"Crowding Out"

The CBO report on the Long Term Budget Outlook has an interesting curve of the GDP projections with a "crowding out" effect.













The CBO states:

“Crowding out” refers to the fact that government borrowing (to finance deficits) tends to crowd out private investment in productive capital, leading to a smaller capital stock and lower output in the long run than would otherwise occur. The stable economic conditions that CBO used in making its long-term budget projections under both scenarios included assumptions—after 2020—of a constant real (inflation-adjusted) interest rate on federal debt and steady growth rates for real wages and output....Increased government borrowing tends to crowd out private investment in productive capital, leading to a smaller capital stock and lower output in the long run than would otherwise be the case. Deficits tend to have that effect on private investment because the portion of people’s savings used to buy government bonds is not available to pay for such investment.

This is exactly what is happening to the economy. Money is leaving by tax confiscation the investment stream of entrepreneurial activities and being redistributed for election purposes.

Obesity, Genes and Inflammation

In Science there was a short note on the Wnt gene pathway and obesity. The article starts with the statement:

Obesity is linked to major adverse health outcomes such as insulin resistance and type 2 diabetes. The mechanisms underlying insulin resistance in this state are multiple and complex, including the recruitment of immune cells, particularly macrophages, to adipose tissue. This results in chronic, low grade inflammation that is causally associated with insulin resistance. With obesity, adipose tissue mass expands and adipocyte (fat cell) size increases. Collectively, adipocytes constitute the body's largest endocrine organ, producing an array of peptide hormones called adipokine...

Now we argued this a month ago when the good economics professor from Harvard made what I considered was a baseless comment on not taxing sodas. It appears that the evidence is overwhelming. But alas the economists are not used to fact based science. The more impratant issue, however, is the fact that obesity kicks in the immune system as if there is a low grade chronic inflammation. This sets the stage for the sequellae, including cancer via many of the cancer pathways.

The article ends by stating:

Stepping back from the more detailed mechanisms, there are general questions that now arise from the observations of Ouchi et al. How do proinflammatory events in adipose tissue communicate with the other major insulin target tissues, muscle and liver, to establish a state of systemic insulin resistance? What is the teleologic purpose of immune cell invasion into adipose tissue during the course of obesity? This understanding will guide the development of therapeutics, which could include harnessing the insulin sensitizing effects of Sfrp5 to treat obesity-related insulin resistance. Such approaches are greatly needed as there is now an enormous health burden in the United States and other countries brought about by the rising incidence of obesity, type 2 diabetes, and associated metabolic diseases.

Possibly at some time the policy types will get off the kick of taxing oil and gas and taxing fat!

Rare Earths and China

A small article this past week in Science is of some note.

It states:

This month, China announced that it will cut exports this year of rare-earth elements (REE) by 40%, leaving demand outside China exceeding the supply for the first time ever. Combined with Chinese export tariffs of 10% to 25%, the policy could ground fledgling efforts to build clean-energy industries in the United States and other Western countries...

China currently produces more than 97% of all rare earths, a group of 17 elements consisting of scandium, yttrium, and the 15 lanthanides. They are vital for a host of electronics and green-energy technologies, and their use is expected to triple between 2000 and 2014, topping 200,000 metric tons. But despite rising global demand, China has focused increasingly on domestic needs...

To counter the advantages enjoyed by Chinese companies, U.S. companies that make magnets and other high-tech components want Congress to set up loan guarantees to back domestic mining, processing, refining, purification, and metals production of rare earths. Bills have been introduced in both houses, but no action is expected in the current session.

This is not a problem just for electric cars...it is a defense issue and it seems that the current administration is truly lacking in its understanding of the strategic importance of this issue.

The US has substantial rare earth deposits, the ones shown above are from New Jersey for example, yet the mines have all been closed due to environmental reasons. Apparently it was fine to despoil China yet not the US. The rooster has come home to roost.

Recession Statistics Update: Q2 GDP Results

We have updated the Recession Stats with the Q2 GDP updates.

First the GDP comparisons. We show it below. The rate of return to normal has slowed the Q2 portion as compared to those before. The GDP stats are still in the lower half of the GDP returns for prior recessions. There is a concern that the GDP may drop down in Q3 and Q4.


















Personal Consumption has been the major issue here. We show the results below and we see that it is at or below all prior recessions. Part of the problem is unemployment and part is the dramatic uncertainty on the part of the consumer. In a walk around to small business owners in the past month it is clear that consumers are not returning in any great way and this is reflected below. Consumer confidence is at an all time low.


















Private investment is on par with average past recessions. That may be a leading indicator of the confidence by some business entities. One suspects it is the larger companies because the smaller ones are still have great difficulty in credit.


















Government consumption is on average which is surprising compared to the massive infusion of funds. This begs the question as to where the money is going.


















Exports have exploded due to the favorability of the dollar. They are driving up the GDP.


















Whereas imports seem to be on a median level.


















The big concern is the lack of consumer confidence despite other stats showing the opposite. There is also the concern as to the return of another down period.

