The recent bankruptcy of the USPS and the proposal to cut Saturday delivery has interesting implications for government and health care. Everyone, from the GAO to the management of the USPS know that there are substantial productivity improvement that could be had with better labor deployment and employee accountability, but no one has the will to take on the union. As a result, the only cost cutting idea they can propose is service cuts. Which is further proof of what I have been saying for a couple of years -- that despite all the hopey changey talk, the only real idea anyone in the Obama administration or Congress can come up with for health care cost reduction is reduced services and/or price controls (which reduce supply and thus services).
Posts tagged ‘productivity’
The WSJ is reporting that Obama's speech will propose:
Starting next year, the plan also calls for annual fees of $6 billion on health-insurance providers, $4 billion for medical-device makers, $2.3 billion on drug makers and $750 million on clinical laboratories. The fees would be levied on individual companies based on market share.
Don't you love that, by the way. The benefits are not programmed to begin until 2013 but the taxes start in 2010. But let's rewrite this paragraph to be less economically ignorant:
Starting next year, the plan also calls for annual fees of $6 billion on customers of health-insurance providers, $4 billion for customers of medical-device makers, $2.3 billion on customers of drug makers and $750 million on customers of clinical laboratories. The fees would be levied on individual companies based on market share, then passed on to their customers in the form of price increases, as are all such fees, particularly on low-margin industries such as health insurance.
Congratulations. Obama has embarked on his quest to reduce the cost of health care by increasing the costs of health care suppliers by over $13 billion per year. That should work.
For years I have been saying that the government has only one lever to reduce costs (as any thought that they might reduce costs through increased productivity is just a joke rebutted by all of history): Force people to use less, either by raising the price, reducing the supply, or outright banning certain expenditures in certain situations.
It is not at all surprising that an Ivy League University professor does not recognize a difference between rationing by individual choice based on price signals and rationing based on government mandate. What is surprising to me is that I remember this particular professor, Uwe Reinhardt, as the only person who would ever take the free market side of campus debates. Kind of depressing. I guess he must have seemed free market just by contrast, or else he has evolved a bit. Is it ironic to anyone else that radicalism of the 1960s, which purported to be based on individualism and freedom, has led to campuses where it is normal not to even consider individual liberty as part of a public policy equation? It just reinforced my sense that no one really wants to get rid of "the man," they just want to be "the man" themselves.
In particular he writes:
As I read it, the main thrust of the health care reforms espoused by President Obama and his allies in Congress is first of all to reduce rationing on the basis of price and ability to pay in our health system
We actually have plenty of examples of the government ending rationing by price and ability to pay. Gas price controls in the 1970s are one very good example. Anyone remember the result?
Or more recently in China, where gas prices were controlled well below world market levels:
We substituted gas rationing by willingness to pay the posted price with gas price rationing by ability to waste four hours of one's day sitting in lines. (I had never thought of this before, but there must be some interesting economic implications of preferentially routing fuel to those least likely to have a full-time job).
Perhaps worse, Reinhardt equates criticism of the current health care system ( and particularly its productivity) with support for socialization of the system. Really? There are perfectly valid free market reasons to criticize health care, where any number of government policy decisions over the years have disrupted the efficacy of price signals and created terrible incentives.
Postscript: Farther left? Further left? Sorry, I try, but your scribe is an engineer at heart and sometimes struggles with the native tongue. When I was in fourth grade, I remember doing a battery of achievement tests, and getting 99+ percentile scores on every test but spelling, where I got something like a 25th percentile. I think this score put me down mostly with kids for whom English is a second language (or maybe even worse, with Russian kids for whom ours is a second alphabet). Only technology in the form of spell-checkers has bailed me out of my personal handicap.
Total k-12 expenditures in this country were about $630 billion two years ago (see Table 25, Digest of Ed Statistics 2008). The efficiency of our education system is less than half what it was in 1971 (i.e., we spend more than twice as much to get the same results "” see Table 181, same source).
So if we'd managed to ensure that education productivity just stagnated, we'd be saving over $300 billion EVERY YEAR. If we'd actually seen productivity improvements in education such as we've seen in other fields, we'd be saving at least that much money and enjoying higher student achievement at the same time.
The Town of South Attleboro, MA sent out wildly threatening past due letters for folks with balances as low as 1-cent (thereby investing at least 42 cents to get one back). In response to charges that this was stupid, City Collector Debora Marcoccio responded:
A computer automatically printed the letters for any account with a balance remaining, and they were not reviewed by staff before being sent out, Marcoccio said.
"It would be fiscally irresponsible for me to have staff weed through the bills and pull out any below a certain amount," Marcoccio said. " And what would that amount be?"
What, are we living in the 19th century with clerks in a musty room preparing bills by hand? This fix probably requires one whole entire line of program code in the billing system to fix. I could probably teach myself to code whatever language the payroll system is written in (my guess is COBOL, which, god help me, I already know) in less time than this woman has spent fielding complaints and media inquiries. Compare this to what TJIC has to do just to get the mail out.
And don't you love people who don't even have enough spine to make a simple decision about the cutoff for minimum bill size. I have found this is one of those things the government is really, really bad at -- making decisions under uncertainty (which covers about all decisions, except routine ones embodied in SOP). Government has no incentives, in general, for productivity, or production, or customer satisfaction. The only time government employees get feedback at all is when they get negative feedback from having someone yell at them for making a decision that some higher-up didn't like.. So if a decision is not justifiable either by past precedent/SOP or explicitly by the rules, it is not made.
By the way, I had a personal programming milestone last night. I finally built a website without using a WYSIWIG editor that formatted the way I wanted it to all in CSS without a single table. I predict that now that I have finally gotten a decent handle on CSS, which mainly consists of learning all the workarounds for when it doesn't work as you would expect, that someone is about to introduce a whole new system for formatting web pages.
Superficially, it seems that many people seek sunny climes,
especially now that air conditioning is available. For example,
long-run population growth in the "Sunbelt" "” the US South - is often
attributed to a demand for, well, sun.
Harvard economists Ed Glaeser and Kristina Tobio think
otherwise. They argue that before 1980, the boom in the South was
thanks to the region's growing productivity. After 1980, population
continued to grow, but house prices lagged behind those elsewhere in
the US, suggesting that the driving force was not high demand but
permissive planning rules. Certainly balmy California, with its tighter
restrictions on building, did not enjoy the same population growth.
