Wednesday, September 30, 2009

Keynes: An Excellent Summary

Robert Skidelsky, the biographer of Keynes, has just written an excellent overview of Keynes and his economic principles, Keynes, The Return of the Master. This book has been reviewed at two extremes by Prof Krugman (The Guardian) and Prof Mankiw ( the WSJ). In addition Judge Posner (The Nation) refers to the book as worthy of attention in a recent article. It is clear that there is still a great deal of heat generated by Keynes depending which side of the street you are on, and people seem to be switching sides almost real time.

Skidelsky in the three volume biography of Keynes presented a professional and detailed work of the man. The three volume biography is readable body of work but from an academic perspective. It is worth the effort if you are seeking for the details on Keynes' life. If however you are a more general reader, it may come up wanting, this is not a criticism, but an observation. The new shorter book we review here is more approachable and despite Mankiw's criticism that Skidelsky eschews mathematics, the work is quite approachable. It can be read and can be enlightening, even to those who may know something of economics, a claim that is not readily made in today's world.

For in many ways economics today is akin to Christology in the fifth and sixth centuries, with all sorts of claimed heresies floating about, monophysites, Arians, Pelagians, and the like, with general disagreement as to the Greek words for person, mind, soul.In today's world of macroeconomics we see the same for each side of the debate. Now, however, the economists apply the purported rigor of equations to make the analysis appear as it it were accepted doctrine. Thus despite the outcry of Mankiw that the author eschews mathematical rigor, the book by Skidelsky is of great use and insight. Words do count, equations can often be the hiding places for weak thinkers.

Now to the book. It is short, some 190 pages, it is relatively easy going, the author writes well, and it addresses the key issues.

Part 1 is an overview of where the economy is at and how it got there. To anyone following the current economic disaster this is somewhat redundant but for a book which I believe will have lasting value it places the immediacy of the topic in a good light. On page 23 he recalls the well known fact that bankers profited at an extraordinary level from their success but did not suffer for the losses. The quote from the British Liberal Treasury spokesperson of "Bring back the guillotine!" may have merit. For consider a financial regulatory regime where there is no regulation on the top side but only one regulatory rule on the bottom side. Namely you can make as much as you want but if you lose anyone's money then you get executed. I wonder how bankers would function in such a regulatory environment? The Brit may have a point, if reinterpreted.

In Chapter 2 he goes over the current state of economics reviewing the various schools and the various underlying premises. The three premises are the rational expectations hypothesis (REH), the real business cycle theory (RBC) and the efficient financial markets theory (EFMT). The REH assumes everyone has perfect knowledge. The RBC theory he explains rests upon the strong version of the REH which is that markets always clear, a statement I have used from time to time, to my dismay, since they don't, and they don't in real time. The EFMT is the final leg of the three legged stool and it states that prices of all financial instruments or securities reflect all the risks that may affect them at any time. Well we have seen that this is not the case. He mentions one of the classic issues, herd mentality, and refers to a second, the stickiness of markets.

There is a third effect. That is that financial market makers, the bankers, will always find ways to work around things, like markets and regulations, and create new instruments and new techniques, to make more money. The bankers have, by nature, the instinct to look at any road block, any danger sign, as an opportunity to overcome it for the purpose of making more profit. Thus, I would argue that it is this "counter gaming" phenomenon that provides a significant alternation to the markets and is an effect that Keynes had not considered. In many ways it is akin to the spy-versus-spy mentality of the cold war. the regulator moves and the banker counter moves.

The author then goes onto to explain the problems inherent in Gaussian statistics. I have discussed elsewhere my experience almost forty years ago with the Black-Scholes model, where one knows that "stuff happens" whereas the Gaussian model is a graceful degradation model. The unknowns of random hits must be anticipated and managed. It is akin to the use of what are called "bang-bang" control systems, which in a manner of speaking, are regulators who prevent movement beyond a certain level. Namely regulators have a purpose in a non-Gaussian world.

Part II deals with Keynes and his life and ideas. Keynes was an idea man who actually did something other than academics. He ran his own investments and he had a first hand understanding of what went into making and losing money. The latter is often a critical element of insight. Keynes also understood ideas. Yes his classic is difficult, as are most writings from the Brits at that time. But is was a work of ideas and secondarily of equations.

Chapter 4 is the best of the chapters in that it reviews and summarizes Keynes economics and his ideas. Keynes had written on probability as a younger man and had struggled with the definition of probability especially as how it applied to economics. Keynes struggled with the issue of the meaning of a probability, namely could one look at an economy as having random events buffet it about or were there just things we did not understand that resulted in the perceived uncertainty. The current macro-economists and finance professors often accept the Wiener process as gospel and they apply the theory of this model as if it were Gospel. They use averages, and we all know that averages rarely reflect reality, and they attempt to bound the spreads with a standard deviation, which may quite small if the reality has what are called "long tails". The author does an excellent job at describing this despite the inherent complexities involved.

On p 80 he discusses the issues regarding the business cycle. The question is what causes a business cycle; something predictable and thus controllable or is the cycle an inherent instability which we must just live through. The author's comment that "...Keynes came to reject the Newtonian schema..." is a telling statement. For he continues with Keynes own words, "...economics is ...a moral deals with introspection and with values...". Perhaps that and even more. Economics is akin to the dynamics of an organic system, like the growth of cells, like what we see in developmental biology and epigentics. The system keeps growing and changing, it is not some inherently stable system which we can control, it is a system where new factors and epi factors keep arising and get activated and result in spurts of change. Imagine if macro-economists thought the way systems biologists think.

On p 83 is the most telling statement of all, he says, "Uncertainty pervades Keynes's picture of economic life". That to me is the most powerful statement in the book. It is not the uncertainty of the Gaussian process it is the inherent uncertainty of not really knowing enough. The discussion on p 88 regarding econometrics is also quite telling. Keynes did not like econometrics. For one can often correlate anything with anything. Yet there must be some underlying reality in this set of relationships, there must be a "law of nature", repeatable and verifiable, which one can rely upon, otherwise econometrics is worthless.

Chapter 5 is an excellent review of the application of the principles. The discussion on p 111 on the differences with Keynes and the current theorists is worth a long and detailed read.

Chapters 6 thru 8 are worth the read in that they details some of Keynes thoughts regarding Capitalism and other issues. They are in many ways a summary of Keynes as the man and less as the thinker.

This is a superb book, worth the read, and worth returning to from time to time. Yes it lacks a single equation, but at times ideas count.

FCC Web Site Down

I just tried the FCC web site ( and they state:

"Federal Communications Commission

The normal FCC website is temporarily unavailable due to technical difficulties. We are working to restore the full FCC website back to normal as soon as possible."