GDP: Current Results and Analysis

The BEA has released the Q2 2010 GDP estimate. We take a look at some of the details here. They summarize it as follows:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.

First we plot the GDP per PoP and see that frankly is is declining from Q1 to Q2. This should be the concern not just the slow growth! The annualized growth rate is small but the annualized growth rate per PoP is negative. BEA generally avoids that slight issue.


















M2 is showing steady stability for the past few months as shown below. This means that despite the tons of money the FED is printing and sending to banks it is going nowhere.


















The M2 slow change is best seen below where we plot annualized and running average growth rates. Note that they are staying at zero.


















Now we look at the changes in M2, GDP and Velocity to estimate the inflation independent to the chained numbers. We obtain the following.


















The shocking observation is a negative inflation or deflation. This is the first time we have observed deflation to a significant degree. The concern by many economists of a deflationary trend we believe is already evident in the data.

We use the calculated money velocity rather than the assumption of constant. We use the relative percent change in our calculation, a standard practice. The data is shown below:


















We now look at the annualized GDP changes by category. Transport and Residential were the two highest relative to percent annualized but Government spending is still a driver. We show these below:


















Finally we depict the total changes in total dollars by these sector below which shows the drivers of growth.

Act!, Don't Think!

In the Battle of Surigao Straits in the Leyte Campaign, October 1944, there is a tale I have told about a Captain of a destroyer in harm's ways who yelled at the con officer the act, not to think. The con officer had a PhD in psychology and was always approach the issues as if they were research topics. However when you are being hit by 16" shells you cannot think what to do you must do it, do something.

But the key to acting is that there was training based upon facts. Archimedes and his principle let the captain determine if the ship could keep afloat, Newton and his ballistics allowed for the determination of the accuracy of shells, and Marconi and his radio along with Maxwell and his waves allowed for communications. These men built the act mode on facts, predictable facts. There does not appear to be a single macroeconomist who has built anything on facts of any sort.

Thus in reading the blog entry by Sumner today I was reminded of that battle. Economists appear to think too much, have no foundation for there models and argue about acting. In control theory and practice one can design a control system which can adapt to any strange set of circumstances. That is to try something, measure the result and then try again. These adaptive control systems really work.

However as seen in the Sumner entry there is much too much thought and little if any action. There is no theory or basis for action and one economists takes shots at another. It is worse than the religious wars of early Christendom over the nature of Christ! Perhaps that is why we are in this mess. The bankers act without thought and the economists think without action. Try that for a stable system. LTCM redux.

The above observation regarding the paucity of fact based reasoning in economics was brought home by a west coast macroeconomist of late. He states:

One of the dirty secrets of economics is that there is no such thing as “economic theory.” There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.

Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature.

Economists have none of that. The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis.

The “right” conclusions depend on which of two types of economist you are. One type chooses, for non-economic and non-scientific reasons, a political stance and a set of political allies, and twiddles and tunes his or her assumptions until they yield conclusions that fit their stance and please their allies. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones will yield lessons and suggest principles to guide our civilization’s voters, bureaucrats, and politicians as they slouch toward utopia.

Can one imagine a "science" which has no basis in fact! And these people are trying to control our economy. Yes, the one type uses their political views to project their economic analysis. In what other field of endeavor would that be allowed. The law has the law, medicine has dead bodies, engineering has broken machines, and then they all try to fix them. There are principles. Economics has no principles. Would you trust so unprincipled a group?

Pigou and the Carbon Tax, Again

I just read a piece by a Professor at Tufts regarding Cap and Trade and the infamous Pigou Tax. Remember the Pigou Tax is a tax imposed by the Government on some action with negative externalities whose sole purpose is to deter the action and reduce the negative externalities.

So let's say we believe this CO2 tale of woe, yes it has been a hot summer, and we further believe that if we reduce use of CO2 producing energy sources then we reduce the results that this CO2 stuff produces.

Now follow the bouncing ball:

1. These Pigou folks say if we tax energy then the higher price will reduce demand.

2. Yet the demand is highly inelastic, yes that is an economic's term. It means that if I drive back and forth to work and there is no alternative then I will still drive and it will just cost more. I cannot use less. If I need heat in the winter then I will use the same gas, oil, electricity, whatever. There just is not that much excess that we have a discretionary choice. The consumer has no control over their usage. The consumer cannot shift to an alternative. Thus a tax is just that, a tax.

3. The good professor states:

Most taxes and charges have negative economic impacts that are only offset by the revenue they raise for important government functions. A carbon fee, in contrast, has efficiency enhancing benefits while it raises revenue to address the U.S. federal budget deficit. Greenhouse gas emissions are a classic externality whereby firms and individuals do not take into account the social cost of their activity. Unlike most economic transactions where the full social cost of a good or service is reflected in the market price, externalities lead to market prices that are below the social cost associated with producing or consuming the externality-generating product.

Economists have long understood that levying a tax or fee on an externality can improve economic efficiency. In this case, levying a carbon fee would not only contribute to a reduction in harmful greenhouse gas emissions but also raise substantial revenues to contribute to fiscal sustainability. In contrast to a cap-and-trade program, it raises revenue in a predictable manner that avoids the problems of short-run price fluctuations that contribute to volatility in carbon revenues.