All of this tends to suggest that people don't value sunshine quite as much as is supposed.
I have pretty convincing anecdotal evidence that the first part, at least, is true. I worked for a large manufacturing corporation called Emerson Electric (no relation to the electronics company). They are one of the few Fortune 50 companies not at all coy to admit that they move factories around the world chasing lower wages. They had an epiphany decades ago, when in their planning, they assumed the move overseas was always a trade-off of wages for productivity... until they visited at motor plant in Brazil that had first world automation and productivity combined with third world wages. That got their attention. To their credit, they have pushed this further and further, such that not only are their factory workers in Mexico, but their plant superintendents and skilled workers and even their engineers are now Mexican too.
Anyway, if you listen to the company tell this story, phase 1 of the story was not a move to Mexico or Asia but to the south. They must have moved probably 50 manufacturing plants over a decade from the northeast to the south during the sixties and seventies.
This constant movement seems to be a natural life-cycle of locations as they grow wealthy. Poorer regions eagerly welcome newcomers who may bring jobs and prosperity. But, once the prosperity is there, the prosperous in town begin using government and other institutions to try to lock in their gains. Corporations use government to fight new competitors. Wealthy homeowners pass zoning to keep home prices high and rising. Unions tend to increase and lock in gains for current workers at the expense of new workers. A kind of culture of hostility emerges to any new job that makes less than $54,000 a year, any house that costs less than $400,000, and any immigrant who doesn't have a pale face.
Arizona required emissions inspections of vehicles, but only for vehicles in the cities of Phoenix or Tucson. So, as you can imagine, they only have testing stations in Phoenix and Tucson.
Our company is headquartered in Phoenix. That is our legal address and the address on all our titles and registrations and licenses and such. Because all of our vehicle registrations show the company headquartered in Phoenix, then the state of Arizona treats all our trucks as being located in Phoenix. As a result, we are required to get emissions tests each year on about 20 vehicles.
But wait. None of our vehicles are actually in Phoenix. In fact, none have ever even crossed into this county. They are all in places like Flagstaff and Sedona and Payson that have no emissions requirements, and therefore, no testing locations. As a result, I am apparently required to, once a year, have all of our trucks driven to Phoenix for an emissions test that they are not actually required to have based on where they operate. In additions to the cost of the test itself, and any repairs mandated by the test, it costs us 400 miles x $0.55 per mile gas and depreciation plus 8 hours x $12 hour labor for the driver or $316 per vehicle to get them to the test site and back. A sort of annual pilgrimage to worship at the alter of mindless bureaucracy.
Recognize that none of this was obvious to me at 8AM this morning. I spent my entire morning not worrying about my 500 employees and not improving productivity and not pursuing some projects we are considering for expanded customer services, but trying to figure this situation out. All because some state legislators didn't realize that maybe corporate vehicle fleets are not necessarily registered in the location in which they are used.
I still think there must be a legal way to show my vehicle domiciled at one physical address but have the mailing address be my corporate office in Phoenix. But if there is, I have not found anyone who will admit it.
Apparently, the state of Arizona, fearing the coming old-folks demographic boom, is looking to create programs to keep older Americans working longer (and by extension off the government teat longer).
The thought of millions of boomers taking their early-retirement
benefits is causing concern about the stability of Social Security and
"We know not everybody is going to up and retire all at once," Starns
said, "and we will have younger workers coming in. But if you look at
all the demographics, there just won't be enough people to fill all the
jobs that could be vacant."
Add that possibility to existing shortages of workers in health-care
and other fields, she said, and "there could be some pretty significant
problems in society."
Arizona, which launched its Mature Workforce Initiative in 2005 to
avert such a crisis, was one of five states lauded last month for
efforts to engage people 50 and older in meaningful jobs and community
The San Francisco-based Civic Ventures think tank also cited
California, Maryland, New York and Massachusetts, saying the five
states recognize older workers as "an experience dividend," rather than
a drain on resources.
Of course, since it is government, the state of Arizona is, with one hand, patting itself on the back for instituting vague and meaningless but well publicized programs nominally targeted at this issue, while with the other taking steps that have real and substantial effects in exactly the opposite direction.
First, Arizona has some of the toughest laws in the country to penalize businesses for hiring, even accidentally, young vigorous immigrants who don't have all their government licenses in order. Young workers are pouring into this state every day, but Arizona is turning them away and locking them up.
Second, Arizona has been legislating as fast as it can to make it nearly impossible to hire older workers. I know, because the vast majority of my work force managing campgrounds is over 65. These workers tend to work for a free camp site plus minimum wage. They like the job despite the low pay because they get a place to park their RV and because the job is part time and very flexible in how they work (not to mention offers the opportunity to take whole chunks of the year off). I like these workers because they are experienced and reliable and paying them minimum wage helps offset their slowing productivity and higher workers comp costs as they age.
Here is the math: Older workers might work 30-50% slower than a younger worker (I have workers right now in their nineties!) They also have higher workers comp costs, maybe equating to as much as 10% of wages. This means that an older worker at the old minimum wage of $5.15 an hour might be financially equivalent to a younger worker making $9.50 an hour, which is about what we might have to pay for such a worker.
However, many states have implemented higher minimum wages with annual cost of living escalators. States like Oregon and Washington now have minimum wages over $9.00. At $9.00 an hour, an older worker is now financially equivalent to a younger worker making $16.50 an hour, well above what I can hire such a person for. This means that as minimum wages rise, I have to consider substituting younger workers for older but slower workers.
Last year, Arizona adopted just such a minimum wage system with annual escalators. Though we have not reached the point yet, the state soon may make it impossible economically to hire older workers. Already, we are looking at some automation projects to reduce headcount in certain places. This is sad to me, but in a business where a 12% rise in wages wipes out my entire profit, I have to think about these steps. I have to react to the fact that, no matter how many "policy advisers on aging" the state hires, in reality it is increasing the price to my company of older people's labor vis a vis younger workers.