Yes, that is right, the FCC, that bastion of communications, that newly revived regulator of the Internet, that saviour of communications is dead in the water. They have no back up plan. Also the web site is like navigating in a jungle, and it just gets worse. Just thought I would make a note.

Oh yes, it could have been worse, it could have been Government Health Care! And you could have just had a heart attack!

I Guess I Was Right

In my last Monday blog I wrote about the Hennessey et al WSJ article commenting on their alleged unfairness towards young people by having them subsidize the older health care folks. I stated that first their facts were wrong and second that their logic was wrong. In a recent Seeking Alpha blog they state the objections even more clearly. The blog actually states:

"What's even more amusing is that contrary to what the article claims, this will not have a negative affect on insurance premiums and may lower them for some young people. The fact is that most health insurance today is "community rating" as it is purchased through an employer. Because there is only one price for the young and old in employer pools, younger people who buy insurance in the individual market where there is some adjustment for age should get lower rates."

One really wonders how three whiz kids of the Bush Administration could be so far from reality, or can one?

Tuesday, September 29, 2009

Nothing is Necessarily What It Appears to Be

Today the Senate Finance Committee rejected the Public Option. It appears as if the Democrats on the extreme left still are holding fast but one is now led to ask what is the true meaning of their actions. To understand this better we must see what seems to be already agreed to.

The Plan as it seems to be evolving has the following characteristics:

1. The providers of insurance will be any and all existing insurance providers. There generally will be no limitation.

2. The offerings will be regulated by the Government in terms of what is covered and what price ranges can be charged.

3. There most likely will be a Government regulator akin to say the FCC, or in the old days the ICC which regulated trucking, the CAB which regulated airlines or the FERC which regulated energy prices.

Thus one could envision a health insurance infrastructure regulated like common carriers were regulated for years. They have to meet certain standards, they have to have cost justifications or even caps, they have to be open to all comers, thus the common carriage model, and they will cross state lines thus being regulated via a commerce clause set of rules.

To understand the dynamics of this one need but read the classic by Alfred Kahn, The Economics of Regulation, which was the seminal work which led to the elimination of regulation on airlines and trucking. Namely we could envision the recreation of a CAB or ICC for health insurance with such things as rate caps and regulatory rules akin to what we had in those industries.

Yet one should remember that when we had a CAB, airlines were costly but they ran on schedule and they were actually enjoyable. Now with unregulated airlines we have cattle cars and experiences that drive people to walk. Thus perhaps regulation is better than no regulation.

Thus one could expect a new Government Agency, akin to the FCC, a creature of Congress not of the Executive with some balance in representation, creating rules, managing costs and reducing everything to some common denominator. Is this good or bad? Clearly the FCC has had its downs and really downs, not very many if any ups, but the ICC and CAB actually made life better, air travel was better and moving furniture was less risky and one knew the costs. Thus the correct regulatory environment has merits. On the other hand look at the SEC, it has done a poor job at best. Thus it appears as if we are entering a new regulatory environment.

On the positive sides this may allow transparency, cost control, openness akin to a common carriage domain, and yet a political animal. As log as this new agency does not pick winners or losers, namely selecting treatments based upon some wisdom of a Government regulator, it may actually be a great benefit.

But one must remember that things do not remain static. The industry will then consolidate and seek regulatory relief and find ways to circumvent the restrictions. One need only read Steve Coll's book the Deal of the Century to see the end game. The dynamics of a regulated regime will play out. Namely we will see a dynamic as follows:

1. Initial compliance by all insurance companies.

2. The loss of small ones who cannot compete.

3. The consolidation into massive insurance providers as we see in telephony, ultimately being a mere handful if not one.

4. The control of regulation slips from regulator to the regulated as happened in AT&T.

5. Congressional action to break up the giant.

6. Re-institution of deregulation.

And the process continues. In a strange sense it is a material dialectic, pure Marxism carried out in thesis, antithesis and synthesis. Then it starts again.

If this is what is most likely to happen then why are the extreme left wing Democrats pursuing so much for a public option. Is it that the want competition or is it something else. "Thou dost protest too much..." is most likely the case. This natural evolution to a nationally regulated system delivers what we all seek, at least those seeking universal coverage. The public option is really the camel's nose in the tent for a Government operated health care system. So why are they not honest, because very few want that solution. We never nationalized AT&T.

Monday, September 28, 2009

Sometimes I Wonder

In a recent Wall Street Journal Article by Leavitt, Hubbard and Hennessey the authors state:

"Thus a healthy 25-year-old and a 55-year-old with cancer would pay nearly the same premium for a health policy. Mr. Obama and his allies emphasize the benefits for the 55-year old. But the 25-year-old, who may also have a lower income, would pay significantly more than needed to cover his expected costs."

First this is just outright wrong. The Baucus Bill makes the older person pay up to 7.5 times as much as a younger person, under the worst scenario. Specifically the Mark states:

"Beginning January 1, 2013, health insurance plans in the individual market would be required to offer coverage on a guaranteed issue basis and would be prohibited from excluding coverage for pre-existing health conditions. Limited benefit plans and lifetime limits would be prohibited, and health insurance companies would be prohibited from rescinding health coverage.

Health insurance premiums would be allowed to vary based only on tobacco use, age, and family composition according to the following ratios:
  1. Tobacco use – 1.5:1
  2. Age – 5:1
  3. Family composition:
  • Single – 1:1
  • Adult with child – 1.8:1
  • Two adults – 2:1
  • Family – 3:1

Premiums could also vary to reflect geographic differences. Taking all these factors together, premiums could not vary by more than 7.5:1."

These former Bush Administration "economist" types just seem to have failed to read any of the facts. Read it guys, it says 7.5:1, in black and white. When I read this stuff I wonder how the Government can run with characters like this, Republican and Democrats. The Baucus Bill is a reasonable start, it is greatly better than the House HR 3200 disaster. Yet it needs fine tuning.

Second, one must understand the simple concept of insurance and premiums. Let us remember that the 55 year old most likely has been paying premiums along with their employer for thirty years or more.

Let us perform a thought experiment. Let us assume that universal health care was mandated 100 years ago. Thus everyone in the system would be paying the fee for their entire working lifetime. It would be like having a whole life insurance policy from the time you began working or say 25 years of age whichever occurred first. Then you would be paying the same fee for each year, a modest fee, but one which would not change, other than say with inflation.

In this environment, the 55 year old and the 25 year old would be paying the same fee. It would be like whole life not a term life plan. No one with such a plan objects, they know that if I start at 25 then I pay my $2,400 per year all my life, that is $200 per month.

Yet if I waited till I was say 55, I would have to pay a larger fee, which is reasonable, but that would not be permitted. Those who are employed and are 55 are paying the same as the 25 year old in their company plan. They have been doing so all their life. That is the way is has worked, at least for those employed with company plans.