4. The above just makes no sense to me. The assertion that a tax will decrease demand has never been demonstrated with any basis in fact and the paper seems no to do so as well. First as we have shown the demand is inelastic. Thus it will not reduce the usage and thus not lower CO2. Sorry guys, the laws of physics really do work whereas the "laws" of macroeconomics are just balderdash! Second if the Government gets more money then what do you think it will do .... it will spend it several times over! Just look at the current administration. It has spent TARP several fold before it even got it all back. These folks have no sanity. It is like giving a homicidal maniac more bullets! Thus the good professors logic has no basis in any fact, it is outright nonsense.

5. The good professor concludes:

• A carbon fee has additional benefits beyond reducing greenhouse gas emissions and raising revenue to contribute to deficit reduction.
• A carbon fee obviates the need for costly subsidies through the tax system for carbon free energy investment thereby providing additional avenues for deficit reduction.
• A carbon fee will reduce emissions of small particulate matter that occur from the burning of fossil fuels and which are a source of public health concern.
• A carbon fee can be the centerpiece of U.S. efforts to reduce greenhouse gas emissions.
• A carbon fee ensures that the U.S. need not put in place inefficient and cumbersome regulations to reduce greenhouse gas emissions.
• A carbon fee would help the U.S. take leadership in the international arena in the area of climate change and help it meet its commitments in international agreements to reduce emissions.
• A carbon fee can border adjust in ways that are more likely to be WTO compliant than cap-and-trade systems thereby preserving the competitiveness of U.S. carbon-intensive industries.

In fact as we simply demonstrate it will do none of the above except avoid regulations. The Markey-Waxman "Bill from Hell" was a give away to more special interests that one could count. So the good professor apparently says we should just take the money and give it to the Government. The US taking leadership is just a feel good thing. The problem is China and India and no matter what the US does they will act in their own interests and totally disregard us. Anyone who have ever done business outside the US would know that fact, as I have for the past 40 years. I regret that I have the distinct disadvantage of experience that appears to be lacking in the good professor.

6. The US economy needs a turn around. I believe that Hayek was correct in that the US economy was built upon and will only survive and thrive upon an entrepreneurial base. Taking money from the economy and handing it to the Government will further starve that investment base. The result will be a destruction of the engine that makes our society work.

7. The solution is a technological solution. New and more efficient energy sources. We have the ability but we seem to be pushing it all over to our new competitors, China and India. We need more engineers and less economists and politicians. We need entrepreneurs who create value rather than destroy value.

The Conundrum of Prostate Cancer

The conundrum of prostate cancer is the problem of dealing aggressively with prostate cancer. In a recent NCI note reporting on a report in the Archives of Internal Medicine they note:

The NCI states:

The researchers found that 77 percent of men with a serum PSA level of 4.0 nanograms per milliliter (ng/mL)—the level at which a prostate biopsy is often recommended—or lower underwent either complete removal of their prostate, known as a radical prostatectomy, or radiation therapy. This treatment occurred even though more than half of these men were considered to be at low risk of disease progression based on commonly used factors, such as the Gleason score and the extent of local tumor spread.

Despite evidence that suggests older men are less likely to have a survival benefit from surgery or radiation compared with more conservative treatments, age was not a barrier to low-risk men receiving aggressive treatment. Nearly 69 percent of men age 65 to 74 and approximately 40 percent of men 75 and older underwent either surgery or radiation.

Let us examine the statements:

1. Clearly as has been demonstrated a PSA of 4.0 is still too high a cutoff, and that 2.5 is more likely a reasonable value but the real problem is velocity, namely change in PSA as well as percent free. A high PSA reflects possibly an enlarged prostate but a low percent free may indicate cancerous cells rather than just benign enlargement via BPH or PIN. Thus one would expect that a biopsy yielding a positive PCa at 4.0 or lower is not unrealistic.

2. There is currently no clinically acceptable means for ascertaining aggressive PCa from indolent forms. Family history may help but it is still guess work. We know the pathways but finding the cell that contains all activated pathways may be akin to finding a needle in a haystack. Low risk is not really a clinically well determined description. It may mean the PCa and family history are representative of low risk. A Gleason of 7 or greater is clearly PCa that one should be concerned about.

3. Old age statistics were based on older data as well and thus saying that anyone with PCa detected at over 65 should not be treated is akin to a death sentence for many. Patients all too often ask what are their chances. Frankly chances only mean something for a large group. There are no chances for an individuals, their result is one or the other, life or death.

4. A positive biopsy means PCa and nothing more. The typical patient wants this problem remedied. The physician is generally clueless as to aggressive behavior. If the first degree relative died of an aggressive form that is a strong indication. However it is not foolproof.

The NCI article goes on:

“It has been documented that men who receive any treatment have increased risk of treatment-related adverse effects,” Dr. Shao and colleagues wrote. “Therefore, it is critical that patients be counseled about treatment-associated adverse effects and benefits when they are deciding about therapy.”