These are the guys trying to take over the world economy in the name of environmentalism:
...But after a full week of attending plenary sessions and contact
groups I can see why the process can be frustrating. I sat in a session
about Carbon Capture and Storage last Thursday that exemplified the
kind of frustration I think they were referring to. After 45 minutes of discussing how the discussion should take place, the facilitator noted that time was up and dismissed the meeting.
Seriously? I was reasonably appalled at the productivity with which
such an important part of the global conference was conducted.
I wasted a lot of time yesterday with this geometry problem. I have about 12 pieces of paper here that look like a Mondrian retrospective, cutting new triangles and parallel lines. Still don't have the proof yet, so I thought I would see if I could pull some of your productivity down with mine. If you are like me, you will decide that the answer is trivial about twice in the first five minutes, both times discovering you have not actually gotten to the answer.
I have written on a number of occasions that the real problem in American health care is the insulation between the person who receives the services and the true cost of the services. Other than a few folks like me with high deductible policies, there is no incentive to shop around and no incentive to eschew certain avoidable and high cost procedures.
Marc Cooper complained that he went to the hospital for a day and it ended up costing the insurance company over $100,000. His take-away form this is that the government needs to step in. My take-away was different:
Did he ask for a price estimate in advance? Did he ask, as most of
us do with all of our large purchases, for a written estimate or
quotation? Did he get such estimates from two or three competitors? Did
he shop around?
Of course not! Because in a system where someone else is paying the
bills, we have no incentive to shop around. So providers have no
incentive to compete on price or to worry about productivity and cost
Sure, this looks like a rip-off. But if you went in to buy a car,
concerned only with the quality of the
car, and never asked the price and then got a bill for $100,000 a few
weeks later, would you be surprised? Would anyone give you sympathy if
you complained you paid $100,000 for the car but admitted you never
asked what the price was?
So I was very pleased to see this from John Stossel:
America's health-care problem is not that some people lack insurance, it is that 250 million Americans do have it.
You have to understand something right from the start. We Americans
got hooked on health insurance because the government did the insurance
companies a favor during World War II. Wartime wage controls prohibited
cash raises, so employers started giving noncash benefits like health
insurance to attract workers. The tax code helped this along by
treating employer-based health insurance more favorably than coverage
you buy yourself. And state governments have made things worse by
mandating coverage many people would never buy for themselves.
Competition also pushed companies to offer ever-more attractive
policies, such as first-dollar coverage for routine ailments like ear
infections and colds, and coverage for things that are not even
illnesses, like pregnancy. We came to expect insurance to cover
Imagine if your car
insurance covered oil changes and gasoline. You wouldn't care how much
gas you used, and you wouldn't care what it cost. Mechanics would sell
you $100 oil changes. Prices would skyrocket.
That's how it works in health care. Patients don't ask how much a
test or treatment will cost. They ask if their insurance covers it.
They don't compare prices from different doctors and hospitals. (Prices
do vary.) Why should they? They're not paying. (Although they do in
hidden, indirect ways.)
For those who are new to my blog, I run recreation sites like campgrounds, mostly with retired people as labor. Retired people love these jobs, because they are looking for a nice place to live for the summer in their RV. Often they are willing to work just for their site and utilities, though as a private entity I must pay them minimum wage as well (when they work for the government, they don't get paid). We sometimes get into odd situations -- for example, because of a disability payment or Social Security limits, it is not unusual I have employees that ask me if I could not pay them or pay them below minimum wage, and I have to tell them no (minimum wage is absolutely required, even if the worker begs to be paid less).
This relationship works out well. The retired persons bring conscientious and low-cost management to the campgrounds. Our employees, who usually are living comfortably off their retirement savings or pension, get a few extra bucks and a nice place to live for the summer. These folks may work a bit slow, but I can afford that at $6 an hour.
But what happens when a state like Maryland, because it's got its blood up against Wal-Mart, passes a $11.30 "living" wage? A number of problems result. First, a camping night generally consumes, on average, about an hour of labor. At $6 an hour with 22% burden for payroll taxes and workers comp, this totals to $7.32 per night of camping in labor. At $11.30 an hour, this totals $13.79 per night of camping. Most of our campsites are tent camping sites and more primitive natural campgrounds (see here) and a typical price for a night of camping is $16. This is a very low price for camping when compared to large RV parks, and makes our sites particularly popular with lower income people. The Marlyland minimum wage would add at least $6.50 to this price, or increase prices by 41% in one swoop. And this is before considering second order cost increases in other purchased goods and utilities due to the minimum wage increase.
The other problem is one I would have thought so obvious that it is amazing to me that no one seems to talk about it -- not everyone earning minimum wage is trying to live on it. Certainly people new to the work force are one example, as they are often willing to trade lower initial wages for training and experience and a work record and other valuable but non-quantifiable benefits. In my case, while I am perfectly happy to tolerate lower productivity from older, retired workers at $6 an hour (the average age of my employees is over 70), when wages are forced arbitrarily to over $11, then I have to think about changing my business model, substituting younger workers for older folks. As any economist would predict, lower productivity workers get pushed out of the market.
For more on this topic, I discussed four case studies in my business dealing with the minimum wage.
Marc Cooper spends 20 hours in the hospital and tells his story here. Price of stay without insurance: $116, 749. Price with insurance: $4,730. Only in America, folks.
He's not very clear if this was an emergency situation -- like, did he have a heart attack and get rushed to the hospital in an ambulance -- or an important but non-emergency situation. I will assume the latter by the tone of Marc Cooper's detailed post.
If so, then my first comment is, indeed only in America would he have gotten this procedure without waiting twelve weeks or without traveling to, say, America to get it done more expeditiously,
Second, I wonder: Did he ask for a price estimate in advance? Did he ask, as most of
us do with all of our large purchases, for a written estimate or
quotation? Did he get such estimates from two or three competitors? Did
he shop around?
Of course not! Because in a system where someone else is paying the
bills, we have no incentive to shop around. So providers have no
incentive to compete on price or to worry about productivity and cost
Sure, this looks like a rip-off. But if you went in to buy a car, concerned only with the quality of the
car, and never asked the price and then got a bill for $100,000 a few
weeks later, would you be surprised? Would anyone give you sympathy if you complained you paid $100,000 for the car but admitted you never asked what the price was?
