Category: health care

Healthcare Inflation

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April 9, 2023

by Stephen Stofka

This week’s letter is about health care spending and its effect on inflation. Economists construct a composite price index number out of many components of the economy. While that construction may have a rigorous methodology we struggle to make causal inferences from the data because price movements in an economy are complex.

In 1965 President Johnson signed the law creating the Medicare and Medicaid programs. At that time, health care spending was 6% of total consumer spending. The radical reformers of that age wildly underestimated Medicare’s costs, particularly for inpatient hospital costs. Since the government now paid for the first 90 days of a hospital stay, doctors were encouraged to take a cautious approach and keep a patient in the hospital if there was a chance of infection or accident at home. The deep pockets of the federal government incentivized medical and pharmaceutical companies to develop new drugs and equipment. Hospitals expanded their surgery and rehabilitation units. Doctors increasingly turned to specialization and their numbers tripled from near 90,000 in 1965 to 284,000 in 1990, according to the National Center for Health Workforce Analysis. In 25 years, healthcare spending (https://fred.stlouisfed.org/graph/?g=12f9k) more than doubled as a percent of consumer spending, coming close to 15% of the total. It has risen to 17% in the past decade and now is 16%. Here’s a chart showing the growing contribution of healthcare spending to total consumer spending (blue line) and healthcare inflation’s impact on overall inflation (red line).

Healthcare spending has a large effect on inflation through two channels: first, during recessions healthcare spending does not decline as much as overall consumer spending; second, prices for health care services have grown faster than the prices of many other goods because the demand for healthcare services remains strong and constant. Since 1990 the prices for all goods and services have increased 81%, far less than the 131% of healthcare prices.

During recessions, total consumer spending falls and that puts downward pressure on inflation. But the healthcare component resists that downward pressure. The Federal Reserve, whose job it is to keep prices stable, might delay lowering interest rates because healthcare spending is keeping the price index elevated above the level of all other goods and services. This in turn could prolong the after effects of a recession: less lending and slower gains in employment. This is what happened after the 1990 and 2001 recessions. During the 1990 recession, inflation (the annual change in price) actually rose a bit before falling, spurred on by an 8.5% increase in healthcare prices. By the first quarter of 1991, healthcare was contributing 40% to overall inflation, rising up from 13% in 1989. The same pattern repeated in the 2000-2002 period.

Even though both recessions lasted less than a year, job recovery was slow. The lingering effect of a recession surely cost President George H.W. Bush a chance at a second term. In 1992, both Bill Clinton and Independent candidate Ross Perot reminded voters that the economy was sluggish and it was time for a change of direction. In the 2000s, Bush’s son, George, learned from his father’s misfortune. He urged the passage of tax cut packages and the Medicare Drug program, which helped secure his victory in the 2004 election despite disapproval of the conduct of the war in Iraq.

The ACA, or Obamacare, capped the growth of inpatient Medicare payments at 2% and this helped keep healthcare inflation (https://fred.stlouisfed.org/graph/?g=12f9b)  at or below 2%. Medicaid expansion doubled the contribution level of healthcare prices to overall inflation, but because healthcare inflation was restrained, that helped to contain overall inflation.

The pandemic showed the enduring influence healthcare has on the general price level. When consumer spending had a sharp decline, healthcare prices remained strong. During the 3rd quarter of 2020, healthcare inflation was 2.9% and was responsible for nearly all of the general inflation rate of 1.1%. But here, the paths diverged. As the economy reopened and the general rate of inflation rose during 2021 and 2022, healthcare inflation decreased. That divergence describes the nature of the current overall inflation. It is procyclical, driven by short-to-medium term events, not a fundamental change in the economy.

In a 2017 Federal Reserve Economic Letter, Tim Mahedy and Adam Shapiro (2017) assigned spending categories into two buckets, procyclical and acyclical. Procyclical components that make up 42% of spending are those whose demand and prices vary with the business cycle and changes in employment. These include housing, recreation, food services and some nondurable goods. Acyclical components account for 58% of spending and include healthcare, financial services, many durable goods and transportation. The authors don’t mention energy specifically but I presume that it is an acyclical component of both housing and transportation services.

The pandemic caused shifts within and between these two buckets. During the pandemic demand soared for housing services, but declined for recreation and food services – an example of a shift within the procyclical bucket. We used a lot less energy in our cars but a lot more electricity and gas at home – a shift within the acyclical bucket. We bought a lot of durable goods – a shift between buckets.

I think it is the between  shifts that had the most disruption. Supply chains for acyclical goods and services function on a less flexible timeline that does not anticipate sudden changes. Global shipping rates soared, ports were clogged with traffic, parts inventories were depleted, leading to manufacturing delays and an opportunity for companies to raise prices to make up for decreased profits due to shrinking volumes. With long delays from overseas suppliers, big retailers like Wal-Mart and Target increased their orders. As pandemic restrictions lifted, people shifted their spending again from acyclical durable goods to procyclical recreation and food services.  

Each of us constructs an instinctive index based on our individual buying habits and circumstances. An American who lives for a while over in Europe has to learn to convert Centigrade temperatures to Fahrenheit. Like the CPI price index, there is methodology for making that conversion. However, it is much easier to remember that 0°C is cold, 10°C is cool, 20°C is comfortable,  30° is hot, and 40° is hell. Much of the time we navigate our daily lives without precision, relying on professionals when we do need exactness. Sometimes the professionals can tell us why something is the way it is but sometimes even they can only guess. Complexity is the result of an interlocking causality that is harder to solve than a Rubik’s cube.

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Photo by John Barkiple on Unsplash

Mahedy, T., & Shapiro, A. (2017, November 27). What’s down with inflation? San Francisco Fed. Retrieved April 6, 2023, from https://www.frbsf.org/economic-research/publications/economic-letter/2017/november/contribution-to-low-pce-inflation-from-healthcare/

A Labor-Output Ratio

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February 19, 2023

by Stephen Stofka

When analyzing the economies of some developing countries, economists refer to a “resource curse,” a commodity like oil or minerals that a country can sell on the global market. In a developing country, that commodity may become the main source of foreign currency, used to pay for imports of other goods. The extraction of that resource requires capital investment which usually comes from outside the country. If the production of that resource is not nationalized, most of the profits leave the country.

