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Health Care Thoughts: Don’t Blame the Techies!

 by Tom aka Rusty Rustbelt

Health Care Thoughts: Don’t Blame the Techies!

The early phases of the exchange sign up have been an unqualified disaster. It must be the techies, right? Not necessarily.

The program design is wildly complicated, with the exchange system trying to do a start-to-finish on a very complicated transaction and pinging for information verification from various government and data firm web sites. Some of the states sites are reported as working well, but the IRS verification piece is not being completed because it cannot be. Are states sites accurate? Dunno.

This matches the rest of ACA, a program in which almost every segment is incredibly complicated, even while good intentioned.

Don’t blame the techies. This is a program design problem.

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Who is the true beneficiary of welfare? or Please define: Entitlement

I wrote in February of 2012 about welfare: Welfare, I’m not hurting from it and neither are you.

I noted the following: but it looks to me like what we spend on welfare is not much more than what the government is spending on just doing the government thingy, unless of course people can’t get a job. Interestingly enough, the share of GDP spent on welfare in 1992 and 2010 is the same. In fact, at the peak of unemployment of the 2001 recession which was 2003, we spent just 0.0098 on welfare.

Understand that 0.0098 is the fraction of our GDP spent on welfare.  That is 0.98% of our GDP.  I did not include the medicaid/healthcare expenditures.

Of course there was the often heard comment to this article about welfare recipients not contributing. No skin in the game, not contributing, blah, blah, blah….stuff for free.  My first response and really the only needed response is “So what?”  I mean really Sooooooooo What!  Is the welfare person really stopping you from getting your Mercedes?

Well here’s the so what. The Public cost of low-wages in the Fast -food Industry

“Nearly three-quarters (73 percent) of enrollments in America’s major public benefits programs are from working families. But many of them work in jobs that pay wages so low that their paychecks do not generate enough income to provide for life’s basic necessities.”

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Irish Austerity Exodus Continues

The Eurozone experiment in austerity continues to fail as the peripheral countries endure ongoing cuts. Following up on my post of August 15, it’s time to look at the most recent Irish immigration data to update it through April 2013 (Ireland records population data from May 1 to April 30) and see how it affects the reported unemployment rate. The picture remains ugly, with emigration climbing once again, from 87,100 in 2011-2012 to 89,000 in 2012-13. Immigration increased by 3200, so net emigration fell by 1300, with net out-migration over the year declining by about 3% to 33,100. Here are the details:


  Year ending
April 2012 April 2013
Immigration 52,700 55,900
Emigration 87,100 89,000
Net migration -34,400 -33,100
of which Irish nationals -25,900 -35,200

Source: Central Statistics Office Ireland

Take a good look at the last line: Net emigration by the Irish themselves increased by 35.9% and accounts for all net out-migration; there was net in-migration by non-Irish citizens of 2100 in 2012-13. Indeed, the Irish comprised 57.2% of all emigrants in the most recent report.

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A tale of two incomes in the money market

Real GDP has dropped to a new level. Many economists think it will return to its previous trend before the crisis.

I made this video to explain how real GDP can drop to a new level as a result of labor share of income dropping after the crisis.


Capital income rose after the crisis, while labor income fell in relative terms. Thus the supply of money to capital rose, and the supply of money to labor fell. So, the interest rate had to fall in the capital income money market, and the interest rate had to rise in the labor income money market in order to reach equilibrium. (Remember that the money in the labor market used for real GDP is many times greater than the money in the capital market.)

However, capital income controls the bond market, so interest rates fell. The result was that either prices or real GDP had to fall in order for the labor income money market to be in equilibrium at the lower interest rate. Prices have fallen some but not nearly enough to reach equilibrium in the labor income money market.

Economists talk about a recession, because real GDP is low. And they talk about having to lower interest rates to stimulate the economy. Yet, the result of the Fed keeping interest rates low is that real GDP is forced down to keep the money market for labor income in equilibrium. Meanwhile, interest rates are low for capitalists, and we have actually seen investment much stronger than would normally be seen after a recession.