So this is a dead-obvious outcome from the health care system we
have, where no one has the incentive to shop. By the way, I have a high-deductible policy which causes me to
shop around, because costs come out of my own pocket. I ask questions
like, is that extra CT scan really necessary?
It's incredible to me that given this situation, the solution for
this blog's author and most of his readers is not "we should find a way
to have individuals experience both the cost and benefits of care,
because only they can make these tradeoffs for themselves and shop
around for better options" but is instead "lets just turn it over to
the government, since they do such a good job with Iraq and the mail
and our schools."
Finally, I would point out that the author is making some wild assumptions about an insurance statement he probably does not understand (I say that with confidence since no one understands health insurance statements). His assumption that the walk-in poor would have had to pay $100,000 for the procedure or would have been left to die are demonstrably untrue, since there is just not that much evidence that either outcome is occuring with any regularity. That is why health care socialization supporters always talk about the number of people uninsured, which is almost irrelevant, instead of the number of people who don't get care, which is a much much smaller, almost vanishingly small number.
I often see the stat that US manufacturing employment has shrunk substantially over the last 50 or so years, usually accompanied by much wailing from the left (yes, the same people who criticized manufacturing work as dehumanizing 40 years ago).
The WaPo, via Hit and Run, says that US manufacturing output is at an all time high, and that the only way to reconcile these two is with technology and productivity. Which is certainly part of the story, and its refreshing to see someone telling this story and not trying to cast the manufacturing numbers as a reason to slam the borders closed against imports.
But isn't there also a measurement problem here? Eighty years ago, if a Ford Motor factory needed the windows cleaned, a Ford employee did it. If it needed the parking lot striped, Ford workers did it. When it needed the bathrooms cleaned at night, Ford janitors did it. Today, the same Ford factory needs its windows and bathrooms cleaned, but an outside service contractor likely does the work. In the economic statistics, haven't these workers migrated from "manufacturing" to "service" without anything real on the ground changing?
How many politicians have you heard say that they care deeply. I hate politicians who care. You know why? Because the way they demonstrate that they care is by using my money against my will to help someone else. It is a freaking slap in the face every time I hear this.
Now, government employees in Massachusetts are getting a new way to demonstrate they care at taxpayer expense:
A much-hyped program that
gives state workers up to a dozen paid days off per year to "volunteer"
in a wide variety of community activities gives another perk to
employees who already have one of the most generous benefit packages in
A Herald analysis
shows that if the 80 employees in the governor's office took full
advantage of the program, the one-year cost would be $217,000. The
taxpayer cost just for Patrick, who makes $140,000, to take all 12 paid
volunteer days would be about $6,400. There are 50,000 state workers
eligible to participate in the program.
the loss of productivity for days off, consider the cost of tasking
other state employees with making sure their co-workers aren't just
extending their weekends," said state GOP spokesman Brian Dodge. "With
bright ideas like this one, the stream of wasted money directly
attributed to Deval Patrick is quickly becoming a raging river."
Its not "volunteering" if you get paid to do it, any more than its "charity" when you give away other people's money. (HT: Maggie's Farm)
Let me try something out on readers. It strikes me that we are in the midst of what we may look back on as one of the great global economic booms of all time. Here's my logic: In the US, let's say that on average our labor is operating with a management and technology factor of "10." As management practices advance, and manufacturing and support technologies are developed, we might move this up to "11" [insert Spinal Tap joke]. We then enjoy the productivity upgrade of going from 10 to 11. However, as the world invests in places like China and India, we see labor that has plugged along at "1" get brought up quickly towards "10." What a huge change! Two billion people with exponentially rising labor productivity -- what an enormous increase in wealth!
I think too many people look at the growth of China through the lens of low labor costs, and assume that as the wages in China begin to rise, the boom will be over. But the source of wealth creation in China is not taking advantage of low wages, it is raising productivity. The boom will continue as long as productivity increases by leaps and bounds; rising wages are just a sign that Chinese workers are getting a share of this productivity increase.
With the northern victory in the Civil War, and the subsequent passage of the 13th amendment, slavery was formally ended in this country. Specifically, the 13th amendment stated:
Neither slavery nor involuntary servitude, except as a punishment for
crime whereof the party shall have been duly convicted, shall exist
within the United States, or any place subject to their jurisdiction.
Unfortunately, over a century later, slavery has returned to the United States. Today, through the exercise of political power and the redistribution of wealth that should never have been Constitutional, 55% of Americans hold the other 45% in bondage, living off the product of their efforts just as surely as the white plantation owners of the Old South lived off the sweat of their African slaves. The basis for this new servitude, however, is not race, or religion, or national origin, but productivity. (via TJIC)
From the Christian Science Monitor:
Slightly over half of all Americans - 52.6 percent - now receive
significant income from government programs, according to an analysis
by Gary Shilling, an economist in Springfield, N.J. That's up from 49.4
percent in 2000 and far above the 28.3 percent of Americans in 1950. If
the trend continues, the percentage could rise within ten years to pass
55 percent, where it stood in 1980 on the eve of President's Reagan's
move to scale back the size of government.
Meanwhile, Ari Fleischer writes in today's WSJ (sub req) that the
top 1% of income earners pay 37% of total income taxes, the top 10% of
income earners pay 71% of total income taxes, and the top 40% of income
earners pay 99% of total income taxes.
The latter analysis is a bit off because it does not include payroll taxes, but if you include these taxes you still have under 50% of Americans paying virtually all the taxes (table at top of this page includes payroll taxes)
The second greatest failing of the Constitution as originally drafted (the first being legality of slavery) is the lack of clear protections for property and commerce. As a result, the only protection we have against full confiscation of everything we own is the whim of the electorate. Now that a clear majority of voters are on the receiving end of money confiscated from a minority of voters, how good is this last protection?
We have become a nation of slaveholders, with the majority holding the productive minority in bondage. Inserting government in the middle of this process as an agent, so the recipients of this slave labor don't have to get their own hands dirty, does not change the nature of the relationship one bit. It just pretties things up for our conscience.
Update: Is the word "slavery" over the top? Maybe, and I guess I could be accused of trivializing the true horrors of African slavery in the 19th century. So substitute the word "serfdom" for "slavery".
I try to avoid local news like the plague, but I did accidentally overhear this story on the local news here:
"There is a teacher shortage, what can be done?"