There are a few big winners and a lot of losers. This uneven ratio promotes economic and social inequality. Political instability arises as people within the country want to get a hold on those resources. Some politicians promise to use the profits from the resource to benefit everyone but those who seize power benefit the most. Political priorities determine economic decisions and the production of that resource becomes inefficient.

A key factor in the “resource curse” is that its contribution to GDP is usually far above its contribution to employment. If a mining sector accounts for 2% of employment but contributes 10% to GDP, the ratio of employment / GDP % equals 2%/10%, or 0.2. Ratios that are far below 1 do not promote a healthy economy. Industries that are closer to a 1-1 ratio will produce a more well rounded and vibrant economy because employed people spend their earnings in other sectors of the economy – a diffusion effect. Some economists might say that a low ratio means that capital is being used more efficiently and attracts capital investment. However, that efficiency comes at an undesirable social and economic cost.

 Let’s look at some examples in the U.S. The construction industry contributes 3.9% to GDP (blue line in the graph below) but accounts for 5.1% of employment (red line). Notice that this is the opposite of the example I gave above. The 1.31 ratio of employment/GDP is above 1, meaning that the industry employs more people for the direct value that it adds to the economy.  Construction spending includes remodels and building additions but does not include maintenance and repair (Census Bureau, n.d.). In the chart below, look at how closely GDP and employment move together. The divergence in the two series since the pandemic indicates the distortions in the housing market because of rising interest rates. Builders have put projects on hold but employment in the sector is still rising because of the tight labor market.

The finance sector’s share of the economy has grown since the financial crisis yet employment has remained steady – or stuck, depending on one’s perspective. The great financial crisis put stress on banks, big and small, but the government bailed out only the “systemically important” banks, leaving smaller regional banks to fend for themselves. The larger banks absorbed many smaller banks, leading to a consolidation in the industry. That consolidation and investments in technology helped the sector become more efficient. The ratio is about 0.75, above the 0.2 ratio in the example I gave earlier. I labeled the lines because the colors are reversed.

Retail employs a lot of people relative to its contribution to GDP. The ratio is about 1.65. Does that mean retail is an inefficient use of capital? Retail sales taxes pay for many of the city services we enjoy and take for granted. Retail is the glue that holds our communities together.

The manufacturing sector employs fewer people in relation to its GDP contribution. It’s ratio is 0.77, about the same as finance.

As I noted earlier, the mining sector is capital intensive with a high ratio of GDP to employment. This sector includes gas and oil extraction. In the U.S. that ratio averages about 0.33 but it is erratic global demand. Look at the effect during the pandemic. In our diversified economy, the mining sector contributes only a small amount, like 2%. In a developing country like Namibia in southern Africa, mining accounts for 10% of GDP. In the pandemic year, the demand for minerals declined and Namibia’s economy fell 8%.

Lastly, I will include the contribution of health care, education and social services, which contribute 7.5% to GDP but employ almost a quarter of all workers. Since the financial crisis and the passage of Obamacare, this composite sector contributes an additional 1% to GDP. These sectors include many public goods and services that form the backbone of our society. The 3.0 ratio is the inverse of the mining sector.

To summarize, the construction, retail, health care and education sectors have a ratio above 1. They employ more people for each percentage unit of output. The finance, manufacturing, mining, oil and gas sectors have ratios less than 1, employing fewer people per percentage unit of output. For readers interested in the GDP contribution of other industries, the Federal Reserve maintains a list of charts, linked here [https://fred.stlouisfed.org/release?rid=331].

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Photo by Camylla Battani on Unsplash

Census Bureau. (2019, April 15). Construction spending – definitions. United States Census Bureau. Retrieved February 16, 2023, from https://www.census.gov/construction/c30/definitions.html

U.S. Bureau of Economic Analysis, Value Added by Industry: Construction as a Percentage of GDP [VAPGDPC], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/VAPGDPC, February 12, 2023.

U.S. Bureau of Labor Statistics, All Employees, Construction [USCONS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USCONS, February 12, 2023.

U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PAYEMS, February 12, 2023.

I will not do a complete reference for each series. Here’s the identifiers for each series: Finance Value Added – VAPGDPFI. Employment in finance – USFIRE. Construction employees – USCONS. Retail Value Added – VAPGDPR. Retail Employees – USTRADE. Manufacturing Value Added – VAPGDPMA. Manufacturing Employees – MANEMP. Education, Health Care, Social Services Value Added – VAPGDPHCSA. Employment is a composite of 4 series. Mining Value Added – VAPGDPM. Mining Employment – CES1021000001

Bridge the Gap?

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Photo by Ragnar Vorel on Unsplash

September 6, 2020

by Steve Stofka

What issues are your priorities this election? For more than thirty years Pew Research has surveyed people about their priorities. For the first time in 2019 a majority of 765 respondents answered that there is a “great deal” of difference in where each party stands, up from 25% in 1987 (Pew Research, 2020). I’ve included the full list at the end.

In January 2019, soon after the midterm elections Pew surveyed 1500 adults (Jones, 2020). I don’t know why the abortion/free choice debate is not on the issue list since that single issue may decide some voters. I’m particularly interested in the large gaps in those priorities among those who lean Democrat or Republican. I’ll start with gaps of 25%. For instance, terrorism is a concern for 80% of Republicans but only 55% of Democrats. Other Republican priorities are Immigration, the Military and Crime.

As you can see, these are fear issues. Should a person in a town of 2000 be more concerned about terrorism than a resident of NYC? Of course not, but it is what it is. People vote out of fear and hope, but fear probably wins the wrestling match, especially among Republican voters who are not hopey, changey voters, as former VP candidate Sarah Palin noted (Gonyea, 2010).

The issue of crime illustrates the conflicting complexities of these issues. It is a 60% priority for Republicans, who are in suburban and rural areas where there is less crime, and a 40% priority for Democrats, who are in dense urban areas where there is a higher incidence of crime. Because crime is much lower than in past decades, this issue has slipped as a priority for Democrats (FBI, n.d.).  

Two of the highest Democrat priorites – Cimate Change and the Environment – have a huge gap of 50% with Republican voters. Democrat politicians have not been able to make these two fear issues personal for Republicans. If they could, they would draw more voters to their side on this issue. 25% gaps exist on issues of the Poor and Needy, Health Care, Education and Race Relations. Rural Republican voters are more likely to be poor and needy, but this is not a fear issue for them (USDA, n.d.).