My argument is that the fee should be akin to a whole life plan. Those 55 most likely have been paying via their employer. The new entrants are pari passu with the 55 year olds. Frankly charging a 55 year old more is not just. The 55 year old is now being penalized for having paid all their life and the new kid on the block wants a break, where under the old game the 55 year old did not get the break.

Now back to the Bushie team of, well I will be kind, after all, look at where they worked, they were the team that got us where we are today, some one must have some sympathy, NOT.

Our whiz kids then go on to state:

"If Congress goes down this road, health insurance premiums will increase dramatically for the overwhelming majority of people. Even if Congress mandates that everyone have health insurance, many will choose to go without and pay the tax penalty. If you think people are dissatisfied with health care now, wait until they understand that Congress voted to mandate hidden premium increases and lower wages."

Here is where I again go ballistic. In the Plan I proposed a few weeks ago, one can get a revenue neutral solution by addressing the demand and supply issues. I did so by working in a detailed analytical and financial fashion through all the numbers. I provided this in a recent White Paper. I have been reading the Hennessey Blog, see below, and it appears to me that he is like so many economists, lacking in any business expertise and failing to address the issue with numbers. This analysis is just a plain and simple financial analysis. The problem is solvable. Read the analysis! Read something guys, because your crying about a non-problem is shameful!

Allocating Health Care: Not My Idea

Health care as described by many of the proposed plans from Congress is costly and the only way to pay for it is to ration, namely allocate limited resources. The allocation procedure must be based upon some set of accepted principles, not necessarily a moral set, but some logical set to some group of people. Enter the Harvard philosopher Rawls and his Theory of Justice. Rawls seems to invent what he call justice out of whole cloth to justify what he feels is the correct way to allocate resources, whatever they may be. They could be tags to the town swimming pool, or life saving surgery for an ill person.

The Rawlsian approach has then been applied by physicians at NIH particularly the current White House Chief of Staff's brother, also an advisor to the current President. An analysis of this paper is worthy of doing at this time to see what will most likely be incorporated into the interpretation of many of the proposed Congressional laws.

Rawls has proposed a theory of justice that is a statement of what many proponents of antitrust theory ion the mid-fifties and sixties promulgated. The essence of Rawls’ theory is composed of three elements;

Original Proposition: There exists a means and method for a society to establish a Contract amongst and between themselves. This Contract thus created in this society of the just is one that maximizes the return on every transaction to the least of the individuals in the society. This approach to Contractarianism is one related to individuals in a non-bargaining environment establishing between and amongst themselves a “contract” to govern their society.

There are two elements contained herein. The first is the essence of a contract, and in fact a form of social contract between the members of society and amongst them as a whole. The second element is that of a view towards man as a constrained and unconstrained view of human nature. The unconstrained view states that man, individually and in concert, has the capabilities of feeling other people’s needs as more important than his own, and therefore we all act impartially, even when the individuals own interest are at stake. The constrained view is to make the best of the possibilities which exist within the constraint.

For example, the constrained view of health care is one which would state that if it costs a certain amount to provide the service, an there is a portion of the society not able to purchase the service, then there is no overriding need to provide it if such a provision is uneconomical and places a significant burden on the other member of society. The unconstrained view, as a form of socialism, states that if there is the least of us in want for whatever the telecommunications revolution has in store, then they should have access to it at whatever cost. One can see that the current trend in Health care is such an unconstrained view.

Rawls approach to this contract is one wherein the individuals in the society collect themselves as individuals, and agree to a plan for the operations of that society.

First Principle of Justice: each person shall have equal rights and access to the greatest set of equal fundamental personal liberties.

Second Principle of Justice: social and economic inequalities are to be arranged so that they both, (i) provide the greatest benefit to the least advantaged., and (ii) attached to positions available to each individual under conditions of fair equality of opportunity.

Now let us see how this may be and is being applied to health care.

In the recent paper entitled Principles for allocation of scarce medical interventions, by Govind Persad, Alan Wertheimer, and Ezekiel J Emanuel (Rham Emanuel's brother and health care advisor to the current President) the authors, all apparently Government employees develop a suggested plan to ration health care. They state:

"Principles must be ordered lexically: less important principles should come into play only when more important ones are fulfilled. Rawls himself agreed that lexical priority was inappropriate when distributing specific resources in society, though appropriate for ordering the principles of basic social justice that shape the distribution of basic rights, opportunities, and income. As an alternative, balancing priority to the worst-off against maximizing benefits has won wide support in discussions of allocative local justice. As Amartya Sen argues, justice “does not specify how much more is to be given to the deprived person, but merely that he should receive more”.

This is a clear statement of not just giving health care but of rationing health care. They continue:

"Accepting the complete lives system for health care as a whole would be premature. We must first reduce waste and increase spending. , The complete lives system explicitly rejects waste and corruption, such as multiple listing for transplantation. Although it may be applicable more generally, the complete lives system has been developed to justly allocate persistently scarce life-saving interventions. , Hearts for transplant and influenza vaccines, unlike money, cannot be replaced or diverted to non-health goals; denying a heart to one person makes it available to another. Ultimately, the complete lives system does not create “classes of Untermenschen whose lives and well being are deemed not worth spending money on”, but rather empowers us to decide fairly whom to save when genuine scarcity makes saving everyone impossible."

The begin the paper by stating their basic premise of rationing in health care. Specifically they state:

"In health care, as elsewhere, scarcity is the mother of allocation. Although the extent is debated, the scarcity of many specific interventions—including beds in intensive care units, organs, and vaccines during pandemic influenza —is widely acknowledged. For some interventions, demand exceeds supply. For others, an increased supply would necessitate redirection of important resources, and allocation decisions would still be necessary …"

Now although they suggest that this be applied in times of crisis for such things as vaccines, they have set the stage for expanding this to overall health care as is currently envisioned. Thus it is critical to bring Rawls and Emanuel into resonance. The seek a "justice" based argument rather than a moral based argument. They try to seek a solution based on humanistic elements rather than what one would call a moral or natural law argument. In fact we would argue that they reject any moral argument and any economic based argument and seek a politically correct extreme left wing argument as stated by Rawls.