I will ignore the fact that the first half of this statement goes entirely unproven, and in fact no evidence that classes are not being taught is offered. My question today is this: Whenever the question of "teacher shortages" is discussed, why is only the salary portion of the equation ever put forward? Why doesn't anyone ever put forward the solution "increase their productivity?"
Steven Pearlstein has a column on the American health care system based on a recent study by the McKinsey Global Institute. As Mr. Pearlstein reads it, the problem with the American medical system is all about the profit - it's all about the doctor profit stacked on the drug profit stacked on the insurance profit. If the government would just take over and get rid of all that profit, the system would run smoothly and be much cheaper. I am flabbergasted that anyone at Cato would remark on such an article with approval.
First, while I worked at McKinsey & Co, I never worked for the global institute. However, though I have not yet read the study, it would be unusual to the point of uniqueness if their recommendation for the industry was more government control and less profit motive, but I guess it is possible. More likely, Mr. Pearlstein is reading the study through his own progressive lens. Anyway, let me deal with a few parts of the article:
Even after adjusting for wealth, population mix and higher levels of
some diseases, McKinsey calculated that we spend $477 billion a year
more on health care than would be expected if the United States fit the
spending pattern of 13 other advanced countries. That staggering waste
of money works out to 3.6 percent of the nation's entire economic
output, or $1,645 per person, every year.
I will agree that for a variety of reasons, there is a lot of waste in the medical system. We will get to "why" in a minute. However, note that the author is taking a leap from "we spend more per capita than Europeans" to "staggering waste." The US spends more per capita on a lot of things than the Europeans, in large part because we are wealthier (by a lot, and more every day). One man's waste is another man's preference. However, I would agree that health care is unique, in that it is the one industry where the decision maker(s) on whether to purchase a service is not the same person who is paying the bills. I think we will find, though, that I and Mr. Pearlstein differ on who the person should be who should do both simultaneously (I say each person for himself, he says Nancy Pelosi and George Bush for everyone).
But let's get into all that money-grubbing. Mr. Pearlstein reads the study as saying the problem is all that profit. Because we have layers of profit in the distribution channel, our health care costs more than it does in Europe, where you have the efficiency [sic!] of government management. Before we get into detail, I would observe that this fails a pretty basic smell test right off: Nearly every single product and service we Americans buy, all of which are rife with layers of nasty profits in the supply chain, are cheaper than their counterpart services and products in Europe. If this layering of profit without government management is a problem, why is it only a problem in health care but not a problem in thousands of other industries. But anyway, to details:
Let's start with one the American Medical Association hopes no one
will notice, which is that American doctors make a lot more money than
doctors elsewhere -- roughly twice as much. The average incomes of
$274,000 for specialists and $173,000 for general practitioners are,
respectively, 6.6 and 4.2 times those of the average patient. The rate
in the other countries is 4 and 3.2.
According to McKinsey, the
difference works out to $58 billion a year. What drives it is not how
much doctors charge per procedure, but how many procedures they perform
and how many patients they see -- a volume of business 60 percent
higher here than elsewhere.
Ooh, those greedy doctors. They are the problem! But read carefully, especially the last sentence. He makes clear doctors in the US are not making more because they charge more, they make more because they see more patients --- ie, they work harder than their European counterparts. Where have I heard this before? Again, in every other industry you can name, the fact that our workers work harder than their European counterparts is a good thing, leading to lower costs and higher productivity. So why is it suddenly bad in medicine? For this I would instead draw the conclusion that their are perhaps too many procedures (an expected outcome of the screwy incentives in the system) and thus too many doctors. Doctors, whom Mr. Pearlstein paints as enemy number one in the health care system, are actually its greatest asset, being 60% more productive than their European counterparts, certainly something to build on.
Don't be distracted by arguments that American doctors need to make
more because they have to pay $20 billion a year in malpractice
insurance premiums forced on them by a hostile legal system, or an
equal amount for all the paperwork required by our private insurance
system. The $58 billion in what the study defines as excess physician
income is calculated after those expenses are paid.
Walter Olson, are you listening? Since Walter is not here, I will say it for him. Malpractice insurance premiums themselves are only a part of the cost of runaway malpractice. Defensive medicine, including the overuse of tests, is another big cost. Malpractice is one big reason doctors prescribe so many more tests and procedures than their European peers.
Proponents of a government-run "single-payer" system will certainly
home in on the $84 billion a year that McKinsey found that Americans
spend to administer the private sector portion of its health system --
a cost that national health plans largely avoid. But as long as
Americans continue to reject a government-run health system, a private
system will require something close to the $30 billion a year in
after-tax profits earned by health insurance companies. What may not be
necessary, McKinsey suggests, is the $32 billion that the industry
spends each year on marketing and figuring out the premium for each
individual or group customer in each state. Insurance-market reform
could eliminate much of that expense.
What freaking planet does this guy live on? Does he really think administrative costs are going to go down in a single payer system? That's insane. I am willing to believe that the number of procedures will go way down, as Congress starts to ration care in favor of building bridges for their constituents (a savings likely offset as America's world-leading doctor productivity discussed above takes a nosedive). Does he really think that administrative costs will go down? Most administrative costs today are for satisfying government paperwork requirements - how is having the government run everything going to reduce these? I would argue exactly the opposite -- that eliminating government from the equation would reduce private administrative costs substantially.
I won't bore you with any more, but he doesn't miss the chance to blame health care costs on drug and hospital company profits as well. Just for entertainment value, I urge the reader to look up a few P&L's of some of these companies. The profit as a percent of sales for Humana is 2.3% of sales. So if you wiped out all that egregious profit at Humana, you would save all its customers a whopping 2.3% (before, of course, the incentives problems take over and costs bloat for the lack of a profit incentive to manage them). Insurer CIGNA's profit is a bit under 10%. Merck's profit is a more comfortable 19% of sales, which means that by cutting their profit to zero we could get nearly a 20% discount on drugs. Of course, new drug development would cease, but the AARP doesn't care about drugs that won't be on the market after their current constituency is dead.
