View From Down Under

The Congressional Budget Office now estimates the House bill would reduce the deficit by $138 billion over 10 years.  They estimate the Senate bill would reduce the deficit by $130 billion over 10 years.  The total cost over ten years is estimated at $890 billion for the House bill, and $600 billion for the Senate bill, with cost reductions and new taxes contributing a bit more.

This will be a surprise if you follow Charles Krauthammer, who says the bill will cost $1 trillion, or Sean Parnell (Sarah Palin’s replacement as the governor of Alaska) who estimates the cost at $2.5 trillion.  Of course, neither the Congressional Budget Office nor right wing commentators actually know the impact, so the argument is over whose assumptions to believe.  At least we’re no longer arguing about baby killing death panels.

The CBO estimates look at costs and income over a 10 year period.  Politicians know this, so the bills contain revenue raising initiatives that start immediately, with cost increases that don’t start for a few years – such as delaying insuring the uninsured for up to three years.  So the first few years are sharply positive, but once everything kicks in the impact is close to neutral or slightly negative.  It is a bit of legislative sleight of hand that tries to hide the cost by delaying benefits – which is wrong on both levels (but apparently a common trick used by both Democrats and Republicans for some time).

The CBO calculations are also only counting the cost to the government.  There should be further net cost reductions in the system, as the uninsured will be able to access health care more cheaply than going to emergency rooms, and insured Americans will no longer be directly subsidizing the uninsured through higher premiums.  However, these gains are likely to be overshadowed by continued escalation in health costs, which neither bill addresses with any vigour and in fact may make worse.

As Jeffery S. Flier, dean of the Harvard Medical School, explains in a great article in the Wall Street Journal:  “I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it.”  This is a result of the insurance based system obfuscating the cost of health care, and this lack of transparency means there are no individual incentives to control or even check health care costs.  Both the House and Senate bill do nothing to change those incentives.

Unfortunately, the very act of insuring the uninsured (however equitable it may be) will have as one consequence the reduction of the only group of people who actually have a keen stake in controlling their own medical expenses.

No matter what form the final bill takes, or even if it passes at all, one thing is clear:  the US will continue to enjoy the world’s most expensive health care system for many years to come.

Popularity: 41% [?]

There is no doubt the US health care system needs reform.  Costs are high relative to outcomes, outcomes are very unevenly distributed, the cost of health insurance is greater than the average mortgage.  Perverse incentives create perverse results.

But the US political system appears to have lost all capacity for meaningful reform.  The bills currently being debated are not much reform at all, and look likely to add to the overall cost and inefficiency of the system.

Part of Barack Obama’s campaign platform was comprehensive health care reform.  So after his inauguration and passing the economic stimulus package, the President called on Congress to develop a health care reform proposal to make coverage affordable to all Americans.  It seems odd that the President would not propose his own plan (like the one he campaigned on), instead of delegating that to Congress.  However, the last time a President proposed a health care reform plan (Bill & Hillary Clinton), the process was handled so poorly and the results so roundly criticized it kept health care off the legislative agenda for nearly 20 years.  Obama wants a bill passed, and the only way to do that in the current political environment is to let Congress figure out what it can pass, and sign it.

Congress responded with some grand rhetoric and then slipped back into their normal, self serving process of getting themselves re-elected.

The result will be a bill that adds more bureaucracy to the process, and does not address many of the important problems.  The current bills do nothing to control costs or improve quality.  There is plenty of data available to suggest that major reforms can improve both cost and quality.  For example, the evidence is fairly clear that a tax funded system is less expensive and with better health outcomes than an insurance funded system.  But of course that is “socialism”, despite the fact that it works well in almost every capitalist country in the world.

The only thing worse than passing this legislation is not passing it.  Reducing the number of uninsured is an important and worthwhile change, with positive flow on effects for all Americans.  If the final bill does not pass both houses of Congress, not only will millions of American continue to lack affordable medical care, but it will likely have the disastrous effect of once again pushing any health care reform out another 20 years.

The view from down under is that meaningful health care reform in the US will require one of two things to happen first: either the US political process is itself reformed; or the health care system reaches an unbearable crisis point.

The saddest thing is the amount of unnecessary human suffering that will occur before that happens.

Popularity: 46% [?]

Big hair is back.

Hemlines are up.

Time to go long.

Popularity: 56% [?]

A recent poll suggests that 52% of Republican believe that ACORN stole the election for Barack Obama in 2008, and only 27% of Republicans believe he won the election legitimately (and an amazing 21% not sure).  Among Democrats, 86% believe Obama won the election legitimately.   Although the wording of the poll is, in my view, suggestive and designed to deliver this result, the numbers are still quite dramatic.