In an accompanying editorial, Drs. Richard Hoffman of the University of New Mexico and Steven Zeliadt of the University of Washington advocated for greater use of so-called active surveillance. This approach “balances the desire to avoid treatment complications against the equally strong desire not to ignore a cancer—while at the same time minimizing the risk of overtreatment,” they explained.

Yes there are adverse effects, and many of them are from less experienced physicians. As to so-called active surveillance, also known as watchful waiting, or whatever euphemism one wants, it assumes the cell doubling is long, when it may very well be short. It is a guess. Nothing more. If it is an aggressive form then by waiting it is most likely going to result in mets, since the cell doubling time is in weeks not months!

An educated patient is important and so too is an educated physician. The problem we are facing here is a clear example of the Comparative Clinical Effectiveness plan under the new Health Care Bill, namely if you are over 65 then no matter what the biopsy says you just wait till it mets to the bones and hope there is enough morphine until the DICs occur and you are gone! So this is what the new health care plan has in store, yes, there is really a "death panel".

The main problem with prostate cancer and this debate is that medicine does not have a test to determine what prostate cancers are virulent and which are indolent. The pathways controlling the growth are somewhat known but the presence of micro RNAs has added additional complexity. Thus the issue is do we wait until we know it is a virulent strain or do we act with an informed patient. Prostatectomy is not a trivial surgical procedure. It has sequellae such impotence and incontinence. Yet death from mets to the bone is much worse. The logic of the NCI piece fails in that on average it works but averages only works for large groups. It should and must be an individual decision. The patient must be the ultimate decision maker, informed of the consequences, but the decision maker.

Some Data on Employment

Altig at the Atlanta FED has presented some data on the unemployment situation using what is called the Beveridge chart.

We duplicate it here and add some additional data for better understanding.

The Beveridge chart is below, we have used monthly and not quarterly data.



















This is Open Jobs versus unemployment. Note that the end points on the lower right are the variations that he points to as they represent the current situation.

We can plot this also as:



















The Gap is what we would be concerned about, namely there may be a permanent drop in jobs and this is what concerns him.

Then is we add productivity changes we get the following:



















Frankly productivity has been increasing for the past decade and that is not the driver,

He states:

The most tempting explanation for the seeming shift in the Beveridge curve relationship (to me, anyway) is a problem with the mismatch between skills required in the jobs that are available and skills possessed by the pool of workers available to take those jobs. The problem with this tempting explanation is that it is not so clear that the usual sort of structural shifts we might point to—for example, only nursing jobs being available to laid-off construction workers—are so obviously an explanation ... Now I realize that a few anecdotes don't make facts, but I have been in more than a few conversations with businesspeople who have claimed that the productivity gains realized in the United States throughout the recession and early recovery reflect upgrades in business processes—bundled with a necessary upgrade in the skill set of the workers who will implement those processes. This dynamic suggests that the shift in required skills has been concentrated within individual industries and businesses, not across sectors or geographic areas that would be captured by our most straightforward measures of structural change.

The reasons for the change in employment may be more fundamental. Movement to off shore outsourcing and more importantly the movement of the intellectual property based components off shore as well. This would herald a dramatic collapse long term in the US.

Electronic Marketing and Distribution Channels

Some economics professor at Chicago made a startling observation on VOX this week:

E-commerce accounts for hundreds of billions of dollars in sales annually in the US and in Europe, and that figure is growing rapidly. The price effects of internet shopping, and e-commerce in general, have received a lot of research attention (see for example Brynjolfsson and Smith 2000, Scott Morton et al. 2001, Brown and Goolsbee 2002, Baye et al. 2007, and Ellison and Ellison 2009). The findings of this research have been drawn on in policy discussions of subjects like net neutrality and the tax treatment of online sales.

But the diffusion of e-commerce through an industry is likely to affect more than just prices. Market structure likely changes as well, as reduced consumer search costs lead to a wave of creative destruction. The tools of e-commerce make it easier for consumers to find lower-price sellers, meaning lower-cost firms (or those able to deliver higher quality at the same cost) will grab larger shares of business away from their higher-cost competitors.

I remember making the same observation in 1980 at Warner Cable, then Warner Amex, to Lou Gerstner who was at Amex, that this was the start of a new marketing and distribution channel and the roles would change. I wrote of this for two decades since then especially in my book on Business Plans in 1988.

Now that it has happened we have economists writing of this discovery. This proves my theory that economists are not the brightest bulbs on the rack! It took them more than 30 years! It was there from the mid 70s with the Warner Qube system. All you had to do was look and listen.

How Big a Number is That?

The FCC recently issued a report on the number of Americans not having broadband.

They state:

In response to a Congressional directive to inquire whether broadband “is being deployed to all Americans in a reasonable and timely fashion,” the FCC concluded in its Sixth Broadband Deployment Report that between 14 and 24 million Americans still lack access to broadband, and the immediate prospects for deployment to them are bleak. This report underscores the need for comprehensive reform of the Universal Service Fund, innovative approaches to unleashing new spectrum, and removal of barriers to infrastructure investment.