Isn't it more reasonable, as I am sure the McKinsey study actually concludes, that the problem is not in companies making profits or doctors working hard, it is in having a health care system, built the way it is through distortive tax law, that gives neither patient nor doctor any reason to consider costs when deciding on care? Can you imagine such a screwed up system in any other industry? How inefficient would retail be in the US, for example, if we all had a "shopping policy" that paid for all our purchases. Would you give a crap about the price of anything? Would you hesitate one second buying something you may not need but is covered by your "policy"?
Mr. Pearlstein sortof agrees, but its hard to find this incentives point in the middle of all his blame-it-on-the-profits progressive rhetoric. Here is our one hint that Mr. Pearlstein understands that the true problem is this mismatch between payer and decision-maker. Unfortunately (emphasis added) he has a really destructive perspective on the issue:
What we have here is pretty good circumstantial evidence of
Pearlstein's First Law of Health Economics, which holds that if you pay
doctors on the basis of how many procedures they do, and you leave it
to doctors and their insured patients to decide how much health care
they get, consumption of health services will rise to whatever level is
necessary for doctors to earn as much as the lawyers who sue them.
Mr. medico-fascist Pearlstein thinks the big system problem is leaving it to you, the patient, to decide what health care you get. The solution for him is to have the person spending the money, preferably the US Congress, decide how much health care you get. I think a much saner solution, and the only one consistent with a free society, is to get back to a system where the same person who gets the care, pays for the care. If its a good enough system for 9,999 things we purchase each year, its good enough for health care too.
When it comes to matters such as the theory of evolution and
stem-cell research, so-called liberals"”i.e., socialists who have stolen
the name that once meant an advocate of individual freedom"”ridicule
religious conservatives for their desire to replace science with the
dictates of an alleged divine power. Yet when it comes to matters of
economic theory and economic policy"”for example, minimum-wage
legislation"”these same liberals themselves invoke the dictates of an
alleged divine power. Their divine power, of course, is not the God of
traditional religion, but rather a historically much more recent deity:
namely, the great god State.
Traditional religionists believe that an omnipotent God came before
all natural law and was not bound or limited by any such law, but
rather created such natural laws as suited him, as he went along. Just
so, today's liberals believe, at least in the realm of economics, that
the State is not bound or limited by any pre-existing natural laws. In
the case in hand, the State, today's liberals believe, is free to
decree wage rates above the level that would exist without its
interference and no ill-effects, such as unemployment, will arise.
Where have I heard that before? Oh yeah, I remember:
So here is this week's message for the Left: Economics is a
science. Willful ignorance or emotional rejection of the well-known
precepts of this science is at least as bad as a fundamentalist
Christian's willful ignorance of evolution science (for which the Left
so often criticizes their opposition). In fact, economic
ignorance is much worse, since most people can come to perfectly valid
conclusions about most public policy issues with a flawed knowledge of
the origin of the species but no one can with a flawed understanding of
In fact, the more I think about it, the more economics and evolution are very similar. Both are sciences that are trying to describe the operation of very complex, bottom-up, self-organizing systems. And,
in both cases, there exist many people who refuse to believe such
complex and beautiful systems can really operate without top-down
By the way, the author partially addresses the Card and Krueger study on New Jersey fast food that purportedly showed that employment goes up as minimum wage goes up. Unfortunately, the author does not get into the now fairly well-known problem with this study. For those who don't know, here it is:
Card and Krueger looked at the employment in fast food restaurants in New Jersey both before and after the minimum wage went up. Here is the key process fact you need to know -- they did not look at every restaurant, just at some branches of national chains (e.g. McDonalds). They did not include, say, Joe's sub shop. The restaurants they studied shared a couple of traits in common:
- They were all far more professionally managed than the average small restaurant
- They all had higher labor productivity than the average restaurant
- They all had far more capital equipment (e.g. automation of labor) than the average restaurant
In other words, they studied the restaurants that were able to incur a wage increase with the least impact on their total costs (and eventually prices). Follow-up studies have shown that there was probably a real reduction in total restaurant employment in New Jersey in the studied period, but the differences in productivity cited above caused the impact to disproportionately hit small ma and pa operations as opposed to large capital intensive nation chains. In fact, during this period, the national chains experienced a gain in market share vis a vis smaller shops, as the higher minimum wage made it harder for local shops to compete with the national chains. So, in fact, what Card and Krueger observed was not an economic miracle on the order of seeing the virgin Mary in your pancakes, but a predictable shift of market share from low capital to high capital competitors in response to higher wage rates.
This theme of regulation, including the minimum wage, advantaging larger competitors is an old one. I discussed it a while back in the context of Wal-Mart's support for a higher minimum wage:
Apparently, though I can't dig up a link right this second, Wal-mart
is putting its support behind a higher minimum wage. One way to look
at this is a fairly cynical ploy to get the left off its back. After
all, if Wal-mart's starting salary is $6.50 an hour (for example) it
costs them nothing to ask for a minimum wage of $6.50.
A different, and perhaps more realistic way to look at this Wal-mart
initiative is as a bald move to get government to sit on their
competition. After all, as its wage rates creep up, as is typical in
more established companies, they are vulnerable to competitors gaining
advantage over them by paying lower wages. If Wal-mart gets the
government to set the minimum wage closer to the wage rates it pays, it
eliminates the possibility of this competitor strategy.
"America cannot be great if most of its workers are in the service
sector"¦" Senator Byron Dorgan (D-North Dakota) declares in his book
"Take This Job and Ship It,""¦
This typical reading of historic manufacturing and service jobs stats is ignorant. My first rule of quoting a statistic, which I admit I sometimes violate, is to make sure you understand how it is calculated. Nothing could be truer than with manufacturing jobs statistics.
The best way to illustrate this is by example. Let's takean automobile assembly plant circa 1955. Typically, a large manufacturing plant would have a staff to do everything the factory needed. They had people on staff to clean the bathrooms, to paint the walls, and to perform equipment maintenance. The people who did these jobs were all classified as manufacturing workers, because they worked in a manufacturing plant. Since 1955, this plant has likely changed the way it staffs these type jobs. It still cleans the bathrooms, but it has a contract with an outside janitorial firm who comes in each night to do so. It still paints the walls, but has a contract with a painting contractor to do so. And it still needs the equipment to be maintained, but probably has contracts with many of the equipment suppliers to do the maintenance.