Before we dump on  Republicans, we should remember that in 2001, 79% of Democrats believed George W Bush did not win the 2000 election “fair and square”, and 28% believed he “stole” the election.  Among Republicans, 85% said Bush won fair and square.

Any rational person would admit that there were more grounds to be suspicious of the final result in 2000 than in 2008.  Nevertheless, it does illustrate the polarization of thinking between Republicans and Democrats.

It also suggests that both Democrats and Republicans fail to accept that any intelligent human could disagree with them, and if an election proves different then it must be that the results have somehow been rigged.  Only an election that delivers the outcome they want will be seen as legitimate.

Viewed from down under, they sound like spoiled little children.

Popularity: 29% [?]

I can’t find many journalists, politicians, or even bloggers willing to go on record that the recession is over, even though technically it is.

The politically correct thing is to say we have a long, hard path ahead.  This will continue to be the case for up to a year.  Politicians in power will argue that their policies (whatever they are) are obviously starting to work but more needs to be done.  Politicians in opposition and other pundits will point to the lack of improvement in lagging indicators like unemployment and commercial bank lending as signs of the apocalypse and failure of current policy.  Both will be wrong.

Emotionally charged events are generally remembered more strongly than emotionally neutral ones  (google “emotional memory” for more info).  For anyone involved in business, the events of late 2008 were highly emotionally charged.  These events make a lasting impression, and it takes quite some time for the emotion to fade.  Eventually we remember the emotion without feeling the emotion, but this process usually takes a couple of years.

As a result, most people are still fearful about the economy, caught up in the emotional trauma of a year ago, and taking baby steps until they’re sure the ground is solid.  Although there has been a strong move out of cash over the last six months, risk taking is still near its cyclical low.

Now is the time of the cycle when bold moves are rewarded.

What bold moves are you planning today?

Popularity: 56% [?]

Sometime in the next few years, the Business Cycle Dating Committee will determine when the 08/09 US recession ended.  The View From Down Under is that it ended last quarter.

The US economy reported its first quarter of growth since June 2008.  The world’s major economies are also improving.  The UK, although still down slightly in Q3, is recovering.  Europe is also recovering, led by France and Germany.  China expects 8% growth in 2010, back to pre recession levels.  ASEAN growth forecasts continue to move up.

The index of leading indicators was up in September for the sixth straight month.

The pessimists say the growth will not continue, but I disagree.  Not just because of my wonderfully optimistic nature, but mainly because of the data now coming in.  Four data points for this post:  inventory reductions, monetary policy, fiscal policy, and economic history.

The economy grew despite inventory reductions. The growth in the September quarter came against backdrop of continuing drop in inventories (US$130.8b drop v 160.2b drop in 2Q).  Destocking is a ‘one off’ kind of adjustment, and a trend that can’t be sustained.  When businesses start building inventories again, (or even just stop reducing them) it will be a strong boost to future growth.

Interest rates will remain low. The Federal Reserve reiterated its commitment to keep borrowing costs low for “an extended period”.  After what Bernanke and his colleagues have been through the last two years, they will be in no hurry to raise rates.  Low interest rates will continue to provide economic stimulus for some time to come.

Stimulus keeps on coming. Government fiscal policy is still strongly stimulating.  According the government’s recovery website, 26% of the $787 billion stimulus has been paid out as of 30 Oct, leaving 74% still to be spent.  Much of the rest will be paid out over the next 12 months, providing continued strong economic stimulus.  Cash for clunkers may have finished, but there is much, much more to come.

History hates a W recession. Since WWII, there has never been a period where 3 or more consecutive quarters of GDP contraction was followed by a W.  The closest the US has come in the past was in 1980-82.  This was a very short and mild recession in 1980, followed by a strong recession in 1981-82.  The impetus for the 81-82 recession was government policy of extended high interest rates designed to kill inflation.  There is no similar government policy looming this time.  History also shows that deep recessions tend to be followed by strong recoveries, not moribund growth.

Next post:  why this creates such fantastic opportunities.

Popularity: 55% [?]

Worthwhile reading from Douglas Elmendorf, the Director of the Congressional Budget Office.

Key sentences come at the end:

“The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the budget is to be placed on a sustainable course.”

The accompanying slides of his speech highlight two converging trends.  The first is the rising cost of health care, particularly for those over 65.  No end in sight for this trend.