Now the propose several systems which we summarize I their own words as follows:

"…Lottery Allocation:.. lottery has been used, sometimes with explicit judicial and legislative endorsement, in military conscription, immigration, education, and distribution of vaccines…

First-come, first-served: Within health care, many people endorse a first-come, first-served distribution of beds in intensive care units or organs for transplant. The American Thoracic Society defends this principle as “a natural lottery—an egalitarian approach for fair [intensive care unit] resource allocation.” Others believe it promotes fair equality of opportunity, and allows physicians to avoid discontinuing interventions, such as respirators, even when other criteria support moving those interventions to new arrivals,,,

Favoring the worst-off : prioritarianism Franklin Roosevelt argued that “the test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little”. Philosophers call this preference for the worst-off prioritarianism

Sickest first: Treating the sickest people first prioritizes those with the worst future prospects if left untreated. The so-called rule of rescue, which claims that “our moral response to the imminence of death demands that we rescue the doomed”, exemplifies this principle. Transplantable livers and hearts, as well as emergency-room care, are allocated to the sickest individuals first…

Youngest first: Although not always recognized as such, youngest-first allocation directs resources to those who have had less of something supremely valuable—life-years. Dialysis machines and scarce organs have been allocated to younger recipients first, and proposals for allocation in pandemic influenza prioritize infants and children…

Save the most lives: One maximizing strategy involves saving the most individual lives, and it has motivated policies on allocation of influenza vaccine and responses to bioterrorism. Since each life is valuable, this principle seems to need no special justification. It also avoids comparing individual lives…

Prognosis or life-years: Rather than saving the most lives, prognosis allocation aims to save the most life-years. This strategy has been used in disaster triage and penicillin allocation, and motivates the exclusion of people with poor prognoses from organ transplantation waiting lists. Maximizing life-years has intuitive appeal. Living more years is valuable, so saving more years also seems valuable…

Instrumental value: Instrumental value allocation prioritizes specific individuals to enable or encourage future usefulness. Guidelines that prioritize workers producing influenza vaccine exemplify instrumental value allocation to save the most lives. Responsibility-based allocation—eg, allocation to people who agree to improve their health and thus use fewer resources—also represents instrumental value allocation...

Reciprocity: Reciprocity allocation is backward-looking, rewarding past usefulness or sacrifice. As such, many describe this allocative principle as desert or rectificatory justice, rather than reciprocity…

The complete lives system: Because none of the currently used systems satisfy all ethical requirements for just allocation, we propose an alternative: the complete lives system. This system incorporates five principles…: (i) youngest-first, (ii) prognosis, (iii) save the most lives, (iv) lottery, and (v) instrumental value. As such, it prioritizes younger people who have not yet lived a complete life and will be unlikely to do so without aid. Many thinkers have accepted complete lives as the appropriate focus of distributive justice: “individual human lives, rather than individual experiences, [are] the units over which any distributive principle should operate…."

Emanuel et al then state:

"As the legal philosopher Ronald Dworkin argues, “It is terrible when an infant dies, but worse, most people think, when a three-year-old child dies and worse still when an adolescent does”; this argument is supported by empirical surveys. , Importantly, the prioritization of adolescents and young adults considers the social and personal investment that people are morally entitled to have received at a particular age, rather than accepting the results of an unjust status quo. Consequently, poor adolescents should be treated the same as wealthy ones, even though they may have received less investment owing to social injustice. "

The complete lives system in my opinion reduces to a simple formula. Save anyone say between 15 and 55, and let the rest die. The very young have nothing immediate to contribute and the old have already contributed. The morality of the approach is not the least it considered, it appears to be pure Rawlsian with a flavor of keeping costs down.

Thus it seems that with the Emanuel et al system we would let say a Nobel Prize winner who is 66 die and treat a 23 year old crack addict with three counts of murder. The system allows those in teens thru early middle age be treated and then withdraw treatment from the others. This approach seems to take abortion a few more steps beyond the womb.

They then conclude:

"The complete lives system discriminates against older people. Age-based allocation is ageism. Unlike allocation by sex or race, allocation by age is not invidious discrimination; every person lives through different life stages rather than being a single age. , Even if 15 year olds receive priority over 65 year-olds, everyone who is years now was previously years. Treating 65 year olds differently because of stereotypes or falsehoods would be ageist; treating them differently because they have already had more life-years is not."

Housing Price Index, Improving

The Federal Housing Finance Agency has published their housing price index as shown below. This is thru July 2009 and shows not only a flattening but some improvement over the past few months. The index is from Feb 2008 thru July 2009.

Now looking at the index on a regional basis we see a significant increase in the Pacific and Mountain index, it was very depressed a year ago, and we see improvement in all other indices except for the central regions.

It is expected that over the next year as the foreclosures work thru the system that the prices will continue to reflect growth in the indices.

Sunday, September 27, 2009

Cap and Trade and Krugman

Krugman has written today in his New York Times space on cap and trade. We had written extensively on this in a Cap and Trade White Paper months ago as well as on this blog when the Markey Bill came out.

Krugman begins by saying:

"I realized... that it might be useful to write down just what the Econ 101 version of cap and trade looks like; as it happens, this also helps explain the intellectual sins of Glenn Beck and Martin Feldstein.

So here we go. Bear in mind that something like what follows can be found in just about every intro textbook."

Well rather than going the economics approach, which as we have seen during this economic downturn was like listening to a collection of fighting witch doctors, and frankly people who I felt were totally clueless, I had used the facts as were available in the open data. My analysis shows that with a pure cap and trade, not the abortion created by Markey, which I shall return to, that by 2020 each person will be paying $500 per year more for electricity alone and by 2030 it will be $2000 per person per year!

Now to Mr. Krugman. You see, that having spent time on the MIT campus, I have always remarked that they kept the economics and business departments way down the east, also left, end of the campus, making it near impossible to wander there. I wondered why almost fifty years ago, but it became clear that it must be because they did now want to contaminate those of us doing real stuff with those who were just shall we say playing around. Krugman came from that part of the campus. Thus there thus a belief that economists are want to be manipulators of equations and numbers and have never demonstrated any consistent expertise in delivering models which consistently predicted anything, and worse could ever develop a strategy to follow. Imagine them building a bridge, you could to find two who would agree on the vary basics of say strength of materials!

Thus back to Krugman. He throws his graphs around and and then criticizes in his typical sarcastic and baseless manner those who oppose him. He states:

"OK, now let’s send in Beck and Feldstein...Beck got his number from someone who learned about a guesstimate of what the auction value of permits might be (way higher than current estimates, by the way), divided by the number of households, and proclaimed this the cost of the bill. In effect, he looked at a guess about the size of the blue rectangle, which does not represent an economic cost, and called that the cost to the economy.

In a way, though, what Martin Feldstein did was worse. He took the CBO’s estimate of “compliance costs”, which was $1600 per household in an early report (it’s now down to $900, but who’s counting?), and implied that this was the economic cost of the legislation...the true economic costs are just the triangle, and are much smaller."

Well my approach is to build a model up from the ground level using detailed facts just as any engineer would do building a bridge or computer network. I do not used nice graphs and general concepts, I use demonstrable facts. Frankly I know little of Beck, I gather he is some rather extreme proselytizer on the tube at late mid day, and some of us have other things to do at that time. Like run the numbers. I am talking of the numbers.