What strategy would a politician or political consultant advise? Run toward the base? If so, one would emphasize these issues where there are large gaps between the two primary factions in this country. The President has largely adopted this strategy. Republican voters are more inclined to fall in line and the President is relying on this party loyalty even if they don’t like him personally.

Some issues where there is a smaller gap between factions are the economy, the budget deficit, jobs, global trade, drug addiction, transportation, Social Security and Medicare.

A politician reaching out to voters on the fence in this election would focus on these issues. Joe Biden hits the jobs theme, the budget deficit, and protecting Social Security and Medicare to appeal to voters who have had their fill of the President’s divisiveness.

In the coming two months, candidates may adjust their strategies. In the 2016 election, Hillary Clinton may not have addressed these shared concerns as well and it cost her the election.  Governing comes after winning an election. In politics, winning is packaging the concerns and identities of voters into an appealing, if not attractive, box that will get them to come out and vote.

What are your priorities this election season? Are you a multi-issue voter, a single issue voter, a party voter regardless of the issues? Here’s the Pew survey list of 18 issues: terrorism, immigration, military, crime, climate change, environment, poor and needy, race relations, health care, education, economy, Social Security, Medicare, jobs, drug addiction, transportation, global trade, and the budget deficit.

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Notes:

FBI. (n.d.). Crime rates in the United States, 2008 – 2018. Retrieved September 05, 2020, from https://crime-data-explorer.fr.cloud.gov/explorer/national/united-states/crime

Gonyea, D. (2010, February 07). ‘How’s That Hopey, Changey Stuff?’ Palin Asks. Retrieved September 05, 2020, from https://www.npr.org/templates/story/story.php?storyId=123462728

Jones, B. (2020, August 26). Republicans and Democrats have grown further apart on what the nation’s top priorities should be. Retrieved September 05, 2020, from https://www.pewresearch.org/fact-tank/2019/02/05/republicans-and-democrats-have-grown-further-apart-on-what-the-nations-top-priorities-should-be/

Pew Research Center. (2020, August 21). Public’s 2019 Priorities: Economy, Health Care, Education and Security All Near Top of List. Retrieved September 05, 2020, from https://www.pewresearch.org/politics/2019/01/24/publics-2019-priorities-economy-health-care-education-and-security-all-near-top-of-list/

U.S.D.A. (n.d.). Rural Poverty & Well-Being. Retrieved September 05, 2020, from https://www.ers.usda.gov/topics/rural-economy-population/rural-poverty-well-being/

Reaching Consensus

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September 22, 2019

by Steve Stofka

In the early 1980s, scientists at NASA raised the alarm that much of the protective ozone layer over Antarctica was missing. Newspapers and TV carried images of the “ozone hole” (Note #1). In 1987, countries around the world enacted the Montreal Protocol and banned the use of aerosols and chlorofluorocarbons (CFCs). There were some arguments and a few AM radio talk show hosts called the ozone hole a scientific hoax. However, most of the world reached consensus. There will always be crackpots who ride backwards on their horse and claim that everyone is lying about what lies ahead.

Compare those days of yesteryear with today. We have a wide array of media and information outlets. People who can’t make change are self-proclaimed experts on climate change. The Decider-in-Chief can’t reach consensus with himself for more than a day. A slight breeze changes his opinion. Intentionally or not, he has become the Anarchist-in-Chief.

The younger generation is quite upset because they will have to live with the consequences of climate change. The fat cats who make their money proclaiming climate change is a hoax will be dead. Next week there’s a climate summit at U.N. headquarters in NYC. A lot of young people demonstrated in cities around the world this past Friday to let the world know that they are concerned. That’s consensus.

What happened to us in the past thirty years? It’s tougher for us to reach consensus about guns, immigration, climate change, women’s rights, and health care to name a few. Let’s turn to a group of people whose job it is to craft a consensus. In a recent Town Hall Supreme Court Justice Neil Gorsuch pointed out that the nine justices reach unanimous consensus on 40% of the 70 cases that they decide each year. Only the most contentious cases make it to the Supreme Court. 40% unanimity means they agree on many principles. 25-33% of their cases result in a 5-4 decision. Those are the ones that get all the attention. The nine justices who currently sit on the Court were appointed by five different Presidents over the past 25 years. Despite the changing composition of the Court over the past seventy years, those percentages of unanimous decisions and split decisions have remained the same.

Let’s turn to another issue concerning consensus – money. Specifically, digital money like Bitcoin. Some very smart people believe in the future of Bitcoin and the distributed ledger concept that underlies digital money. In this podcast, a fellow with the moniker of Plan B discusses some of the econometrics and mathematics behind Bitcoin (Note #3). However, I think that pricing Bitcoin like a commodity is a mistake.

I take my cue from Adam Smith, the father of economics, who lived during a time and in a country with commodity-based money like gold and silver. Unlike today, paper money was redeemable in precious metal. However, Smith did not regard gold or silver as money. To Smith, the distinguishing feature of money is that it could be used for nothing else but trade between people. Money’s value depends exclusively on consensus, either by voluntary agreement or by the force of government. Using this reasoning, Bitcoin and other digital currencies are money. They have no other use. We can’t make jewelry with Bitcoin, or fill teeth, or plate dishes as we can with gold and silver. The additional uses for gold and silver give it an anchoring value. Bitcoin has an anchoring value of zero.

When people lose confidence in money, they lose consensus over its value. Previous episodes of a loss of confidence in a country’s money include Zimbabwe in the last decade, Yugoslavia in the 1990s, and the sight of people pushing wheelbarrows of money in Germany during the late 1920s.

Like gold, Bitcoin must be mined, a process that takes a lot of electricity and supercomputers but does not give it any value. Ownership in a stock gives the owner a claim on the assets of a company and some legal recourse. Ownership of a digital currency bestows no such rights.

In an age when we cannot reach consensus on ideas like protecting our children at school or the rights a woman has to her own body, we seek consensus with others on more material things like Bitcoin. We seek out information outlets which can provide us with facts shaped to our perspective. When facts don’t fit our model of the way things should be, we bend the facts the way water bends light.

