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Columbia U. Conference Shows Incentives Pervasive but Controls Work

Columbia U. Conference Shows Incentives Pervasive but Controls Work

 Day one of the Columbia International Investment Conference in New York has concluded, and the takeaways are very clear. The topic is investment incentives, prompted by Louise Story’s “United States of Subsides” series last December. Story moderated panel 1, which covered the pervasiveness of subsidies. How widely used are investment subsidies? As the presentations made clear, they are used by virtually every country in the world. That is depressing takeaway number one.

The second big lesson is that for most types of foreign direct investment, the use of incentives has no effect at all. Resource companies, companies seeking strategic assets, and companies needing to sell in a particular market are coming regardless of the use of incentives. (I would qualify the last part to say that only applies when coming to markets that aren’t divided into a number of competing jurisdictions, such as the US and EU, where the member states can engage in subsidy wars, related but gated article here.) It is only for “efficiency seeking” or cost minimization investment that incentives can make some difference in location decisions.

Third, one of the biggest cost of incentives consists of funds given to firms that were coming to your location even if they had not received the subsidy, according to Louis Wells, the panel 2 moderator. He says most studies place this at 60% to 70%. A more recent study by Peter Fisher (p. 8) says that a more typical figure for the amount of jobs is only about 9%, versus the 30-40% implied by Wells. This means that the real cost per job of projects is at least 2.5 times as large as reported cost per job, and may be up to 11 times higher. And don’t forget that there is also a big opportunity cost based on the value of other possible uses of the funds given away. As I have pointed out, all the public sector jobs lost since December 2007 could be replaced if incentives were abolished.

Fourth, the good news is that there are control methods that do work. I have written before about this, and a conference presentation by Investment Consulting Associates (p. 3) illustrates this with a comparison of incentives in the United Kingdom and the Czech Republic. Recall that European Union state aid policy aims to direct bigger incentives to poorer regions of the EU. ICA’s database shows that the mean incentive was more than twice as large ($8.61 million vs. $3.41 million) in the Czech Republic than in the UK; the  mean “aid intensity” (subsidy/investment) was 36% in the Czech  Republic compared to just 15% in the UK; and mean cost per job was $67,088 in the Czech Republic versus only $20,288 in the UK. These are precisely the outcomes the European Commission wants to achieve with the state aid rules, creating a reliable bias in favor of poorer regions (and at the same time the poorer regions have subsidy limits holding down what investors can receive).

Tomorrow (Thursday, November 14) will have panels on “What are the alternatives” and my panel, “The way forward,” where we will discuss EU rules and other methods of controlling out-of-control incentive wars. You can follow the action on Twitter at #CIIC13.

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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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Median wealth increases, but U.S. still stuck at #27 in world

The new Global Wealth Report and Global Wealth Databook from Credit Suisse were released last week. According to the Report (p. 3),

Global wealth has reached a new all-time high of USD 241 trillion, up 4.9% since last year and 68% since 2003, with the USA accounting for 72% of the latest increase. Average [mean] wealth per adult reached a new all-time high of USD 51,600, with wealth per adult in Switzerland returning to above USD 500,000.

For the United States, this represents an increase in mean wealth per adult of 11.4% from mid-2012 to mid-2013 (Databook, p. 92). Median wealth per adult increased even faster, from $38,786 to $44,911, or 15.8%, although we should recall that measurement of median wealth is less reliable than that for mean wealth.

Nonetheless, while these data represent improvement for the typical American, there was no change in our ranking relative to the rest of the world. While Kuwait and Cyprus fell below the U.S., Slovenia and, more surprisingly, Greece now have higher median wealth per adult. Thus, the United States remains only 27th in the world.

These data are significant for at least two reasons. First, they highlight the fact that while the United States has a higher gross domestic product per capita than all but four of the 26 countries ahead of it in median wealth per adult (Qatar, Luxembourg, Singapore, and Norway), the long-term trend of economic policies has clearly hurt the middle class. Inequality is a big part of the explanation here: mean wealth per adult in the U.S. is 6.7 times median wealth per adult, the highest ratio in the top 27. By contrast, in #1 Australia the mean-to-median ratio is only 1.8:1. In fact, this ratio is less than 3:1 for 19 of the 26 countries with higher median wealth per adult. In Slovenia, mean wealth per adult is less than 1.5 times median wealth per adult! (All figures calculated from Databook, Table 3-1.)

Second, these low levels of wealth contribute to the coming retirement crisis of the middle class. Americans have low levels of saving, while Social Security still looks vulnerable to the chopping block despite our already high level of elder poverty.

Here are the top 27 countries by median wealth per adult.