Now to the Markey Bill. The problem I articulated is that this Bill gives credits to entities which are funded by the tax. The entities are pork programs that Markey and his cohorts in Congress obtain a benefit from. I suggest you look at my posting in May detailing this and further read the Bill.

Thus this cap and trade bill is a tax on the consumer that redistributes the consumer's wealth to programs which most likely benefit Markey and his ilk! Krugman shows total ignorance of this fact.

I would suggest that Mr. Krugman deal with the facts and try approaching this the way an engineer of business person would. Then and only then do we get the chance to deal with it on a factual and repeatable basis. The approach of the economist we all know now is truly wanting, it can neither predict nor direct.

Saturday, September 26, 2009

Debt and Housing

The above is the total consumer credit from 2000 thru July 2009. Note that it had been climbing at a rapid rate and then stopped as the economy took the tail spin and has been declining for the past nine months. This clearly means two things. First that consumers are spending less, a Keynesian problem, and second that consumers are saving more, the same type of problem.

The chart below shows the separate elements of the debt for the past two years. There does not appear to be any material change yet there is a noticeable decrease.

The final chart below depicts the housing starts in their separate elements. The good news is that authorizations and actual starts are now increasing. This is a result of the lower prices, the purchase of foreclosed homes, and the low cost of interest. In a sense it may be dominated by the foreclosure issue which means that the bad debts which housing has caused may be slowly being digested in the normal mode of things. I suspect that at this point if we have enough data on the purchase of foreclosures that it will be possible to value a great deal of what TARP was to have valued due to the mere fact that it is now being monetized. This data is slowly beginning to become available. It may not be as low as we expected.

These two metrics indicate a stabilizing in debt and in housing, the two key consumer elements. This adds additional credibility to the end of the recession. We await the next unemployment numbers.

Friday, September 25, 2009

Nuclear Weapons Control

From 1977 thru 1980 I was seconded to the Arms Control and Disarmament Agency, ACDA, then headed by Paul Warnke, and reported to Adm Tom Davies organization as a senior technical adviser to staff the Comprehensive Test Ban Treaty (CTBT) negotiations with the UK and the Soviets.

Thus I represented part of the "technical" team helping out the negotiations. and developing the systems to perform verification A great deal of time was spent understanding and developing means and methods to address the question of verification as well as the ways the Soviets could counter what we had proposed. I did not take the position of the Carter Administration and its NSC head as gospel and I approached the process of verification by assuming that you trusted no one. The "Trust but Verify" dictum was not yet uttered. Under Carter it appeared that the intent was "get a treaty no matter how bad".

Thus I bring a certain personal history and experience to the table when looking at the issue of nuclear treaty analysis and options. During the almost four year period I had several opportunities to deal one on one with the Soviets, and yes you could not trust them, and I was certain that they felt the same towards the US. Yet, on the other hand, we did discuss children and parents, for family was a common thread even between adversaries. There was a true cultural nexus despite the political gap.

Now to the present. Yesterday the UN Security Council issued Resolution 1887 (2009) which focused on the elimination of nuclear weapons. The resolution states:

"Unanimously adopting resolution 1887 (2009) in its first comprehensive action on nuclear issues since the mid-1990s, Council members emphasized that the body had a primary responsibility to address nuclear threats, and that all situations of non-compliance with nuclear treaties should be brought to its attention.

The Council reaffirmed, in particular, its strong support for the Treaty on the Non-Proliferation of Nuclear Weapons, calling on States that were not yet signatories to accede to it. It also called on States parties to comply fully with their obligations and to set realistic goals to strengthen, at the 2010 Review Conference, all three of the Treaty’s pillars -- disarmament of countries currently possessing nuclear weapons, non-proliferation to countries not yet in possession, and the peaceful use of nuclear energy for all.

While the resolution did not target specific countries, the Council demanded that parties involved in “major challenges to the non-proliferation regime” comply fully with their obligations, and reaffirmed its call on them to find early negotiated solutions to their issues.

The text underlined the right to pursue peaceful nuclear energy under IAEA supervision, but also urged States to curb the export of nuclear-related material to countries that had terminated their compliance with Agency safeguards agreements. It also called for the enforcement of strict controls on nuclear material to prevent it from falling into dangerous hands.

In addition, the Council called upon all States to refrain from conducting nuclear test explosions and to ratify the Comprehensive Nuclear-Test-Ban Treaty in order to bring it into force as soon as possible. It called upon the Conference on Disarmament to quickly negotiate a treaty banning the production of fissile materials for explosive devices. "

The CTB they refer to is detailed at the CTBTO site. The US is a signatory but did not ratify, so too is Iran a signatory but did not ratify. Russia is a signatory and it ratified the treaty. China is a signatory and did not ratify. Thus the US under Clinton did sign the treaty but Congress did not ratify it, in fact it rejected it. The current President seeks to now have the Treaty ratified by Congress.

Thus the CTBT has been around for over thirty years. There are two critical problems that still exist. They are:

1. Verification and Compliance: This is the issue regarding how the CTBT signatories can ascertain whether a signatory has been in compliance or whether it has violated the Treaty. Can this be accomplished technically or does it require teams of inspectors all over the world poking into the affairs of countries?

2. Violations and Controls: If a violation occurs what are the consequences? This is the classic problem.

Now historically the CTBT was at most tripartite. It consisted of the US, UK and USSR. We knew where to look and they knew where to look. We knew how to respond and the same for the Soviets. The problem now is that with so many players we have a possibly unstable playing field. But more on that later.

In a 1982 article in Scientific American (when it was the scientific journal of record, not the flashy puff piece it seems to be today) Sykes and Evernden wrote on the issue of verification of a comprehensive nuclear test ban. Verification is always the first and often the most difficult step. Before discussing this seminal paper let me reflect on what the difficulty is with verification. In the 1970s there was concern about large weapons, the Mega Ton weapons, estimated at over 100,000 such weapons.

That would have been enough to destroy the world many times over. There mere thought of this massive amount of destructive power made anyone close to the process be terrified of any outcome. Nuclear war was and is the end of all life as we know it.

Yet there was also another concern, the small weapon issue. This was the 1-10 Kilo Ton weapon, the one we now call the brief case weapon, the one we saw then as a tactical weapon used in a land war in Europe. That could be tested and and the testing done so in an almost secret manner. Ironically it is the same low yield weapon which concerns us now from the perspective of a terrorist attack and from the perspective of an Iranian or North Korean launch or sale. Low yield weapons are quite deadly, they resemble the one at Hiroshima, a 20 KT yield, more likely 10-12 KT. It did real damage, it killed hundreds of thousands.