The interest rate was able to adjust in the capital income money market, which meant that real GDP had to adjust in the labor income money market.

So in a word, it is LUDICROUS that the Fed is keeping interest rates low in the face of lower labor share of income. The lower interest rate forces down real GDP and creates the appearance of a recession. The answer is to find a mechanism to transfer money into the money supply of the money market for labor income. Real GDP will then rise as a result. And eventually interest rates will be able to rise.

Without a rise in the supply of money to labor, the Fed is spinning its wheels against a real GDP that has fallen to a lower equilibrium.

The Fed’s worry is creating inflation. Once again, LUDICROUS.

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Ben Bernankepoulos mets Erskine Fatas

Antonio Fatas debates Paul Krugman. Fatas noted that there is limited evidence that using the Euro is correlated with extreme economic distress. Krugman argued roughly that there is a strong theoretical presumption that the Euro is the work of the devil. Fatas praised Krugman’s unshrill analysis and then chose to debate his basic claim. This is not, in general, a good idea. In this case it is a terrible idea.

Fatas wrote

2. Ben Bernankepoulos.

Here is my second scenario: let’s have a Euro periphery country leave the Euro (or never join) and have monetary policy follow the policies that Ben Bernanke has followed in the US (bring interest rates down to zero, aggressive quantitative easing).


And what would happen to capital flows? It is likely that capital will flow out of the country, given that the country started with a current account deficit this would be a problem (dealing with a sudden stop is never easy). If debt is denominated in foreign currency the situation could be dramatic (as in the Asian crisis in the 90s). But even if debt is denominated in local currency there is still an issue: there is the need to finance a current account deficit and in the absence of capital inflows it would lead to a collapse of internal demand. Yes, exports might be increasing but it is hard to see that this adjustment would be fast enough to compensate for the immediate correction required given the lack of funding. Unless the rest of the world is happy holding more of our currency, in which case we can finance our expenditures via monetary expansion.

My reaction (toned down to be polite) is WTF ?!?! How the hell does this happen ? Here the idea is that a country whcih has been running a current account deficit suddenly can’t anymore so the sudden increase in netx eports causes “a collappse of internal demand” Well there is an alternative “Unless the rest of the world is happy holding more of our currency, in which case we can finance our expenditures via monetary expansion.” What ??? What does the rest of the world have to do with anything ?

Fatas asserts as plainly obvious that in a closed economy expenditures can’t be financed with monetary expansion. He gives no hint to an explanation of why this might be.

Here is a sincere attempt to try to figure out what he was thinking. German banks have been loaning money to Greece buying Treasury bonds and loaning to Greek banks which loan to other Greek entities. Then they suddenly stop. Ben Bernankepoulos has no way to replace the demand for Greek Treasury bonds or the supply of laons to Greek banks, because Central Banks don’t have discount windows and can’t conduct open market operations.

Well that didn’t work very well. OK the problem is that if Bernankepoulos creats DRachmas out of nothing to buy bonds and loan at a low discount rate, then no one will have any faith in the Drachma so it will lose value both compared to other currencies and compared to goods and services. The appraoch of making sure that a loss of international confidence doesn’t cause a recession will cause inflation. And central banks can’t allow inflation, because Bernankepolous is like Bernanke except that he doesn’t have a dual mandate.

To go on, in the real world, inflation accelerates when economies are overheated. Between recession and accelerating inflation there is a sweet spot of neither. Yes if we assume rational epectations, then the loss of confidence will worsen the inflation unemployment tradeoff (inflation need not continuously accelerate but it should jump up and stay high). I don’t believe this for a second, but will assume for the sake of argument that, given the sudden fiscal dominance (need to monetize the national debt) expected inflation will jump up and either actual inflatoin will jump too or unemployment will rise.

So ? Fatas didn’t write that with a loss of confindence a country must accept high unemployment or high inflation — he said the country must accept high unemployment.