So, today, there might be the exact same number of people in the factory cleaning bathrooms and maintaining equipment, but now the government classifies them as "service workers" because they work for a service company, rather than manufacturing workers. Nothing has really changed in the work that people do, but government stats will show a large shift from manufacturing to service employment.
Is this kind of statistical shift really worth complaining about? By complaining about the shift of jobs from manufacturing to services, you are first and foremost complaining about a chimera that is an artifact of how the statistics are compiled. So if we were to correct for this, would manufacturing jobs be up or down? I don't know, but given on the wailing about "shrinkage" of manufacturing in the US, I bet you would not have guessed this:
Considering total goods production (including things like mining and
agriculture in addition to manufacturing), real goods production as a
share of real (inflation-adjusted) Gross Domestic Product (GDP) is
close to its all-time high.
- In the second quarter of 2003, real goods
production was 39.2 percent of real GDP; the highest annual figure ever
recorded was 40 percent in 2000. See the Figure.
contrast, in the "good old days" of the 1940s, 1950s and 1960s, the
United States actually produced far fewer goods as a share of total
output, reaching 35.5 percent in the midst of World War II.
So manufacturing is close to an all time high as a percentage of the economy. There is absolutely no way anyone who looks at this graph can, with a straight face, talk about the "shrinking" of America's manufacturing sector. If manufacturing employment is somehow down vs. some historical "norm", then that means that manufacturing productivity has gone up faster than service productivity. So what? And to the extent there has been a shift, as TJIC writes, who cares?
Yeah, we hates the service sector.
Who needs lawn care, child care, food preparation, legal
services, stockbrokers, professors, blogs, actors, and contract
software engineers ?
Let's get everyone involved in good 19th century atoms-and-mortar activities like raising corn and smelting iron.
Sure, some flakes argue "those are jobs for machines", but we
aim to recapture the glory of our national greatness, when men were
men, women were women, America was strong, and the average life lasted
50 years and ended with pneumonia, a threshing accident, or a crushing
The same populists who complain today about the shift from manufacturing to services complained a hundred years ago about the shift from agriculture to manufacturing. And I am sure all of us would much rather be waking up with the sun each day to push a plow.
During the last election, politicians and pundits made a lot of hay trying to argue that the labor market was somehow broken and not functioning like it always has. First, the argument was that we were having a "jobless recovery." Then, when employment took off, the argument was that wages were somehow broken and trailing productivity. Whether this was a secret plot by GWB or by Wal-Mart was never quite made clear.
Well, it turns out that the job market works like it always has. In a cyclical economic recovery, employment and productivity gains always precede wage gains. Wages tend to go up late in the cycle, after excess available labor is soaked up:
After four years in which pay failed to keep pace with price
increases, wages for most American workers have begun rising
significantly faster than inflation.
With energy prices
now sharply lower than a few months ago and the improving job market
forcing employers to offer higher raises, the buying power of American
workers is now rising at the fastest rate since the economic boom of
the late 1990s.
The average hourly wage for workers below
management level "” everyone from school bus drivers to stockbrokers "”
rose 2.8 percent from October 2005 to October of this year, after being
adjusted for inflation, according to the Bureau of Labor Statistics. Only a year ago, it was falling by 1.5 percent.
I am not one to really accept the "active bias in media" argument (I believe in a more passive bias based on reporters failing to apply skepticism to stories that fit their view of the world). However, the bias crowd predicted that reported economic news would suddenly improve after the election and that certainly seems to be the case.
One final note - be careful of folks who are claiming that wages have not kept up with inflation for years. Make sure they are using "total compensation, including benefits" and not just "wages." The former number has consistently outpaced inflation. These numbers diverge because the portion of compensation paid out in non-cash benefits has been growing as a percent of total compensation.
Apparently, USAirways (the recently merged product of America West and US Air) has made a bid for buying Delta out of bankruptcy. The bid is around $4 billion in cash and $4 billion in USAirways stock. Which got me thinking about airline mergers in general.
Companies can be thought of as having tangible assets (trucks, airplanes, factories) and intangible assets (reputation, employees, brand names, contracts). Most companies are worth far more than the book value of their tangible assets. Most of Microsoft's value, for example, is in it's products, its brand, its franchise, its contracts, its people, etc., not in hardware or buildings. As a result, most acquisitions are completed at prices far above the book value of the assets of the purchased company. The difference is called "goodwill" by accountants and "enterprise value" by economists.
But enterprise value is a problem in airline mergers. Most investors expect to pay and get paid a premium over asset values in a merger. But I am not sure there should be any such premium nowadays for airlines, because I fear that the typical airline's "goodwill", or the value of their intangible assets, may be negative.
Take the example of Delta. Unlike scrappy competitors like Southwest and JetBlue, Delta has a lot of baggage (so to speak). First and foremost, they have terrible legacy union contracts that mean that pay all of their employees much more money than do startup airlines and they are much more constrained by work rules in improving productivity. They have huge and building under-funded retirement and medical accounts. They have legacy contracts that may suck, and they often have hodge-podge mixed fleets that are hard to maintain. All of this tends to add up to a negative effect on value.
The one positive intangible companies like Delta have is their brand value, and I would argue that most of that is tied up in their frequent flier programs[** Update Below]. Without these programs, most frequent fliers have demonstrated that they would switch airlines for trivial improvements in fares. This value in the frequent flier programs was demonstrated in the America West merger (among others), when Juniper Bank contributed $455 million (!) to the merger for the right to issue the visa card attached to the program. Wow.
Given this problem of negative enterprise value, it is not surprising that savvy upstarts like JetBlue and Southwest before it have not grown by acquiring other companies. Both are willing to take advantage of bankrupt competitors to grow, but they only have bought assets (like planes and gates) rather than whole enterprises, so they don't inherit legacy contract or union issues. When the companies who are making money do things one way, and the companies who find themselves in bankruptcy court every five years do it another way, the difference probably matters.
Which brings me to the title of the post and agency costs. It is really, really uncertain whether buying Delta is good for the USAirways shareholders. Since buying airline equities has always been a losing proposition over the long haul, the deal only makes sense if 1) They are getting a screaming deal, either because of Delta's bankruptcy or because they are doing the deal in just the right part of the business cycle; or 2) They can really harvest synergies, which in this case would have to include shutting down entire hubs, such as Charlotte in favor of Atlanta or Cincinnati in favor of Pittsburgh. While I can't speak to the latter with any facts, you have a better chance betting Arizona will win the Superbowl than betting any acquisition hits its promised synergy values.