Thus the verification problem simply stated is to detect a low yield test amongst a background of seismic and other noise. Anyone desiring to develop such a small weapon must test them. One cannot just build a weapon and then hope the design works. It must be tested.

The testing then opens the door for verification of compliance. These tests can be conducted generally underground and thus can be hidden from most means of verification. In the 1960s and 1970s the DoD had several VELA programs focused on detecting such nuclear tests. They ranged from VELA underground to VELA Hotel program, a satellite program, run partly by the National Reconnaissance Organization, "NRO", the joint DoD and CIA satellite entity. These programs have continued over the past thirty plus years and are yet the best way still to verify and validate compliance is via seismic sensing.

Back to the Sykes and Evernden article. They start by stating:

"Two treaties put into effect over the past 20 years have set limits on the testing of nuclear weapons. The Limited Test Ban Treaty of 1963, which has been signed by more than 120 nations, prohibits nuclear explosions in the atmosphere, the oceans and space, allowing them only underground. The Threshold Test Ban Treaty of 1976, a bilateral agreement between the U.S. and the U.S.S.R., prohibits underground tests of nuclear weapons with a yield greater than 150 kilotons. In the present climate of widespread pressure for more effective control of nuclear arms the idea of a comprehensive ban on all nuclear testing is receiving renewed attention.

Such an agreement would be an important measure. It might inhibit the development of new weapons by the major nuclear powers, and it might also help to prevent the spread of nuclear weapons technology to other countries. A halt to all testing was the original goal of the negotiations that led to the 1963 Limited Test Ban. New talks with the aim of achieving a total ban were begun in 1977 by the U.S., the U.S.S.R. and Britain, but the talks were suspended in 1980. In both cases the main impediment to a comprehensive treaty was the contention by the U.S. and Britain that compliance with the treaty could not be verified because sufficiently small underground nuclear explosions could not be reliably detected and identified.

In July the Reagan Administration announced that the test-ban negotiations with the U.S.S.R. and Britain will not be resumed. Once again the primary reason given was a lack of confidence
in methods of verifying compliance."

They conclude by stating:

"A comprehensive test-ban agreement should not be regarded as a substitute for disarmament. Meaningful reductions in the nuclear threat must include a continuing and serious process of arms control; in this process, however, a comprehensive test-ban treaty could have an important part. The problems of negotiating such a treaty are overwhelmingly political rather than technical and must be recognized as such.

Before the suspension of negotiations between the U.S., Britain and the U.S.S.R. in 1980 tentative agreement had been reached on a number of issues. All three nations agreed that a test-ban treaty would include a prohibition of all tests of nuclear weapons in all environments, a moratorium on peaceful nuclear explosions until arrangements for undertaking them could be worked out, provisions for on-site inspections, a mechanism for the international exchange of seismic data and the installation of tamper proof seismic stations by each country in the territory of the others. The proposed treaty would have a term of three years. The agreements on the long-standing issues of on-site inspection, peaceful explosions and the placement of monitoring stations in each country represented important breakthroughs. It would be a setback for the cause of international security if this hard-won ground were now lost. "

We agree, that today even more than thirty years ago, we have the technical means to verify. Yet those means will also require inspection, on site open inspection, since the systems available provide high probability of a test or violation but on site inspection is the sine qua non gold standard. It must be open and timely. That then becomes the political issue.

The second political issue is what does one do if there is a violation. That becomes the ultimate concern. In the days on the Cold War it mean the side finding the violation was then free to resume its own testing. It was a two player game, where the next step was simple. That no longer works since the game is now a multi-player game.

The final issue is the old Dr. Herman Kahn issue of Mutual Assured Destruction, MAD. Both the US and the USSR were to some degree rational players. They were not driven by religious fatalism and a willingness to sacrifice all for a belief. That type of a mindset changes the game dynamics. Indeed the whole process can be considered a game, a very deadly game. That type of consideration, one focused on a religious belief, was never a consideration in any of the studies in the Cold War. When looking at a psychological profile of any Soviet counterpart one always saw a family, a belief set, a basis in reality. Despite the Soviet and American rhetoric, the fear was more one of some wild card error rather than a deliberate confrontation. Now we have just the opposite.

The problem of managing and controlling nuclear weapons is in a sense a true example of game theory. The key element of the game is the definition of what winning is. The reason why the US and USSR never came to blows was that both sides had understood the concept of a win, namely world dominance, and both sides had come to the realization that nuclear war meant world destruction and thus it was a game in which no one side could ever win. Both sides were rational and both sides had a common understanding of both what a win was and what the rules of the game were.

In the case of Iran and others the concept of what "the win is" is not anywhere near what it was with the US/USSR game. For them total destruction is the win. Thus the game is unbalanced. This is what makes the game with Iran a very dangerous game, it is a game being played in many ways by zealots. Unless the strategists understand this fully, then only dire consequences will result. It seems clear that Israel understands this, it is not at all clear that the US current Administration does.

Thus the approach by the current Administration in some ways resembles the Pollyanna approach by Carter and that led to no reasonable path. It took Reagan and his poker playing that brought rationality to bear. Yet the very nature of the game has changed, wild cards have been introduced, and the tools we have developed to handle this dangerous game are no longer viable. Reagan poker playing will not work. The other side will not be bluffed into an agreement, the other side may not have a rational base of belief consistent with that of the US. Nuclear weapons have a place if the other side has a value system which abhors the results as much as we would. If on the other hand the other side or sides seek the ultimate destruction, or further believe that the ultimate destruction is an eschatological necessity, the game changes totally. A Treaty may not be the straight forward solution, nor frankly is a war. This creates a very complex game, and a very dangerous one.

Wednesday, September 23, 2009

Watching for Inflation

We have been watching both M2 and the CPI as shown above on the look out for any inflationary tendencies. So far so good. There is a creep in CPI, mostly energy and health care costs and a slow increase in M2. No problem seen here as of now.

Recent Commentary on the Sugar Tax

The Ethicist of the New York Times has entered the battle of taxing carbs. First the mere thought that the Times has an ethicist is an oxymoron if I ever saw one. Is it that they need one or is it that they believe that they can opine on what is right. But back to what was said. The article begins:

"Proposals to tax sugary drinks as a way to fight obesity and finance health care reform have found support from medical experts and some interest from President Obama while meeting resistance from the beverage industry in general and the Coca-Cola C.E.O. Muhtar Kent in particular. “I have never seen it work where a government tells people what to eat and what to drink,” he told the Rotary Club of Atlanta last month. “If it worked, the Soviet Union would still be around.” Is this sort of argument so dubious, and does it come from the maker of products so damaging, that Muhtar Kent should be dragged off in handcuffs — or worse?"

