brewing a month or two before the actual start of the recession in March of 2001. Even so, we would have been aware of problems 8 months ahead of the recession by seeing a low capital consumption rate of 3.9% in 2nd quarter 2000.

Currently the capital consumption rate is running around 21%. The rate had reached 16% by the 1st quarter of 2012. Even before the 2007 recession, capital had never used more than 17% of its income for consumption. The most I have seen so far in the flow charts I have done is 24% in 1980. So, capital is consuming a lot at the moment. Capital’s consumption may be close to peaking, and in such a case would make a good “sensitivity” precursor for economic trouble ahead… the “canary in the coal mine” for a recession as it were.

From these flow charts, we can see what the rich are thinking. They cannot hide their consumption or lack thereof. Within a couple of months, we see their behavior through these charts. We know what they are doing with their money. I might think that if capital’s consumption rate fell to 17%, for example, a yellow flag might go up for economic trouble ahead. If it fell to 14%, maybe a red flag. If it fell below 10%, recession imminent.

We will just keep an eye on how capital spends their income. So far they seem to be enjoying the income they have.

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Social sharing shows us what?

New England Complex Systems Institute (NECSI) offers a brief glimpse into how people share or point to information on social networks, in this case Twitter. The subject of BBC programs caught my eye as opposed to food or pets, being rather wonky in image and therefore noticeable in relation to Angry Bear. Angry Bear has about 2500 followers, many from institutions or people connected to economics, as well as readers. I actually know little about how people use twitter…I use rss feeds and twitter as an index mostly to filter informative posts.

CAMBRIDGE (Aug 20, 2013) — Where do people get their news, and how does information spread through social networks? Researchers at the New England Complex Systems Institute (NECSI) analyzed how BBC articles are shared through Twitter, and discovered how the BBC successfully reaches multiple audiences. Mapping social networks, especially around the dissemination of news, makes it possible to forecast — with a growing degree of accuracy — social and political movements, technology adoption, and economic behavior.

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Are we close to a recession? (update)

Last week the 2nd quarter numbers for labor share of national income came out. Labor share ticked up a bit from the previous quarter, but pretty much exactly the same.

There is a graph I use to detect if a recession is imminent. The graph gets updated as the labor share number is revised. Here is the graph produced from FRED.


link to graph.

When the blue line goes below the yellow line, a recession was imminent 7 out of 8 times since 1967. As you can see, a recession was not imminent as of the 2nd quarter 2013.

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