There are 308 million Americans so we are looking at less than 5%! There are more than 5% who cannot read! So why are we worried?

I still ask if you want to live on a mountain top it is your choice and no one should be taxed to support your life style.

Diogenes Redux

The WSJ recently bespoke about the current Administrations budget and spending, and of course taxing actions. They state:

The Congressional Budget Office is contributing to this political drama by declaring this week that the "federal budget is on an unsustainable path." Of course, but why? The biggest reason is that Medicare and Medicaid keep rising at two to three times the rate of everything else in the economy and, as CBO explains, will eventually take up every dollar of tax revenues raised, leaving no money for anything else, including national defense.

This we have shown is wrong. The biggest eater of dollars by far is Homeland Security. If all else fails look at the facts. And there is no explanation.

Then one of the comments states:

I was surprised to read that "White House economists believe that taxes have little effect on growth." Just a few days ago I received the June 2010 issue of the American Economic Review, the flagship journal of academic economics. The current issue contains an article by CEA Chair Christina Romer and her husband David Romer on the macroeconomic effects of tax changes. Their paper examines "all major postwar tax policy actions" and concludes that "tax increases are highly contractionary." For emphasis, the authors add that this finding is both "strongly significant" and "highly robust."

Could it be that the White House economic team is suffering a bit of cognitive dissonance?

No, it is Ms Romer. She went into the office having been on record with her husband that if the multiplier existed it was higher in the private sector than the public, then she changed that position and put out a benchmark for the Stimulus, then she denied she did that and in her "chuckles" like manner tells the Senate she never did it, she never set a benchmark, when it is in writing and we have been following her monthly, then we get this. Cognitive Dissonance, not quite, it is Washington and the inability to deal with the truth or even find it.

Bottom line, the economy is a mess and getting worse, a double dip is now wishful thinking, the folks in charge seem to have a de minimis grasp on reality but then keep driving it deeper into an un-rectifiable position.

A telling statement from, in my opinion based upon my observations, the left leaning Quinnipiac University Poll in today's WSJ states:

The U.S. economy has continued to flounder, and surely that is part of the reason for the president’s decreased standing. But the disillusionment with the president’s handling of the economy stems from the same public skepticism about the role of government in economic policy as in health care.

If Quinnipiac says this then the reality may possibly be even stronger. When talking with people on the street, especially those who voted for the Administration last time, they are in near total revolt, two issues, health care and economy. We cannot have the US lose as much as the Harvard endowment ... perhaps we need a change of a few staff ...

When the CBO states the following:

The federal government incurred a deficit of just over $1.0 trillion for the first nine months of fiscal year 2010, CBO estimates, $81 billion less than the roughly $1.1 trillion deficit incurred through June 2009. Revenues so far this year are slightly higher than they were last year at this time; outlays are about 3 percent lower.

And where is the money going? Well CBO states:

Outlays were $11 billion higher in June than in the same month last year, CBO estimates. Outlays for the Troubled Asset Relief Program (TARP) and Fannie Mae and Freddie Mac were, in total, about $19 billion lower this June than in June 2009—but other spending was up by about $30 billion. Outlays increased by $5 billion for the Federal Deposit Insurance Corporation and by $3 billion each for defense and for health programs. Spending for Social Security benefits and veterans’ programs increased by $2 billion each. In addition, the National Railroad Retirement Investment Trust lost more than $1 billion on its investment portfolio in June 2010; a year ago, it earned about $1 billion....

Spending for unemployment benefits increased by almost 50 percent, or $41 billion. Outlays for Medicaid and Medicare rose by $17 billion (or 9 percent) and $14 billion (or 4 percent), respectively. Payments for Social Security benefits increased by $30 billion (or 6 percent). Defense spending also was up by about 6 percent—$27 billion.

Why the 9% Medicare change? I can see the 6% SS due to population changes and the same would apply to Medicare, but is it a 3% inflation plus a 6% annual population growth... It seems that the press focuses on the total and not on the separate elements.

Where the Money Goes Redux

A couple of days ago I wrote a piece asking why the largest growing elements in out exploding budget under the current administration is Homeland Security. I think the answer is in the Washington Post piece. In reading the piece DHS seems to now be spending money as if there was no morrow!

The WaPo article is worth the read but to anyone who has spent time around DC knows the news is really not new. I have a few of these establishments in my home town, along with the NJ Jets training camp.

As to the WaPo article and DHS they state:

The Department of Homeland Security asked for more air marshals, more body scanners and more analysts, too, even though it can't find nearly enough qualified people to fill its intelligence unit now. Obama has said he will not freeze spending on national security, making it likely that those requests will be funded.

More and more and more and more ... made in China? Just a guess.

Books Serve a Purpose

In today's Washington Post two former FCC staff wrote a piece negative to the Texas book project and suggesting that books can be done away with.

The authors state:

But the debate misses a more important question: Why are we still using ink-on-paper textbooks, when digital technology offers a much better way?