One would expect the CEO of Coke to say as such. But there is an example. It is the tax on cigarettes. It has worked and continues to work. We have shown that many times and it is detailed in our book, Health Care Policy: Politics vs Reality.

He goes on to state:

"Assuredly, many factors affect our weight. But it doesn’t follow that because a policy fails to address all of them, it should not address any. That the feds devote few resources to going after counterfeiters who mint fake quarters doesn’t mean they should decline to pursue those who run off $20 bills.

What’s more, the multiple causes of a problem need not share equal significance. Studies suggest that sugary beverages are a key contributor to obesity. In its analysis, the Center on Budget and Policy Priorities notes that “Americans consume about 250-300 more daily calories today than they did several decades ago, and nearly half of this increase reflects greater consumption of high-sugar soft drinks.” So there’s a case to be made for giving serious consideration to a soda tax even if other steps are not taken."

To build upon the above let us recall the simple relationships:

1. It requires 3500 kcal for each added pound.

2. A BMI between 25 and 30 is overweight and over 30 is obese. Obesity is the primary cause of Type 2 Diabetes which costs us $275 Billion in 2007, and it is growing.

3. The extra 300 kcal per day equals 2100 kcal per week, or 109200 kcal per year or 31.2 pounds per year!

We want to reduce health care costs so here is the target. It is not ethical it is economic.

In a recent NEJM article the authors state:

"Economists agree that government intervention in a market is warranted when there are "market failures" that result in less-than-optimal production and consumption. Several market failures exist with respect to sugar-sweetened beverages. First, because many persons do not fully appreciate the links between consumption of these beverages and health consequences, they make consumption decisions with imperfect information. These decisions are likely to be further distorted by the extensive marketing campaigns that advertise the benefits of consumption. A second failure results from time-inconsistent preferences (i.e., decisions that provide short-term gratification but long-term harm). This problem is exacerbated in the case of children and adolescents, who place a higher value on present satisfaction while more heavily discounting future consequences.

Finally, financial "externalities" exist in the market for sugar-sweetened beverages in that consumers do not bear the full costs of their consumption decisions. Because of the contribution of the consumption of sugar-sweetened beverages to obesity, as well as the health consequences that are independent of weight, the consumption of sugar-sweetened beverages generates excess health care costs. Medical costs for overweight and obesity alone are estimated to be $147 billion — or 9.1% of U.S. health care expenditures — with half these costs paid for publicly through the Medicare and Medicaid programs.""

Our analysis presents a substantially greater number but they are within a factor of two which is not bad for this type of analysis. The NEJM authors then go on to discuss how the taxes would work. Let us look at this in a more general manner. We see the following mechanisms:

1. Tax at Point of Sale/Consumption: This is akin to the cigarette tax. We know that the cigarette tax works but it took many years and many tax increases to get it to function. Also there is a one to one mapping between tobacco and cancer for example. That is if you stop tobacco usage as in cigarettes you stop lung cancer. This is not the case with sugar. It is total kcal which must be modulated. Thus we would have to tax cookies, cakes, candies, and the like. It is more complex.

2. Tax at Point of Result: This is the proposal that everyone must be weighed each and every year and they get taxed on excess BMI. Thus, for example, you get weighed and pay $1,000 per point over 25 if you are between 25 and 30 and say $2000 for every point above 30. After all you get you car inspected each year and all you would then do is do the same for yourself! Thus if you desire to gain weight you can but you get taxed.

These two proposals look at extremes. One looks at one particular element and the second looks at the result. One attempts to modify behavior and the other penalizes the results. We feel that neither accomplishes the desired result and that the carb issue is more complex than tobacco but it worth continued study.

The FCC and the Internet

In 2006 we wrote a paper about Internet Access and Neutrality and in it we addressed the issue of what can a carrier do with packets that they transport across their network. We stated then and believe that it holds now that two facts are in evidence; (i) there is no express law delimiting the actions of any carrier and (ii) there is a basis in tort law which allows remedies in the even that a harm is done. Thus we stated that with no Federal Statue in place the best one could do was to wait until harm was done and then sue under one or several torts.

Now along comes the current FCC. One must remember that the FCC reports to Congress and is NOT part of the executive. Its current Chairman in line with the current President seems to be moving in the direction of establishing an Administrative law, which he can then enforce with his executive powers and administer via his Administrative courts to ensure what he perceives is net neutrality. It is akin to the FCC being a ruling authority unto itself.

In the Chairman's recent talk he stated:

"...I believe the FCC must be a smart cop on the beat preserving a free and open

This is how I propose we move forward: To date, the Federal Communications Commission has addressed these issues by announcing four Internet principles that guide our case-by-case enforcement of the communications laws. These principles can be summarized as:

Network operators cannot prevent users from accessing the lawful Internet content, applications, and services of their choice, nor can they prohibit users from attaching non-harmful devices to the network.

The principles were initially articulated by Chairman Michael Powell in 2004 as the “Four Freedoms,” and later endorsed in a unanimous 2005 policy statement issued by the Commission under Chairman Kevin Martin and with the forceful support of Commissioner Michael Copps, who of course remains on the Commission today. In the years since 2005, the Internet has continued to evolve and the FCC has issued a number of important decisions involving openness. Today, I propose that the FCC adopt the existing principles as Commission rules, along with two additional principles that reflect the evolution of the Internet and that are essential to ensuring its continued openness....

The fifth principle is one of non-discrimination -- stating that broadband providers cannot discriminate against particular Internet content or applications. This means they cannot block or degrade lawful traffic over their networks, or pick winners by favoring some content or applications over others in the connection to subscribers’ homes. Nor can they disfavor an Internet service just because it competes with a similar service offered by that broadband provider. The Internet must continue to allow users to decide what content and applications succeed....

The sixth principle is a transparency principle -- stating that providers of broadband Internet access must be transparent about their network management practices. Why does the FCC need to adopt this principle? The Internet evolved through open standards. It was conceived as a tool whose user manual would be free and available to all. But new network management practices and technologies challenge this original understanding. Today, broadband providers have the technical ability to change how the Internet works for millions of users -- with profound consequences for those users and content, application, and service providers around the world."

These are laudable principles and in fact ones which we would support. However the FCC has no basis in law to promulgate them into the Administrative law code. It seems as if the Chairman has decided unilaterally to become the ruler of the cyber world! What basis does he have to make these laws. In fact the FCC has ruled in multiple previous cases that the provision of Internet services was unregulated, beyond their jurisdiction and the Courts have supported such decisions. Thus one wonders what has changed in the law to give the FCC this authority. Or are we to expect that the FCC will rule, set the Administrative law in place, disrupt the industry, find itself in Court and over ruled again, with the net result being a massive cost to our economy. Perhaps it may be time to disband the FCC.