The second trend is demographic.  At the moment (according to his slides) the population age 65 or older is about 20% of the population aged 20 – 64. In 20 years, this grows to nearly 40%.  With a labor force participation rate of about 65%, this means there are now about three workers for every person over 65.  In 20 years this will be less than two workers for every person over 65.

In my view, the US has four options:

• less spending (particularly on health care for seniors);
• more taxes (falling heavily on the young);
• increase the number of working age residents (which means much higher immigration); or
• further expansion of public debt (which at some point simply becomes unsustainable).

Unfortunately, if you are a member of Congress today, the first three options carry significant personal career risk.

Popularity: 53% [?]

Well, there has been an awful lot of hype comparing the current recession to the great depression of the 1930s.  People are starting to call this the “Great Recession”.

In some ways, they’re right.  The chart below shows every recession in the US since 1948.  The vertical axis is the maximum unemployment rate reached in the recession, the horizontal axis is the amount of reduction in real GDP (top to bottom on quarterly basis), and the size of the bubble represents the duration (bigger means longer).

In terms of GDP decline, the US is suffering the worst recession since the 1930s.  Unemployment is also approaching the high of 1982.  Unemployment may go up for another month, but in my view is more likely to trend down before Christmas.  Still, by any measure it has been a very tough time.

If we add the downturn of 1929-33, it really puts that period into perspective for those of us too young to remember it.

However, I was interested in what typically happens after a recession.  Below is similar data, except this time the vertical axis is economic growth in the 12 months post recession.

Now, I haven’t run a statistical analysis of this data, but it looks like a reasonably strong correlation between the severity of the contraction and the strength over the next twelve months.

If the recession technically ended some time last quarter (and it may be some months or years before the NBER’s Business Cycle Dating Committee determines that), and if the same pattern holds true, then the US can expect some quite strong economic growth in 2010.

Popularity: 54% [?]

House Republicans have, finally, produced an alternate health care plan.  Though I have not read it, there are some provisions that appear quite sensible – limits on malpractice awards, for example.

What strikes me is that the proposal was introduced only when it looks likely the Democratic bill (in some form) will become law, and therefore the Republican alternative is unlikely to have much impact on the final form of the bill.

If the Republicans and Democrats had actually worked together, I believe the resulting legislation would have been better than either plan alone.  Instead, Democrats tried to bludgeon legislation through without (much) compromise, and Republicans resorted to disrupting town hall meetings and frightening citizens with nonsense about ‘death panels’.

The whole sordid process highlights the perverse incentives in Congress.  Crafting legislation to improve the lives of citizens is a secondary consideration to getting re-elected.

Republicans who try to work with the Democrats on valuable compromises are labelled by right wing activists as traitors, communists, and numerous names I won’t repeat.  They are called “RINOs” (Republican in name only) and targeted in their home districts by Political Action Committees funding right wing opponents.   Democrats are, frankly, behaving like bullies now that they are in nominal control of both houses of Congress, and seem more intent on payback than progress.

Credit to Olympia Snowe, R-Maine, who said this about her decision to support a compromise health care plan:  “When history calls, history calls, and I happen to think that the consequences of inaction dictate the urgency of Congress to take every opportunity to demonstrate its capacity to solve the monumental issues of our time.”

Whether she made the right call or not I’ll leave for you do decide, but the intention is admirable.

Popularity: 24% [?]

When the economic stimulus bill passed in February, no Republican reps and only two Republican senators supported the bill.

House Republican Leader John Boehner said at the time “Democratic leaders barrelled ahead with their trillion-dollar spending plan that everyone agrees won’t work.”  John McCain showed amazing ignorance of economics with this quote:   “’The American people are beginning to figure out what this package is, that it’s not a stimulus package — it’s a spending package” (as if there is a difference).  He said this as he was introducing amendments to add $75 billion of spending to the package.

With language like this, the Republicans put themselves in a no-win situation.  There is no doubt that government economic stimulus boosts short term economic growth.  This is true both across history and across every economy.  By opposing it, Republicans portrayed themselves as obstructionist and pro-recession.

Now that the economic stimulus package is having a strong positive effect on the economy, Republicans have painted themselves into the ‘Chicken Little’ corner.  The plan that “everyone agrees won’t work” appears to be working pretty well.

The Republican response to the economic data was basically, “OK the economy is growing but where are the jobs now let’s talk about health care”.

With unemployment typically a lagging indicator, and independent research suggesting the stimulus plan has created or saved between 600,000 and one million jobs, no wonder Republicans want to change the subject.

Popularity: 28% [?]