Today, Johnny opens his math textbook and reads a chapter. He understands parts of it, but not all. He does the 10-question homework on paper and hands it in. Later, he gets the homework back and sees that he answered seven questions correctly.

Envision this: Johnny pulls up a math chapter on his e-reader.

Well I began to think just where were they going. Children today walk about like turtles with their backpacks loaded with tons of heavy grade paper filled with tons of pictures. I am glad I am old because I remember my books from High School, they had thin paper and few if any pictures. You did not need pictures for Latin or Greek, or even French. I still have my third year French book, it is about 3/4 inch thick and about 8" by 5" with a sturdy red cloth cover. I could carry all my books in one hand. In fat I really only needed my Latin book for translations, you had to have the Aeneid in front of you when called upon. I never had a book bag ever!

Thus when speaking of books, perhaps the problem is the publishers and their extortionary fees. You could place the questions on something called paper, you know that stuff you use to print out the stuff you download so you can walk around and memorize the stuff you need to regurgitate on the multiple choice exam!

The former FCC folks then say:

Replacing textbooks with e-readers would create a platform that lets students learn as much as they can, as fast as they can. The teacher is freed from drudgery, such as correcting homework, and given the tools to teach more effectively. Parents and school officials get data that help them guide the educational experience

So I guess the student looks at the computer, oops I mean e-reader, and then works thru the questions, answers them, gets immediate feedback, and then the teacher gets the result. Folks, how do we know the student really did this. I remember my third grade, doing all those pages in work books were a waste, I got the principle, so next. But I caught on that Mrs. Hill would walk down the aisle and see if you had put answers on each page, she never checked beyond the first page if it wall ass correct. So, solution, get the first page correct, then just fill in the rest with whatever! Made it thru the third grade doing one tenth the work. The trick worked at MIT as well. In fact MIT required you learn such tricks to get thru. The lesson Folks is that the teacher is supposed to see if YOU did the work. Or at least some of it. Your computer scheme is useless on that front. Mom, Dad, sister Jane, they could have done it.

The FCC Folks keep going:

Equipment such as the iPad and technological developments such as 4G wireless and massive computing power mean that the technology needed for such a platform is available today, at costs cheaper than providing material that Gutenberg could have produced.

For the sake of our children, and for the competitiveness of the nation, America ought to be aggressively developing a new category of educational content, delivered using high-speed Internet access.

Why in God's name do you need 4G! Ever heard of pencil and paper. It really works well. What are you trying to do...

You see I like books, I have 10,000 now and am proud of it. I have read most of them even. Just love the little critters. I also have disk drives filled with electronic stuff, love that sometimes even more so, I can index it and search it. My life could never see a world without Google Desktop! Where would I be without Desktop helping me find the right files.

But do I need 4G for arithmetic, geometry, calculus. No, in fact when I see my grad student using MATLAB I just shake my head. You see we in the old days without MATLAB had to obtain a feel for the solutions. We had to look at the boundary conditions and see if the solution made physical sense. No one cared about the elegant solution as much as the physical insight. MATLAB may very well have taken it away, as it seems to with the current generation of PhDs. Paper and pencil, back of the envelope, and not 4G were essential!

The Folks just did not stop with text books, they got into health care, I guess it helps to cover the bases:

And it's not just education. Broadband networks can create ecosystems for health care, such as through remote, in-home monitoring, that can improve patient well-being while lowering costs. In public safety, emergency alerts delivered through mobile devices can be far more targeted and effective than many current practices are in providing critical information in a disaster.

We commented on the EHR multiple times but the problem with patient care is not solved by electronics. Despite what economists are wont to say, via speculation most likely consistent with the profession, Type 2 Diabetes is most often caused by obesity, obesity by eating too much. Thus having an iPad and 4G will not push your fat belly away from the Big Mac! On the other hand perhaps we can monitor your every consumption of calories and report it to the food police.

Aside from these comments, let me reiterate. Books are good, they are friends, and they complement the electronic media and do not replace it. The school issue is a canard. Those big fat books do not belong there in the first place! In fact one would suspect that almost all course could be taught with paper handouts, and yes some computer reference material, and a few paper back books. You could reduce the book costs by orders of magnitude and improve the orthopedic health of the students!

But an iPad and 4G, the Folks from the FCC in my opinion do not have a clue.

Posner is Spot On

For those of us who have started and run businesses, unlike the economist academics who merely opine on what should be done, the recent blog by Posner is spot on,

Posner states:

Many of the President’s legislative initiatives, in particular the health reform law, the just-enacted financial regulatory reform law, and the credit card law of last year, have increased the uncertainty of the economic environment for business. These laws really haven’t settled anything; it will take years of regulatory implementation before their full impact can be determined. But in addition business has to deal with the unpredictable exercise by the President of an uncanalized extra-legal authority to bend business to his wishes. It is no wonder that the economic recovery appears to be progressing so slowly.