John Bogle, the founder of Vanguard, died recently. He was an advocate of investing in the consensus of value about stocks and bonds. Now we call it index investing. That’s all an index is – a consensus of millions of buyers and sellers about the value of a financial instrument. There are several million owners of Bitcoin – a small consensus. There are several thousand million owners of SP500 stocks. That is a very large consensus, and like a large ship, turns slowly in its course. A small ship, on the other hand, can zip and zig and zag. That’s all well if you need to zig and zag. Many casual investors don’t like too much of that, though. They prefer a steadier ship.

I do hope we can move toward a consensus about the bigger issues, but I honestly don’t know how we get there. In 2008, former President Obama called out “Si, se puede!” but quickly lost his super-consensus in Congress. “No, you can’t!” called out the new majority of House Republicans in 2010. We’ve gotten more divisive since then. Journalist Bill Bishop’s 2008 book “The Big Sort” explained what we were doing to ourselves (Note #4). Maybe he has an answer.

In the next year we are going to spend billions of dollars gloving up, getting on our end of the electoral rope and pulling hard. Our first President, George Washington, was reluctant to serve a second term. Hadn’t he given enough already? In our times, each President looks to a second term as a validation of his leadership during his first term. There’s that word again – consensus.

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Notes:

  1. Images, video of the ozone hole in 1979 and 2018 from NASA.
  2. We the People podcast from the National Constitution Center
  3. Discussion of bitcoin on this podcast
  4. The Big Sort by Bill Bishop

Job Threats

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September 8, 2019

by Steve Stofka

The greater threat to your job – automation or other workers? For thousands of years people have stored their human capital in writing. In some cultures, only a privileged few were allowed access to these “secrets.” The invention of the printing press in the 15th century caused massive unemployment among monks and scribes who copied treasured books by hand.

No, that didn’t happen. Demand for books, particularly the Bible, added many jobs. A symbiosis of knowledge exploded through Europe and parts of Asia. In the network of knowledge, the sciences flourished. The mathematics of chance and the development of calculus spawned the birth of modern physics in Newton’s Principia Mathematica. In the following centuries came the understanding of air and other gases, the physics of fire, electromagnetism and the very structure of stuff. All this human capital was written down in words and equations written in a single language called mathematics.

Books could hold and display the knowledge but couldn’t make the calculations. All that changed when the computer was invented in the mid-20th century. Dancing on pathways etched on silicon circuit boards, electrons simulated the calculations that the human brain had learned.

After defeat by IBM’s Deep Blue chess computer in 1996 (he won the first game), Garry Kasparov realized that computers could become human partners. Crude mechanical computers had automated some tasks during the the 19th and 20th centuries. Now they were ready for some of the tasks of knowledge workers like lawyers (Note #1). Some clerical tasks in the practice of law have been automated but there is still much that relies on judgment gained through experience and “je ne sais quoi” – the subtle weighing of multiple factors that are difficult to write algorithms for.

Thirty years ago, a grocery clerk had to be good at arithmetic – able to multiply four apples times 89 cents per apple and punch in the total on older cash registers. Clerks who could do those calculations quickly and accurately were paid good money.

An accounting clerk in a finance office had to know what calculations to do to get a loan payoff, or to calculate how much credit to extend to a customer. Today a clerk with much less knowledge and training can tab from box to box on a screen and enters the data that the program asks for. Natural language processing is rapidly making even that obsolete. A clerk will simply be able to ask a program a question and it will compute the answer or ask for more information if needed. We used to have to give Google the formula to compute the volume of a sphere. No longer. Ask “what is the volume of a sphere with a radius of 2?” Each year more human capital is being transformed into technology capital.

Some are concerned about the number of jobs that will be lost to automation. The development of the Cotton Gin in the early years of the nineteenth century reduced the number of workers needed to harvest an acre of cotton. Did plantation owners tell their slaves “I don’t need your services any longer?” No. They devoted more acres to the growing of cotton and the demand for slave labor increased.

A few years earlier before the cotton gin, the invention of the Loom greatly improved the efficiency of garment workers. Manufacturers reduced prices of some finished goods, the demand for silk and cotton soared, and employment in the industry grew.

The invention of primitive computers in the middle of the 20th century should have put arithmeticians out of business. Instead the demand increased for people who could do the more difficult or time-consuming computations. Careful but relatively unskilled people could punch in data on a punch card and the computer would tabulate the results. In the 1960s, the demand for business data dramatically increased.

Those in technical professions like lawyers and doctors lobby to protect their jobs not from automation but from other people who could do portions of their job.  In some states, a dental technician cannot fill a cavity. In some states, routine tasks can be performed by a paralegal with less training. They also command lower salaries. In other states, those tasks have to be carried out by a lawyer or with the active supervision of a lawyer.

Some areas of the country are based on a monoculture, an industry that dominates the local economy. The leaders in those industries exert a lot of political influence. A fundamental shift happens when one monoculture competes with another. Many coal workers may be convinced that former President Obama killed the coal industry with burdensome regulations. In 1979, the rock group The Buggles sang “Video Killed the Radio Star;” a similar shift has happened to the coal industry. The surge in lower cost natural gas supplies killed the coal industry. North Dakota against West Virginia and Wyoming. The coal industry’s leaders had less political influence and could not push back against the regulators.

In the 1990s, checkers at Albertson’s went on strike to protest the adoption of scanning technology and UPC codes that were first developed in the 1970s. They were concerned that the store chain would begin hiring lower-paid workers who simply had to pass a grocery item over a scanning screen.

Technological change displaces one type of worker with another type. Millions of workers are doing jobs today that didn’t exist 50 years ago because of technological change. I was at a get-together a few months ago and spoke with a woman who was a social media manager. That’s a job. As the growth of social media has exploded around the world, thousands of new jobs have been created. In the past two decades, programmers have automated some coding. Programmers who could not adapt did lose their jobs but many more jobs were created for those with different or more complicated skills.

What can’t be automated -so far – is people taking care of people. The fact that these are some of the lowest paid professions speaks to the values of our society. Companies pay paltry wages to the people who take care of our parents and grandparents. Those jobs cannot be automated to any great degree. It’s possible that some company will develop a robot that can help an older person into a bathtub or shower, but the process requires many delicate decisions, patience and empathy.