Now to some specific issues:

1. Why does the FCC believe it should apply these rules to wireless? The wireless carriers bought their spectrum, mostly at auctions. One need just look back at the PCS auctions of the mid 1990s and the rules that applied allowed the owners of this property the right to do whatever they wanted. There was not even an expectation of any regulation. This would be ex post facto and frankly illegal. What is the basis for this attempt by the FCC to delimit a property right? It violates the "takings clause" of the Constitution!

2. Wireless spectrum is limited and what right does the FCC have in unilaterally re-allocating it? The wireless spectrum is limited and demands real time spectrum management. Having been in this business for almost half a century this fact has been drilled home many times. What new divine revelation has come to the FCC Chairman to permit him to see beyond the laws of nature, perhaps his law degree has facilitated insight that engineers have missed!

3. There are costs in access, and the more access one uses the more costs are incurred. Who pays for those costs? It appears as if the FCC forgets that the Internet is not free. In the original model of the Internet there was an assumption of parity of usage. Namely that all users were pari passu in what they did, there were no data hogs. In today's world there are obese Internet users, the data hogs, those who download and upload massive amounts of video, thus loading up the network, and costing others. The carrier should be allowed to charge them. Yet the carrier at the same time should not use this as an excuse to gouge everyone else!

These are just a few questions. But as anyone familiar with the FCC process, the NPRM is just a fig leaf. The Chairman has already written his rules and has reached a conclusion. In fact he is so forthright to even state this as such:

"I’ve talked about what we need to do; now I’d like to talk about how we should do it. I will soon circulate to my fellow Commissioners proposed rules prepared by Commission staff embodying the principles I’ve discussed, and I will ask for their support in issuing a notice of proposed rulemaking. This notice will provide the public with a detailed explanation of what we propose to do and why."

We suspect that the next steps will be litigation and a costly battle!

Wednesday, September 16, 2009

The Baucus Plan: A Quick Note, Good Job!

The new version of the Baucus Plan is an interesting read. We have reviewed it here in its earlier form and the latest version is not dramatically different. It is in many ways what we have been arguing for as well. Simply it is:

1. Universal
2. No Pre Existing Conditions
3. Incents a good life style
4. He uses 13% of gross income I use 10%
5. He does not state an express employee contribution but incents a minimum
6. He avoids a public plan
7. He moves the CCE to a private entity from the Government institution

All in all not a bad step forward

However he fails in the following:

1. No focus on obesity. He taxes smoking but obesity is greater and costs more
2. No tort reform

Other than that not a bad job. Congratulations Senator, it required courage to do this! It beats HR 3200 by several parsecs!

I will return to this after I get back from Washington.

CPI Data and Increases

The Department of Labor issued the CPI data as of this morning. We depict it below.

First is the CPI total with month by month changes.

The total CPI is increasing driven by fuels costs and related costs. We show the details below:

Note the changes in actual annual and annualized from the last month. The spikes are in growth of auto sales, new versus used. Medical care services and commodities are the two largest after taking out the effect of rising oil costs.

The BLS summarizes this report as follows:

" On a seasonally adjusted basis, the Consumer Price Index for all Urban Consumers (CPI-U) rose 0.4 percent in August, the Bureau of Labor Statistics reported today. The index has decreased 1.5 percent over the last 12 months on a not seasonally adjusted basis. The 0.4 percent seasonally adjusted increase in the CPI-U was driven by a 9.1 percent rise in the gasoline index. This increase accounted for almost the entire advance in the energy index and over 80 percent of the overall increase. Despite the August increase, the gasoline index has fallen 30.0 percent over the last 12 months.

The indexes for food and for all items less food and energy both posted slight increases in August. The food index rose 0.1 percent following a 0.3 percent decline in July. The food at home index, which fell 0.5 percent in July, was unchanged in August. Of the six major grocery store food group indexes, three rose in August and three declined. The index for all items less food and energy also rose 0.1 percent in August, the second consecutive such increase. Increases in the indexes for used cars and trucks, medical care, public transportation and lodging away from home offset a decline in the new vehicle index. The index for all items less food and energy increased 1.4 percent over the last 12 months, the smallest 12- month increase in the index since February 2004."

Medical Costs: Some Just Do Not Get It

In a recent article by Worstall in the AEI Journal the author speaks of health care cost reductions. He refers to a paper by Baumol who argued that in certain industries such as a symphony orchestra it is just impossible to gain what could be called scale economies. Thus what he argues is that there may be a fundamental flaw in health care that will drive costs up as demand goes up.

Specifically he states:

"What we really want to do is to routinize and mechanize as much of the medical process as we can, and the one spur, the workable incentive, that we know encourages this is that combination of greed, profits, the division of labor and specialization, and the urge to find cheaper ways of doing things which comes from that odd but unique interaction of capitalism and markets.

It is a basic truism that if you do not identify the source or cause of a problem then you cannot discover a workable solution to said problem. The current laboring of the elephant will indeed produce a mouse to address the perceived problems of healthcare unless we grasp the basic points—that we want more, not less, high-tech medicine and that to get from here to there we have to harness both markets and capitalism to our desires, not attempt to abolish them from the system.

In short, attempting to bend the cost curve through legislative fiat is simply silly, but to try and do so by limiting either capitalism and markets or innovation in new technologies is, quite frankly, insane."

Now he also refers to Emanuel's comments, the brother of the Chief of Staff of the current President:

"Which leads us on again to the idea that the way to reduce the inflation in medical costs is to curb the use of “high-tech” medicine. Dr. Ezekiel Emanuel, the president's healthcare adviser, is said to be a fan of this idea, which is worrying. For of course it is entirely and absolutely wrong. It is precisely and exactly technology that reduces medical costs by increasing the productivity of labor."

But more on that later, since Emanuel also urges rationing and only providing services to 15-55 year olds, and letting the rest for the most part to fend for themselves. Nice trick if you can do it. But what does one expect.

Now back to the AEI article. As we have argued the basic cost equation in health care is:

Costs = Population X Incidence X Procedures per Patient X Cost per Procedure

Thus we can try to reduce any one of these four elements. Yet the true issue as we have stated is the number of new procedures used. Again just look at heart failure and the 1970 6th Edition of Harrison's versus the 2008 17th Edition of Harrison's. We now perform dozens of more procedures, both diagnostic and treatment wise. Yes the unit costs has gone up but that is not the driver, it is the number of procedures for heart failure. Yet in the Type 2 Diabetes realm it is the incidence not the procedures. Thus it is possible to look at the ten major diseases and compare 1970 to 2010 and see whether it is procedures, incidence, or both which are the drivers. Then if one follows Emanuel we let the older and the younger die, perhaps, but Dr. Emanuel should note the problem is with those in the middle!