It is the massive uncertainty of costs, regulation, and almost fear of Washington and it abject hatred for the independent business person by the powers that be. It is as if the country is being run by a group of High School kids, the nerd group if you will, who somehow have seized control and are bullying everyone else around, but in reality the others are just not really paying any attention and are just waiting for the to pass through like a piece of bad meat.

Where is the Money Going?

I have taken the Treasury monthly reports for the past few years and asked where is the money going? It is interesting to do the following calculation.

1. Lay out the outlays for a few years. Remember inflation has not been that great.

2. Select a baseline year, I chose 2006.

3. Then by Department or expense line calculate the increase each year from the baseline.

4. Then sort from largest to smallest and plot. That is the above.

The conclusion:

1. Homeland Security has gone up almost $400 billion annually since 2006. The question is what has happened? The border has not used up much, they cut back on New York, so what are they spending money on!

2. DoD still sucked up $250 billion more than in 2006. Again what's up? The same wars, in fact we are winding down in Iraq. Why should it have exploded as well?

3. Ooops, HHS is up $350 billion! What is that, it exceeds any Medicaid costs.

4. Social Security is up $250 billion and it is 26% in five years, not really too bad but it makes one wonder.

Labor is up $200 billion, must be unemployment insurance, but remember we all paid into unemployment insurance, it is taken out of your pay and should pay for itself from the fund. So where is the fund?

Why is Agriculture increasing, and HUD, is that a loss in loans? And on and on. It would be nice if they could explain this. You see my prior calculation on unemployment said we were not getting just a small amount. The problem is the current administration has exploded spending. So we are down $200 billion in receipts but up $900 billion in expenses. Has anyone ever thought to cut back?

More on the Unemployment Analysis

I redid the above chart as follows:

1. It uses total unemployed now being about 14.5 million instead of just looking at the 27 week number. The average take is still $1500 per month per employee. The average unemployed before this mess was 7 million. This we have 7.5 million times $1500 per month or a gap of $11.25 B per month or $135 billion per year.

2. We see the blue line depicts what the added burden should have been and perhaps twice that due to unemployment insurance. The take per month pops down about the $12 billion we looked at earlier.

3. Yet the actual deficit is running $120 billion per month. That is 10 time what it would be due to the loss in jobs. This has to be the Stimulus money which seems to be having no effect if one were to ever believe Ms Romer.

4. Unemployment is actually much greater as we have shown before but even doubling the number gets you no where close, again the Stimulus.

EHR and Meaningful Use

The NEJM has published a short article by Blumenthal regarding Meaningful Use of EHRs.

I summarize the Table here with some comments below.
























































The key point is that the Government will be paying for this. Blumenthal states:

Through HITECH, the federal government will commit unprecedented resources to supporting the adoption and use of EHRs. It will make available incentive payments totaling up to $27 billion over 10 years, or as much as $44,000 (through Medicare) and $63,750 (through Medicaid) per clinician. This funding will provide important support to achieve liftoff for the creation of a nationwide system of EHRs.

My main concern is that anyone who has ever deployed so massive a system knows that in the commercial world it takes a long time, just look at ATMs and here we have a system with no feasibility trials, no discussions as to whether it is patient based, physician based, institution based, or Government based. It also raises a great number of privacy issues as well as legal challenges. Not that it is not a worthy and necessary effort, yet it is being done by the Government and academics, a paid of groups who have shown less than sterling levels of accomplishment in this area, namely systems design and deployment. Remember the motor vehicle office just in case.

Blumenthal concludes:

The meaningful use rule strikes a balance between acknowledging the urgency of adopting EHRs to improve our health care system and recognizing the challenges that adoption will pose to health care providers. The regulation must be both ambitious and achievable. Like an escalator, HITECH attempts to move the health system upward toward improved quality and effectiveness in health care. But the speed of ascent must be calibrated to reflect both the capacities of providers who face a multitude of real-world challenges and the maturity of the technology itself.

As part of this process, the DHHS is establishing a nationwide network of Regional Extension Centers to assist providers in adopting qualified EHRs and making meaningful use of them. The DHHS is committed to the support, collaboration, and ongoing learning that will mark our progress toward electronically connected, information-driven medical care. We hope that providers and consumers will now join us in the effort to assure that we make the best possible use of our most precious health care resource: information about the patients we serve.

There is the issue of architecture and the system engineering to achieve useful implementation and the continuing monitoring of performance. An independent group like IETF would have been much better than a Government group. The Extension Centers is a nice play on the Agricultural Extension Centers but this is not a yellowed lawn or poor corn crop we are talking about.

This may very well turn into one of the greatest lost opportunities ever all because someone wanted to score points quickly.

And We Think it is Costly Here

Germany and Switzerland have health care costs second to the US. In a recent Lancet article there is a discussion regarding the increases that workers will have in their contributions, yes all you union members, their contribution, yes all you New Jersey freeloaders, their own money!