In monoculture economies around the country, some worry that unauthorized immigrants will take lower paying jobs from Americans. Immigrants are more willing to move for a job than Americans. In a county dominated by oil, gas, coal, mining, agricultural or car manufacturing industries, there isn’t much variety in employment and native residents of those towns and cities have something to worry about.

For the whole country, there will not be enough people to fill many lower paying jobs. The Bureau of Labor Statistics estimates that jobs for home health and personal care aides will grow by 36% – rising to almost five million workers. Difficult to keep up with a growth rate far above the 7% average growth of all occupations. Employment for in-facility nursing assistants and orderlies are expected to grow by 9%. Even taking care of our pets will be more difficult – job opportunities for vet assistants are expected to grow by 19%.

If only Congress could set up an immigration program to help our hospitals, clinics, long-term care facilities and home aide programs fill these positions. If only. The H-2B visa program is for temporary jobs only and there are far too few permits issued each year (Note #3). Most of the demand for health care services comes from urban and suburban areas, whose votes have less influence in a rural state where the legislature heeds the wishes of the extractive and “ag” industries. We are not fighting the machines. We are fighting each other.

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 Notes:

  1. Kasparov recounts that match with Deep Blue in the TED talk (transcript)
  2. BLS estimates of employment growth for health care aides
  3. 1H-2B visa program

Country Roads and the Election

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May 12, 2019

by Steve Stofka

I spent the past week traveling with my sister to a family reunion near Dallas, Texas. In our travels, we passed through rural counties in southeast Colorado, western Oklahoma, and northwest and central Texas. In contrast to the signs of a brisk economy in the larger cities, some rural communities show signs of stress. Some roads leading off the main route need repair; some houses could use a fresh coat of paint; some stores have delayed maintenance. In some small towns most of the stores remain boarded up ten years after the financial crisis.

Candidates for the 2020 Presidential election must speak to the two Americas. The Americans who produce the food we eat and the power that lights our businesses and homes are not doing as well as those in the urban corridors. Young people in rural America leave for the larger cities to find a job or pursue an education. Older people with medical needs must move to larger cities with hospital facilities available in an emergency.

Let’s turn to a proposal on the list of issues for the 2020 election – an increase in the Federal minimum wage. A person making a minimum wage of $15 an hour in Los Angeles earns a bit more than half of L.A.’s median household income (MHI). She may work 2-1/2 weeks to pay the rent on a one-bedroom apartment (Note #1). The MHI in rural America is about 20% less than the national average. In Limon, Colorado (population less than 1500), the MHI is about half of the national average (Note #2). $15 an hour in Limon is the MHI.

In 2009 and 2010, the Democrats controlled the Presidency, the House and had a filibuster proof majority in the Senate. They could have enacted a federal minimum wage that was indexed to the living costs in each county or state. Why didn’t they fix the problem then? Because Democrats use the minimum wage as an issue to help win elections. If Congress passes a minimum wage of $15 an hour this year, they will have something new to run on in five years – a raise in the minimum wage to $17 an hour. Voters must begin asking their elected representatives for practical and flexible solutions, not political banners like a federal mandated one-size-fits-all $15 minimum wage.

For decades after World War 2, Democratic Party politicians who controlled the House refused to allow legislation that would index tax rates to inflation. This resulted in “bracket creep” where cost of living wage increases put working people in higher tax brackets automatically (Note #3). The problem became acute during the high inflation decade of the 1970s and the issue helped Ronald Reagan take the White House on a promise to fix the problem.

A week ago, I heard a Democratic Senator running for President say that they knew all along that Obamacare was just a start. The program was poorly drafted and poorly implemented and now we learn that Democrats knew all along that it was bad legislation? Will Medicare For All also be built on poor foundations and require a constant stream of legislative and agency fixes? This provides a lot of work for the folks in Washington who draft a lot of agency rules that require a lot of administrative cost to implement. Democrats are fond of federal solutions but show little expertise in managing the inevitable bloated bureaucracy that such solutions entail.

Some Democratic Party candidates are promising to fix the harsh sentencing guidelines that they themselves passed in the 1990s, which fixed sentencing guidelines enacted 25 years earlier by Democratic politicians in the 1960s and 1970s. This party’s platform consists of fixing its earlier mistakes.

According to a Washington Post analysis of election issues (Note #4), some candidates are concerned about corporate power. A Democratic president would have to work with the Senate’s Democratic Leader Chuck Schumer whose main support comes from large financial corporations based in his home state, New York. While a President Elizabeth Warren might propose regulatory curbs on corporate power, Mr. Schumer would be gathering campaign donations from the large banks who needed protection from those same regulations.

Large scale industrial power production has a significant effect on the climate. The few blue states that supported a Democratic candidate for President in the 2016 election also consume most of the final product of that power production. Have any candidates proposed solutions that lower the demand for power? Temperature control systems in commercial buildings could be set to a few degrees warmer in the summer and a few degrees cooler in the winter. That would have a significant impact on carbon production. Some candidates propose solutions that regulate the production and supply of power – not the demand for power. Most of that production occurs in states that supported a Republican candidate in the 2016 election. Proposals to install wind and wave generating stations in Democratic leaning coastal states in the northeast and northwest have been met with local resistance. Voters in the blue states want green solutions to be implemented in the red states, but not inconvenience residents of the blue states. Voters in the red states see through that hypocrisy.

A viable Democratic candidate must convince independent voters who are wary of political solutions from either party.  Donald Trump won the Presidency without visiting rural folks on their home turf. He landed his plane near a staged rally and the folks came from miles around to hear him. Compare that approach with former Republican candidate Rick Santorum who visited many small towns in Iowa in the months before the 2012 Iowa primary. In small restaurants and rural post offices, Santorum listened to the concerns of voters. Trump’s approach was successful. Santorum was not. Go figure.

Trump convinced rural folks that he was going to go to Washington and drain the swamp. This in turn would help the economy in small town America so that those folks could get themselves a new roof, or a new pickup truck, fix the fence or get a few potholes patched. From what I saw, those folks are still waiting. Some rural folks may run out of patience with Trump by next year. The success of any Democratic candidate depends on that.

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Notes:

  1. One week’s take home pay of $550 x 2.5 weeks = $1375. A 1 BR in L.A. averages $1350 L.A. Curbed
  2. Areavibes.Com assessment of Limon, Colorado.
  3. Tax indexing
  4. Washington Post article on various election issues

Promises Made and Unpaid

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November 11, 2018

by Steve Stofka

A tip of the hat to veterans on this holiday.