 

Country                                                      Median Wealth Per Adult

 

1.  Australia                                                    $219,505

2.  Luxembourg                                               $182,768

3.  Belgium                                                     $148,141

4.  France                                                        $141,850

5.  Italy                                                           $138,653

6.  United Kingdom                                      $111,524

7.  Japan                                                         $110,294

8.  Iceland                                                      $104,733

9.  Switzerland                                               $  95,916

10. Finland                                                     $  95,095

11. Norway                                                    $  92,859

12. Singapore                                                 $  90,466

13. Canada                                                     $  90,252

14. Netherlands                                              $  83,631

15. New Zealand                                            $  76,607

16. Ireland                                                      $  75,573

17. Spain                                                        $  63,306

18. Qatar                                                        $  58,237

19. Denmark                                                  $  57,675

20. Austria                                                     $  57,450

21. Greece                                                      $  53,937

22. Taiwan                                                      $  53,336

23. Sweden                                                     $  52,677

24. United Arab Emirates                              $  51,882

25. Germany                                                   $  49,370

26. Slovenia                                                    $  44,932

27. United States                                            $  44,911

 

Source: Credit Suisse Global Wealth Databook, Table 3-1

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A $1000 per month pension equals $300,000 in savings

Too much recent travel, but my wife referred me to this article by Lynn Parramore* (originally published here) on how the 401(k) “revolution” was a big bust for the middle class, something I have also written about. I just wanted to add one quick point to her discussion.

Parramore references the common recommendation that you have at least $1 million in savings to retire. This is usually related to the “rule” that you can take 4% of your savings per year and not exhaust it. That would give you $40,000 per year in income. However, with low interest rates and flat stock market performance (the S&P 500 just topped its 2000 peak this spring), even 4% may be too high as you run a greater risk of outliving your savings.

The flip side of that rule, which I haven’t seen mentioned anywhere else, is that a $1000 per month pension equals at least $300,000 in savings (in terms of retirement income), as $300,000 times 4% is $12,000 per year. If 4% is too high, then its value is even greater. If you can only take 3% of your savings per year safely, it would be equal to $400,000 in savings, for example.

This shows how important it is to protect pensions where they do exist, primarily at the state and local government level. They are being chipped away at varying rates, mainly but not exclusively in red states. Oregon, for example, looks set to cut state pensions in a special legislative session via reductions in cost of living adjustments similar to the idea of using a less generous inflation measure for Social Security to provide backdoor cuts.

It should be obvious that this is even more true for Social Security, since everyone is eventually eligible for benefits. That is why I have argued that expanding Social Security is the best solution to the coming middle class retirement crisis.

 

* Disclosure: Lynn Parramore is the editor at AlterNet who commissioned my article there on state and local government subsidies to business.

Cross-posted at Middle Class Political Economist.

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Nauseating Health Care Idiocy from Forbes

A non-blogging friend points me to this new article at Forbes by Chris Conover purporting to show that the “typical family of 4” will see its health care spending rise by $7450. He quotes the Center for Medicare and Medicaid Services (CMS), saying “in its first ten years, Obamacare will boost health spending by ‘roughly $621 billion’ [that’s the CMS quote]  above the amounts Americans would have spent without this misguided law.” How stupid is this? Let us count the ways.

First of all, this is not $7450 per year, but over the entire 10-year (or more likely 9-year; he usually refers to 2014-22) period. So he’s hyping shock value that isn’t there. As he explains, he divides the $621 billion by total population over the period to give a per capita cost, which he then multiplies by 4 to get the cost to his “typical family of 4.” So what we’re actually looking at, before we start tearing up his calculation, is ($7450/9)/4 = $207 per capita higher spending per year on average. Recall that in 2011 the United States spent $8174.90 per person on health care (see link on how to navigate to the ultimate source for this data, stats.oecd.org).

Second, Conover doesn’t understand present value. He writes, “Of course, all these figures are in nominal dollars. In terms of today’s purchasing power, this annual amount will rise steadily.” Of course, it is just the opposite. A dollar in 2022 is worth less than a dollar today. In 2013 dollars, the amount is less than $207 per person per year (how much less depends on what you consider an appropriate discount rate). How does an editor not catch this? I have a screen shot to memorialize the error after it eventually gets fixed.