Fatas is a very smart and, until now, always very reasonable economist. What happened ? I speculate fter the jump.

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There is a debt problem

Yves Smith writes:

So bad economic times increase income disparity even among the young, and that will also make it even harder for them to contend with debt.

I’ll return to this topic, because I think this recitation isn’t adequate to convey how the pieces are being put in place to put bigger and bigger swathes of the public under the debt yoke. And officials act as if this sort of thing is desirable as long as they can pretend it’s “affordable”. This cheery statement comes from that Department of Education release:

“The growing number of students who have defaulted on their federal student loans is troubling,” U.S. Secretary of Education Arne Duncan said. “The Department will continue to work with institutions and borrowers to ensure that student debt is affordable. We remain committed to building a shared partnership with states, local governments, institutions, and students—as well as the business, labor, and philanthropic leaders—to improve college affordability for millions of students and families.”

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Projecting the utilization of labor and capital

So the cobra equation has made me re-evaluate the dynamics of the effective demand limit. The main reason is that the graph of the Cobra equation shows that capital utilization decreases as employment increases at the effective demand limit. I was assuming that as employment increased, the utilization of capital would also increase. That was an error.

As businesses in the aggregate reach for profits, the path at the effective demand limit shows that capital will be less utilized as labor is more utilized.

I had been thinking that unemployment would bottom out at 6.7% to 7.0%. That was assuming that capital utilization would increase. But now I see that unemployment can go lower, because capital utilization will not increase.

Here is the path of the utilization of labor and capital (blue circles) since 2009 up to today’s data from unemployment. (3rd quarter unemployment is 7.3%, which is 92.7% in the graph.)

 cobra 2a

Equations for the two lines are given above the graph.

The blue oval shows the projected range of the equilibrium point where profit maximization crosses the effective demand limit. The economy gravitates toward that blue oval area. The utilization of labor and capital (blue circles) is moving along the effective demand limit following increasing profits toward the blue oval.

The Cobra equation is the equation that I have been searching for since last year. Now that I can see it, the dynamics of profit at the effective demand limit are coming clear. I still see the environment for a recession starting in one year, but the dynamics of that environment are clearer.

For reference… here is the Cobra equation to measure the profitability of utilizing labor and capital dependent upon labor share.

Measure of profitability in the aggregate = (x + y) – ax2y2

x = capital utilization rate
y = employment rate
a = coefficient for labor share to establish profit maximization.
Coefficient “a” = (els)2 – 2.474*(els) + 2.0 … (els = effective labor share, for example 80% as 0.80).

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Basic Income initiative in Switzerland

Here is an interview from the Real News Network with one of the founders of the Basic Income initiative in Switzerland, Enno Schmidt. The initiative would guarantee a basic income of $2800 per month for every adult. That may seem like a lot from the perspective of the United States, but it is enough to live in Switzerland.

The wonderful thing about this video is that Enno Schmidt explains the reasoning behind the idea of a Basic Income incredibly well. His reasoning is profound.


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California v. Red States, What Causes Growth, and the Great Stagnation

by Mike Kimel

California v. Red States, What Causes Growth, and the Great Stagnation

Lately there has been a small cottage industry of California v. Texas comparisons, with California getting the apparent short end of the stick.  Heavily regulated, high tax, big gubmint California is the past, and free wheeling low tax small government Texas is the future, and among the pieces of evidence is people moving out of California and into Texas.  California has been the punching bag as long as I can remember.  Texas usually plays the role of the victor, but every so often another state is put up as the shining paragon.  Over the years I’ve seen California get the negative comparison treatment relative to Colorado (mostly in the 1980s), North Carolina (mostly in the 1990s), Tennessee (a few times over the decades), and even (lately) North Dakota.

The graph below shows the indexed real state GDP for each of these states using state GDP and deflator data from the Bureau of Economic Analysis (  Figures go back to 1963:








Figure 1.

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