The Kaiser Family Foundation (KFF) regularly updates their map of the states that have not expanded Medicaid under Obamacare (Note #1). Here’s a screen shot.

KaiserMap
All the non-expansion states except for Wyoming had per capital personal incomes below the national average.

PerCapPersIncByState

Since these states have less per capita income, it is likely that more of the residents in those states qualify for Medicaid. During the initial phase of Obamacare, the Federal government picked up the tab for the additional costs. That share will gradually decrease to 90% in 2020, when the states will have to foot 10% of the expansion costs.

A ten percent share seems light. Why don’t these states expand their Medicaid eligibility? Let’s look beyond accusations of prejudice, which exists in every state.

The populations in most of these states are older. Poor seniors living in nursing homes qualify for traditional Medicaid, which costs each state much more than expansion Medicaid. The national average of state costs is 38%; the Federal government picks up an average of 62% of traditional Medicaid spending. Wyoming pays almost 50%, far above the average. Texas and South Dakota pay 44% and 41%. Oklahoma and Florida pay the average of 38% and the rest of the non-expansion states pay below average (Note #2).

The financial crisis ten years ago crippled state finances for several years and some have still not recovered. Since 2000, average per capita real income in the U.S. has grown only 1.2% per year. Medicaid spending has grown at more than three times that rate (Note #3). Residents in these poorer states have fared worse than the average. Revenues in those state have barely kept up with obligations. Officials in poorer states with older populations anticipate that funding difficulties will continue now that the first of the Boomer generation has turned 70. Given the political pressure to expand, how much longer will some of these states resist expansion?

Thirteen states that have expanded coverage have adopted new revenue sources to fund the additional costs (Note #4). Most states fund their Medicaid spending, original and expansion, out of general revenues which are falling behind state promises. These include infrastructure repairs – roads, bridges, improvements and repairs to schools and other government buildings – as well as pension obligations. Officials of state and local governments made these promises decades ago, when per capita incomes were growing more than 2%. Annualized growth over a twenty-year period has not been above 2% since 2001.

PerCapIncReal

Tax the rich is one solution offered, but that is a short-term solution. In the long-term, higher income growth is the sustainable solution. Until Democratic politicians can craft a coherent policy message that promises to promote stronger economic growth in these states, the voters will reject them.

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Notes:
1. KFF’s map of states that have turned down Medicaid expansion.
2. KFF’s breakdown of Medicaid costs per state.
3. A summary of inflation adjusted Medicaid spending from 2000-2012 showed a 4.1% annual growth rate – pg. 4. A state by state breakdown is on page 35. A 49 page report from Pew Charitable Trust.
4. A recent article showing the various sources of funding that expansion states are using.

U.S.S. Obamacare Sails On

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In March 2000, I cursed myself as I watched the SP500 cross the 1500 mark for the first time. Almost a year earlier, I had given in to my conservative instincts and paid off the mortgage with some savings. In 1999, my choice had been partially driven by a suspicion that the stock market was a bit overvalued. In 2000, I could see I was wrong; that I just didn’t understand the new economy. Had I invested the money in the stock market, I would have made 15% in less than a year.

When I set the time machine to election day 2016, I see that the index stood at about 2130, 40% higher than the 2000 benchmark. But wait. An asset is only worth what I can trade it for. Year by year, inflation erodes the real value of that asset. When I compare real values (BLS inflation calculator), the SP500 index on election day was almost exactly what it was in March 2000.

As the year 2000 passed into 2001 and the stock market fell from its heights, my decision to invest in real estate exemplified a golden word in investing: diversify.

Since the election, the SP500 has risen about 10%, as investors speculated that Republicans will usher in a new era of de-regulation and lower taxes. By mid-March, banking stocks had shot up over 25%. This past Monday, the 20th, the Freedom Caucus confirmed that they had the “no” votes necessary to block Thursday’s scheduled House vote on the Republican health care bill, AHCA. Banking and financial stocks, thought to be the biggest beneficiaries of less regulation, higher interest rates, and infrastructure spending, lost 5% over several days.

The Freedom Caucus is a group of 30-40 Republican House members who came to office in 2010 on the Tea Party wave. Led by North Carolina Representative Mark Meadows, the Caucus adheres strongly to conservative principles as they define them. They are chiefly responsible for driving out the former House Speaker, John Boehner. While strict adherence to principle – “my way or no way” – worked well as an opposition movement when Obama was President, the Caucus’ unwillingness to compromise is problematic under the current one-party rule. Can Republicans govern?

Paul Ryan, the current Speaker of the House, delayed the vote until Friday. House leadership and the White House tried to come to some compromise that would bring the Freedom Caucus on board without alienating the more moderate Republican members. With no support from Democrats, the additional no votes from the Freedom Caucus meant that Ryan could not muster the majority needed to pass the bill. Shortly before the scheduled vote at 4 PM on Friday, Ryan called off the vote.

The stock market is a herd attempt to predict and price what the world will be like in six months. As events catch up with forecasts, stock prices correct. Passage of the bill was supposed to be a key step toward tax reform if the Republicans want to pass a tax bill using Reconciliation rules, which require only a majority in the Senate.

With more than a half hour left in the trading day, the market had time to sell off 2 – 3%. And? Nothing. Did the bulls and bears cancel each other out in a flurry of trading? Nope. There was no unusual surge of volume in stocks. Either the market had already priced in the defeat of the AHCA, or buyers and sellers were left undecided.

Investors take a “risk off” approach during periods of uncertainty, moving toward gold (GLD) and long dated treasuries (TLT). Both have risen a few percent in the past two weeks but each is short of their January and February highs. Since mid-March, the SP500 (SPY) has lost a few percent. This tells me that investors had already adopted a more cautious stance.

President Trump has indicated that he wants to move on to tax reform and an infrastructure bill as well as the building of some type of defense perimeter on the border with Mexico. Perhaps investors hope that the lack of cohesion among Republicans on the health care bill will not sidetrack them from passage of these other bills.
The defeat of this bill is sure to empower the Freedom Caucus on further legislation. They were a thorn in John Boehner’s side and will no doubt frustrate Paul Ryan as well.