Third, Think Progress’s Igor Volsky is completely right when he quotes Paul van der Water of the Center on Budget and Policy Priorities that none of this will apply to the “typical American family” because that family gets its insurance at work. More money will obviously be spent over time, but it won’t be spent at the center of the health insurance distribution, if you want to look at it that way. But Conover can’t see this point. Instead, he points the finger at President Obama for promising that the ACA would reduce premiums for the typical family by $2500 per year. Not only do two wrongs not make a right, but…

Point four is that what he says is impossible just isn’t: “It’s simply not possible for national health spending to rise by $621 billion and for the “typical” family to expect a $2500 (per year!!!!) premium reduction.” I don’t know if it will happen, but it certainly isn’t impossible. Conover is overlooking the fact that the increase in health spending is being funded in ways that don’t come out of individual health care spending. High-income taxpayers ($200,000 single, $250,000 filing jointly) are paying 0.9% points more in Medicare tax and an extra 3.8% on investment income. According to Robert Pear of the New York Times, “The new taxes on wages and investment income are expected to raise $318 billion over 10 years, or about half of all the new revenue collected under the health care law.” The medical device tax will raise $29 billion over 10 years, over $100 billion will come from insurance companies, $34 billion from drug companies, and $150 billion from the “Cadillac” tax, according to the Obama administration. (We can debate the wisdom of this tax, but it doesn’t fall on the “typical” family.) We’re already at $631 billion over 10 years. If we increased these taxes more, yes, we could use the money to fund premium reductions, most plausibly by increasing the income levels eligible for subsidies.

Then, there’s the little matter of the newly insured. By 2022, according to the CMS report Conover cites, 30 million more people will have insurance than would be the case without Obamacare. While many of those people will be receiving subsidies, a lot of them will be paying something for their insurance, adding even further to the sources of income that don’t come out of what the “typical family” will pay.

Finally, the new 30 million people will be covered very efficiently. $621 billion divided by 9 years is $69 billion per year, divided by 30 million people is $2300 per person per year. While that figure is too low because we won’t be insuring all 30 million immediately, remember that 2011 U.S. health spending per capita was $8174.90. Any way you look at it, the newly insured will be costing far less per person than those currently in the insurance system.

There you have it. Forbes‘ most-read story of the day (with over 26,000 Facebook shares and 3400 tweets as I write this) is simply false. Between all the new taxes and the premiums from the newly insured, you can cover the total increase in health care spending. The typical, already insured family isn’t going to see increases due to the rise in overall health care spending. You add 30 million new insured at a far lower cost than what we currently spend per person. And the editors didn’t catch a blatant error on present value.

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New Jersey Subsidies More Out of Control than Ever Under Christie

I have written before how state and local subsidies are more out of control than ever, and more recently how the number and size of megadeals has increased substantially since the Great Recession.

Now a new study from Governing magazine (h/t to Al at LinkedIn group Economic Development 2.0) exhaustively analyzes New Jersey’s five largest incentive programs and their growth since 2011. Governor Chris Christie has made aggressive use of incentives a centerpiece of his economic development strategy, but the magazine’s comparison of New Jersey’s job performance with than of surrounding states shows that it simply isn’t working. Not only that, according to the report, “at least 20 companies receiving incentives filed layoff notices” before fulfilling their job requirements.

 

But it is the sheer dollar value of incentives that makes the head spin. According to the magazine’s estimates, the state awarded $904 million in 2011 and $872 million in 2012. Adding in this year’s awards brings the total to $1,950 million which is, Governing notes, “more than the previous 15 years combined.” (Note: 15 years is the entire life of these programs.)

Moreover, some of the biggest incentive awards have been some of the most outrageous. The Urban Transit Hub Tax Credit awarded Panasonic $102.4 million to move nine miles, within the state, from Secaucus to Newark. As I have reported before, giving subsidies to move existing facilities is the most obviously wrong form of incentive use, because no new jobs are being created, but tax revenue is cut. Interstate job piracy is bad, but for the state to fund intra-state piracy is lunacy.

Meanwhile, New Jersey’s July unemployment rate came in at 8.6%, 43rd worst of the 50 states.

Kudos to Governing and reporter Mike Maciag for a great piece of reporting, providing a well-documented case study of what out-of-control subsidies look like as the country tries to recover from its ongoing jobs depression.

Cross-posted at Middle Class Political Economist.

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Republicans’ “Market-Oriented” Health Care Reforms Won’t Work, Part 2

Last time we examined a common conservative “solution” to the country’s health care problems, allowing insurance companies to sell policies across state lines. What we found, though, is that this would lead to a race to the bottom in state regulation of insurance products, and that there is no reason to think that further marketization of healthcare in the U.S. will lower costs.

Today, we turn our attention to tort reform. It figured prominently in Karl Rove‘s Wall Street Journal article last week (paywalled). This has been a conservative theme for so long that most states have already done it. In fact, since 1986, 39 states have limited noneconmic damages, punitive damages, or both, making it hard to see how further tort reform can yield much in terms of gains that haven’t already been achieved. The current conservative battle cry is for federal tort reform, in other words forcing the states to reduce protection against medical malpractice whether they want to or not.