But if the value of the acquisition is unclear for shareholders, there is one group that almost certainly benefits: USAirways management. Management, even if shareholders don't get a great deal, will benefit in both monetary and non-monetary (e.g. status) ways from running an airline three or four times as large as the current enterprise. This mis-match in incentives between hired management and shareholders is called agency costs, and is something every board should be more cognizant of when approving acquisitions.
I was going to respond to Kevin Drum's post crowing that the Oregon minimum wage increase didn't do any harm. But Brian Doss at Catallarchy does a fine enough job that I will outsource to him. Here is a taste:
The 5.4% unemployment rate tells us a bit more; its 1 point higher
than the national average. I'm not going to be as quick as Kevin to
infer causation from correlation here either, but it doesn't seem like
much of a positive spin to say that a rate of unemployment that's 25%
higher than the national average is good because it happened to be 7.2%
back in 2002"¦
Also, the quote seems seriously confused that there is a meaningful
distinction (in this case) between the theoretical and statistical
(what else would employment economists use in their theory?). Despite
that confusion, David Neumark (mentioned in the WSJ article) does lay out a fairly comprehensive, concrete, statistical study of minimum wage laws and their effects here,
among other things showing that for whatever else a minimum wage does,
the effect is primarily among the teenaged to those in their early 20s,
the sign is negative, and in the long run negative if a minimum wage
prevents a teen or young adult from gaining employment and more
importantly not gaining the habits of employment.
Further evidence of the this kind is summarized by Alex Tabarrok here,
whereby he relates studies showing that 25% of the folk on the mininum
wage (nationall) are teenagers, and 50% of all minimum wage earners are
aged 25 and younger. These are people, Alex notes, that with age and
experience will likely soon earn more than minimum wage anyway, thus as
an antipoverty tool it's fairly weak....
Its a particularly bad antipoverty tool, it has non-trivial effects
on the structure of employment within and across industries, and has
possible non-trivial long term negative effects on low-skill
individuals' abilities to stay employed and to increase their own
productivity and standards of living. All of the things it purports to
want to do can be done by much more targeted, efficient, and effective
"˜Liberals' of America, please, I beg of you: save your breath for policies that actually help poor Americans, eh? And it you won't do it for me, can you do it for the children"¦?
There is much more good stuff.
Whenever I read these articles by progressives that basically boil down to "the most basic laws of supply and demand don't apply to labor, which is the most fundamental trade good in the economy," I just have to shake my head. I am reminded of my advice to progressives:
Economics is a science. Willful ignorance or emotional
rejection of the well-known precepts of this science is at least as bad
as a fundamentalist Christian's willful ignorance of evolution science
(for which the Left so often criticizes their opposition). In
fact, economic ignorance is much worse, since most people can come to
perfectly valid conclusions about most public policy issues with a
flawed knowledge of the origin of the species but no one can with a
flawed understanding of economics.
Economics have a concept called the "broken window fallacy" that many of the media to this day do not understand. Here is an example: Every hurricane season, the media always writes a "silver lining" story about how recovery from a devastating hurricane spurred the local economy. One might assume from this reasoning that it is good to go around breaking windows, since one will make a lot of work for glaziers and boost the economy. The problem is what is not measured. What would the money that was spent on window replacement have been spent on instead? It is a safe presumption that had they not had to repair storm damage, they would have spent the money on something more productive (test: if this were not true, everyone would be breaking their own windows). Advocating the broken window fallacy is a bit like saying that stealing money from banks would increase the savings rate, since people would have to deposit even more money to replace that which was stolen.
Anyway, I bring this example up because today I saw the most amazing example of the broken window fallacy I have ever seen, via Kevin Drum and Business Week:
Business Week's cover story in their current issue tells us that healthcare inefficiency is what's keeping the American economy afloat:
very real problems with the health-care system mask a simple fact:
Without it the nation's labor market would be in a deep coma. Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related
industries such as pharmaceuticals and health insurance. Meanwhile, the
number of private-sector jobs outside of health care is no higher than
it was five years ago.
.... The U.S. unemployment rate is 4.7%, compared with 8.2% and
8.9%, respectively, in Germany and France. But the health-care systems
of those two countries added very few jobs from 1997 to 2004, according
to new data from the Organization for Economic Cooperation &
Development, while U.S. hospitals and physician offices never stopped
growing. Take away health-care hiring in the U.S., and quicker than you
can say cardiac bypass, the U.S. unemployment rate would be 1 to 2
percentage points higher.
....Both sides can agree that more spending on information
technology could reduce the need for so many health-care workers. It's
a truism in economics that investment boosts productivity, and the U.S.
lags behind other countries in this area. One reason: "Every other
country has the payers paying for IT," says Johns Hopkins' Gerard
Anderson, an expert on the economics of health care. "In the U.S. we're
asking the providers to pay for IT" "” and they're not the ones who
Let's go back to slow-motion instant replay. What was that first line?
Business Week's cover story in their current issue tells us that healthcare inefficiency is what's keeping the American economy afloat
I am not seeing things, am I? Did he really write that it is the inefficiency of one of the largest and most ubiquitous and perhaps most important industries in the country that is propelling the economy? Do I really have to state the obvious? Do you really think that if all those people were not hired to push paper around in health care they would be sitting unemployed today? What about all the money either consumers or corporations would be saving from more efficiency -- would that really not have been spent on something else?
In a way, I guess this is sort of consistent with Drum's position on Wal-Mart. If Wal-Mart is detroying the economy (according to him) by bringing increased productivity to retail, I guess this argument that health care inefficiency helps the economy is at least consistent. Maybe if we could get our state drivers' license agency folks to take over the whole economy, we would have a boom! And the old Soviet Union must have been an economic powerhouse!
This is some of the worst economics I have seen in a while. Lefties like Drum often rail against conservatives for being anti-scientific in their opposition to teaching evolution or approving the morning-after pill, but for God sakes the most fundamentalist Bible-belt home schooled conservative Christian probably knows more about the science of evolution than journalists understand about the science of economics.