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Existing Home Sales

We had a warm February in most of the country. Realtors reported good foot traffic but, but, but…a lack of affordable housing has turned away many first time home buyers. Home prices have been rising at double the growth in wages. While Feb’s numbers declined from a strong January, YTD existing home sales are more than 5% ahead of last year’s pace.

Regional declines varied: the northeast at -14% and the midwest at -7% led the list. The decline in the west was almost -4% but cities in California and Colorado report the fastest turnaround times from listing to sale. The San Jose region reported an average of 23 days.

Here’s February’s report from the National Assn of Realtors

Replace, Beta Version

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This week Republicans released their preliminary version of the replacement for the Affordable Care Act, aka Obamacare. Preliminary is the key word. The debate has started. The bill still needs to be scored by the Congressional Budget Office, which will estimate the total cost over the next decade. If the CBO estimate is high, we can expect major revisions in an attempt to rein in the costs.

Democrats and conservative Republicans have both criticized the bill, which is emerging from two committees in the House of Representatives.  The bill will pass through several steps of bargaining before it is voted on in the House. The Senate will have a different version of the bill but will contain some of the same elements. The Republicans have only a three vote majority in the Senate so the bill is likely to undergo revisions if it is to make it through the higher body.

If it does pass the Senate, that po’ little bill will be exhausted, but it will then have to pass through a committee that will reconcile differences in the House and Senate versions. Finally, it will head to the White House for President Trump’s signature.

The Republican version is AHCA.  Obamacare was ACA. We’ll hear these abbreviations a lot in the coming weeks.   People with employer group insurance will see few changes.  About 11 million people pay for their own insurance under a non-group private plan. Lower income enrollees receive subsidies under Obamacare. Many complained of rapidly escalating premiums, and insurance companies have been dropping out of the market, particularly in rural areas. 14.5 million people with really low incomes were added to the insurance rolls via Medicaid expansion under Obamacare (Politifact).

Here is a brief synopsis of what is proposed so far.  Popular provisions of Obamacare will remain. Parents can keep a child on their health care policy till the child is 26. Insurers can not refuse a policy because of a pre-existing condition.

Gone are the penalties for not buying insurance. Gone is the employer mandate to provide insurance and the individual mandate to have insurance. Gone are the formulas that employers must use to determine the number of full-time employees.  Gone are the subsidies for lower income working people, gone is the tax on tanning beds and medical equipment.

Instead of government subsidies based primarily on income, tax credits will be based on age first, and will phase out slowly for individuals with incomes above $75K. The credits are refundable, so that they are available to everyone whether they pay any Federal tax or not. This is similar to the Earned Income Tax Credit (EITC) for low income working families. (This provision has raised objections from the Freedom Caucus, a coalition of conservative Republicans.)

The proposed bill blocks any federal funding for Planned Parenthood, whose revenues consists mostly of Medicaid claims for non-controversial medical procedures. This provision will generate a number of discrimination lawsuits should it remain in the bill.

Medicaid funding will be based on each state’s at risk population – the elderly, the poor, the disabled. Each state can decide how to administer the funds. Several governors, including Republicans, are concerned about this provision. Under the ACA’s Medicaid expansion, hundreds of thousands of people were added onto the program. Governors worry that they will be stuck with some hard decisions in the case of a recession, when many more people lose their jobs, including their employer insurance, and qualify for Medicaid. The federal government can legally borrow money to fund promises when tax revenues are insufficient. States must run balanced budgets.

We can be sure that there will be a flurry of unsubstantiated assertions from politicians and surrogates on both sides of the aisle. We will be bombarded with catch phrases. Each politician hopes that their pithy phrase will make it into the 24 hours news cycle.

Here are just two examples from the floor of the Senate this past Tuesday. Each Senator has some good points but they drown those points in partisan drivel.  Both of these Senators are regarded as moderate voices within their party.

From John Cornyn, Texas Senator and Majority Whip, comes a phrase that all Republicans are required to use to describe Obamacare: “unmitigated disaster.”  Republicans didn’t feel that invading Iraq was an unmitigated disaster. Only Obamacare qualifies for that epithet. Republicans have learned that repeating a phrase over and over and over and over again makes it so. Politics reduced to a slogan, like the Wendy’s commercial “Where’s the beef?” (Here are a few excerpts of the speech. Cornyn’s staff doesn’t provide a full transcript.)

How much of an unmitigated disaster is Obamacare?  The Republican version keeps a number of key features of Obamacare so we can be reasonably certain that this is radical rhetoric, typical of what we hear from either party.

Cornyn uses the phrase “broken promise” to describe Obamacare. Over on the other side of the aisle, Washington Senator Patty Murray uses the same phrase to describe the Republican replacement. Maybe they both share the same speech writers.

Murray declared that millions of people will lose health care under the proposed legislation, which returns control of health care to the states. Here’s what passes for math in the Democratic Party, whose estimates of Obamacare enrollment have been  way above actual enrollment. The big  increase in enrollees have come from the Medicaid expansion, not the appeal of private market Obamacare plans.  Democrats could have passed a 100 page Medicaid expansion Act and have achieved the same results.

So, how does Murray justify the statement that millions will lose health care?    It’s not current enrollees, but future enrollees who will lose health care.  Got that?  These are invisible millions. Based on wildly optimistic estimates of future enrollments if Obamacare was left in place, Democrats then estimated that those exuberant estimates will not be met under the new proposal.  In past years, when enrollment figures did not meet projections, Democrats did not lament the fact that “millions” lost health care.  Democratic politicians only use their special math on programs from the other side.  And yes, Republicans do this as well.  (Murray’s staff made a transcript of the whole speech available.)

Like Cornyn, Murray reaches into her box of assertions, pulls out a few and repeats them. Only Obamacare can protect women’s health. 62% of white women, and 42% of all women, voted for Trump and his promise to repeal Obamacare because they wanted to damage their health? Does Murray think those women are stupid, or suicidal?  Maybe a lot of these women are the deplorables, as Hillary Clinton called them.

Like most Democrats, Murray can not understand that people resent the dictates of the Washington crowd and want more local control of their lives, even if it is only an opportunity to make their own mistakes. Politicians in Washington, those of both parties, have made a lot of mistakes. Voters in many states think that their legislatures and governors can’t do any worse.