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

http://www.middleclasspoliticaleconomist.com/2013/08/republicans-market-oriented-health-care.html

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 (stats.oecd.org):

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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Austerity sinks all boats

July 31 saw the latest release of European Union unemployment numbers, and Monday’s gross domestic product figures brought no joy, especially for Greece. As Think Progress reports, Greek unemployment hit a new record of 27.6 % in May, while Spain’s June unemployment figure was 26.3%, according to Eurostat. As the world’s biggest experiment in austerity, the European Union continues to prove a failure. Below is the Eurostat figure for unemployment in member states for June, including new (as of July 1) member Croatia, designated HR.

Source: Eurostat

 

As reported at first at Reuters, Greece’s gross domestic product has fallen by 23% since January 2008. Anyway you slice it, that’s a depression, not a recession. Despite austerity, the Greek economy has gotten sicker and sicker.

But, wait! you say. What about Ireland? Its unemployment rate has dropped an estimated 1.5 percentage points from its January 2012 peak of 15.1% to just 13.6% in June 2013. Isn’t austerity finally paying off there?

If only that were so. What actually is happening is that Ireland has returned to its historical solution of substantial out-migration to reduce the number of unemployed workers that show up in the official data. And yes, the numbers are way more than enough to wipe out the apparent 1.5 point drop.

According to the Central Statistics Office Ireland (Table 5), emigration has surged from 72,000 in 2009, the last year of net in-migration, to 87,100 in 2012, when net out-migration was 34,400. If you look at net emigration of those 15-64, the closest we can get with the data to prime working age, the situation is even somewhat worse. Over 2010-2012, net out-migration in that age group has totaled 90,700.

I calculate the potential effect on the unemployment rate as follows. Ireland only compiles official unemployment data quarterly, and makes monthly estimates in between. So the last official unemployment rate was 13.7% for the first quarter of this year. According to the CSO, there were 292,000 unemployed then. Dividing by 0.137, we get a labor force of 2,131,387, subject to rounding error. Now add 90,700 to both numerator and denominator, and the maximum potential unemployment rate, if all of those people were in the labor force and unemployed, is 382,700/2,222,087 or 17.2%.

Now, certainly some of the 15-24 year olds would not be in the labor force, though many will. Even if we restrict ourselves to the 25-44 age group, net out-migration for 2010-2012 comes to 36,000, which would bring the unemployment rate back to 15.1%, equal to the worst month since the recession began.

We can see, then, that austerity is sinking all boats. Greece has passed Spain in unemployment and is producing barely 3/4 what it did in 2008. Ireland’s reduction in unemployment is a mirage based on emigration. The same is true in Latvia and Lithuania, by the way, which the Irish Times reports have lost 7.6% and 10.1% of their population between 2007 and 2012. As the paper notes, “If Spain and Italy had lost the same proportion, it would have been 11 million.”

Yet the drumbeat for austerity continues. The sequester goes on. And millions suffer needlessly.

Cross-posted from Middle Class Political Economist.

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Let’s Debase the Dollar!

A lot of people, especially conservatives, complain about the so-called debasement of the U.S. dollar. For example, Craig R. Smith, who is apparently important enough to be interviewed by “FOX News, CNN, CNBC, ABC, NBC, CBS, PBS, CBN, TBN, Time, The Wall Street Journal, The New York Times, and Newsweek,” wrote a book last year that claims the value of the dollar has fallen by 98% in the 100 years since the income tax and Federal Reserve were established in 1913. He predicts terrible economic calamity will be the result of this debasement. Smith is not alone in this view; evidently Rep. Paul Ryan shares it, too (h/t Paul Krugman).

Mind you, this is a slight overstatement according to Bureau of Labor Statistics (BLS) inflation data (www.bls.gov, series CUUR0000SA0, set date range for 1913 to 2013). This shows that the Consumer Price Index has increased from 9.8 in January 2013 to 233.5 in June 2013, which implies a decline in the dollar’s purchasing power of only 96%. To put it another way, according to the BLS, today’s dollar is worth 4 1913 cents, while Smith says it only worth half as much, 2 1913 cents. Either way, sounds pretty awful, right?

Of course not. This is another example of something I wrote almost two years ago: “When someone tries to get you to focus on only one part of a complicated picture, it’s a safe assumption they are trying to mislead you.” The most obvious omission of the “debasement lobby” is the fact that pay levels have risen a lot since 1913. A single dollar does not buy as much as it did in 1913, but people get paid a whole lot more dollars per hour/week/year than they did, then, too!

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