Whenever we talk health care reform in the U.S., the discussion inevitably turns toward the single payer option, similar to the Canadian and British systems. One of the arguments against single payer systems is that the government rations care with long waiting times for appointments, particularly those for specialists, operations and hospital beds. Proponents of the U.S. system argue that the U.S. is far more responsive to the needs of patients.

Is that true? Several researchers studied {PDF} the waiting time statistics provided by governments in developed countries and found that comparisons of wait times are largely invalid. Why? Because different countries use different start times. From the paper:

“Current national waiting time statistics are of limited use for comparing health care availability among the various countries due to the differences in measurements and data collection.”

In some countries, the wait time to see a specialist might not start till the specialist makes an appointment with the patient. In other countries, the clock starts when the primary care physician writes the referral order that the patient needs to see a specialist. Some start the clock when the specialist receives the referral. Some countries distinguish between ongoing and completed care, while others don’t. The lack of consistency explains the contradictory results when comparisons of wait times are taken at face value.

After six years of stamping their feet and saying “No, no, no, no, no” like a four year old, Republicans have finally put some ideas on the table. We hope for some rational discussion of principles and likely outcomes, but, as each party has drifted to the extremes in the last two to three decades, the voices of moderation have been drowned out by impassioned pleas and slogans.  Moderation is a difficult political position to defend because it requires more than a catch phrase and a belligerent tone.

In the 24 hour media circus, politicians must posture and polemicize for the camera, for their constituents, and most importantly, for their contributors. Have your shovels ready for we shall soon be buried in the muck of debate!

Heatlh Care

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November 29, 2015

Obamacare

United Healthcare (UNH), the largest health insurance carrier in the U.S., announced that they may drop out of the state health care exchanges at the end of 2016.  The CEO indicated that it would review costs again in mid-2016 but was concerned that continuing losses on the state exchange plans would simply make it uneconomical for UNH to continue to offer these plans.

UNH says it has evidence of many individuals gaming the system by coming into and out of the health insurance system when they need medical services. {Bloomberg and Market Watch} It is not clear how patients would do this since the health care exchanges have enrollment rules similar to Medicare.  These restrictions are designed to make it difficult for individuals to game the system.  Are those rules being implemented consistently on the state level?  If the policy rules are in place, have the screening algorithms been reviewed?  Poor implementation and oversight have plagued some exchanges.

At the heart of Obamacare is the projection that costs for the newly insured stabilize after approximately two years, a metric derived from long experience with Medicare patients.  Individuals who have not had regular medical care often have chronic unattended conditions which need to be stabilized.  Medicare costs typically rise during this initial stage before leveling off.

Obamacare will certainly be an issue in the upcoming Presidential election.  The debate will intensify if other insurers express doubts about the economic feasibility of the system,

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Productivity and Policy

Economists and policy makers continue to debate the causes, and solutions, for the slowdown in labor productivity that has occurred over the past several decades.  Larry Summers served as Treasury Secretary under President Clinton, Director of the National Economic Council under President Obama, and Chief Economist at the World Bank.  In other words, the guy’s got some chops.

In a recent speech Summers noted several trends:

1)  Dis-employment of unskilled workers.  The participation rate of those aged 25 – 54 has declined from 95% in 1965 to 85% now. (p. 3)  While this is often attributed to technical improvements, Mr. Summers makes the case that labor productivity should go up, not down, due to technical change.  That is not the case.  Summers says he doesn’t have the answer either but the contradiction between theory and data indicates that economists still don’t understand the underlying processes. (p. 4)

2) Mismeasurement.  Productivity measures are based on the calculation of real GDP which is dependent on the measure of inflation.  Summers asks whether differences in quality, or what are called hedonic measures, are captured in CPI data.  He asks “Which would you rather have for you and your family, 1980 healthcare at 1980 prices or 2015 healthcare at 2015 prices?  How many people would prefer 2015 healthcare at 2015 prices?”  If people prefer the 2015 variety at 2015 prices then inflation has been negative in healthcare.  As a percent of GDP, healthcare spending has increased.  Mismeasuring inflation in healthcare may negate all or most of this increase. (p. 5)

3) As we have transitioned to an economy dominated by services, mismeasurement of inflation has probably increased.  A leading technocat in Democratic administrations, Summers casts doubts on a staple of liberal rhetoric – that median family income has not changed since 1973.  This idea is a central tenet of Bernie Sanders presidential campaign.  What if the measurement of median family income is flawed?  This doubt is more often raised by conservative economists and policy makers.  Summers’ remarks crossed the ideological and political divide and surely raised a few eyebrows. (p. 6)

4) Developing the theme of measurement as it pertains to different types of economies, Summers refers to several statistical terms like “unit root” stationarity that may challenge casual readers.

When a time series (data observations over time like GDP) has a unit root it exhibits more deterministic behavior; it is more likely to adopt an altered path or trendline when shocked off its previous path.

Series without a unit root are more likely to exhibit stochastic behavior when subjected to some shock; that is, they will tend to return to their former path or trendline, not form a new trendline.

At mid-century, when our economy was much more reliant on manufacturing, it behaved in a stochastic way when subjected to economic shocks.  It rebounded to a previous trendline.  Our economy is now overwhelmingly service oriented, about 88%.  Summers makes the case (p. 9) that unbalanced economies like ours behave differently than a more balanced economy.  The growth path of GDP changes permanently in response to an economic shock like the financial crisis of 2008.  If that is the case, policy changes will be ineffective in returning GDP and employment back to the former trendline. (For more info on testing the deterministic and stochastic components of time series processes, see this).

Summers adds to the number of voices calling for a more accurate – but also objective – measurement of inflation. Poor measurement leads to imprecise data leads to inaccurate conclusions leads to ineffective policy leads to more problems leads to…

Policy debates often involve complicated issues of identification, measurement, and methods of analysis that are not readily explainable in a campaign speech.  On our way home from work, a complicated system of algorithms based on traffic data determines whether the traffic lights continue to trip green as we maintain a constant speed.  Much of this is hidden from us and incomprehensible to most of us.  All of that complexity is boiled down to a simple heuristic: we go when it’s green, stop when it’s red.

Voters like simple.  The job of a politician is to convince voters and donors that if they are elected, they will implement the right policies, the correct algorithms that will move traffic, i.e. the economic fortunes of the families of America, faster.