Lancet states:

To deal with a deficit predicted to reach €11 billion by 2011 in the public health insurance fund, the governing centre-right coalition will raise individuals' contributions to the fund from 14·9% to 15·5% of gross pay. Employers will contribute 7·3% of the total 15·5%, with the insured contributing the rest. Controversially, the 7·3% employer's contribution will be capped from now on, but Germany's public health insurance providers will be free to demand unlimited top-up fees from individuals to cover what the health ministry described as inevitable future spending increases. Individuals asked to pay top-up fees greater than 2% of their gross pay might be eligible for government aid, depending on their level of income.

That means individuals contribute 8.2% of their gross pay to health care. The average US Family Income per US Census is about $53,000 in 2010. That means about $4,500 of salary to health care from the employees and about $3,800 from the employers for a total of $8,300 per family. In the US today we take out 1.5% for Medicare only and almost all union and Government workers pay zip! Not really, the rest of us pay for them in costs and taxes.

Perhaps Berwick should look at Germany, perhaps the whole administration should!

The Lancet piece ends as:

The portents are not good. Recent attempts to put greater price controls on drugs came to nothing in the face of aggressive lobbying from the pharmaceutical industry, while the present reforms represent the opposite of the cost-cutting measures that were promised before the most recent election in September last year. Political will, it seems, is in short supply.

Ration or not to Ration

In a recent article on The Health Care Blog the author states:

Suppose you were an emergency room physician on triage duty and chance forced you to choose between saving one of these two patients:

• (a) A 40-year-old college graduate or a 20-year-old high school dropout?
• (b) A 50-year-old scientist or a 30-year-old derelict?
• (c) A brain-damaged child or a healthy young adult?
• (d) A 40-year-old successful entrepreneur or a 30-year-old day laborer?
• (e) A 30-year-old concert pianist mother or a 20-year-old welfare mother?

His answer is:

I believe that most people, most of the time would choose to save the patient who is likely to make the greatest contribution to national well-being. That is, most people will allocate care in order to maximize national output broadly defined. (Broadly means, considering not just GDP, but also things that aren’t well measured by GDP, such as contributions to the arts and sciences.)

The problem is that no one gave him the authority to make that value judgment. In the ER the triage nurse makes decisions based on the criticality of the presentation, often cardiac problems, GSW and the like get first place. Now a GSW on a known criminal presented at the same time as a police officer, perhaps in the same incident even then take precedence often based on criticality.

But the new position of Comparative Clinical Effectiveness Czar, for Medicare, in the case of Dr Berwick could raise these questions to a higher plane of reality, personal reality.

Unemployment, the Derficit, and Where is the Money Going?

I read another note in Mankiw's blog this am which takes me in another direction. Foolishly I had been thinking that the loss of tax dollars from the unemployed was a major problem in deficit explosion. That is what you get when you fail to look at the numbers. So here goes:



















This is the chart that Mankiw used and he was taken from the St Louis FED but I redid it since I wanted to look at the numbers in detail. This is the total unemployed by month since the 1940s. Looks frightening but you really should normalize by the population. So I did that one below. This is unemployment for 27 weeks or more:



















But we are still not there because we should really look at percent unemployed as percent of the working population. Thus we again normalize this. Remember, however, that the Feds play all sorts of normalizing games here but alas we have corrected for this before but will not do so here for we have a different point to make. Looking at that subset we obtain the following:



















Now we can look a bit closer at this just in case over the most recent recession as we do below:



















So indeed we have great unemployment. But what does that mean on the deficit. So I went to the Treasury and got the receipts, deficits etc for the past few years. Here is what I looked at:

1. What was the tax per employee per month sent to the Treasury say in 2007. The answer was $1,500, not that much. Recall that this is gross tax and is not just income but corporate and all the other stuff, but the ratio is a reasonable metric since income tax accounts for about 70% and the others tag alone. I admit my wording is not economics acceptable but this is the way one looks at a problem.

2. Now I asked what was the average number unemployed during 2007 for the same 27 weeks or more, the answer was about 1.25 million and what was the monthly deficit in 2007, well about $52 billion. That was Iraq and the other stuff we are messing with. Again not a great economics description.

3. Now, if we have about $1.5 K per month per employees, and we had normally 1.25 million not working and not paying and we now have say 6.25 million not working more than 27 weeks , that is 5 million more at $1.25 K per month or $6.25 billion a month, or $80 billion more year. But we are way over that, why? But the total unemployment was 14 million and the baseline before that was about 7 million, so roughly we added 7 million to the unemployed at $1500 tax per we have a down turn of $10.5 billion a month or $125 billion per year.

Here is the data for the receipts in 2007 on a per employed person basis. See that they are flat. That is where we got the $1500 per month:



















Now look at the past two and a half years:



















They are declining. So not only do we have fewer people contributing but we have less per person of those contributing. A double hit, but still not enough to get the large hist we are seeing.

We then plot this deficit, estimated, real and variance and we do that below:



















So what does that leave us with?

Well the current administration is apparently going wild spending money. Further they seem to just outright falsify facts. Romer, the head of the CEA and the who whose words we track monthly just outright refused to admit that her numbers of January 11, 2009 were benchmarks before a Senate Committee. At what point do facts matter? Apparently not to Washington and especially not to economists.

The back of the envelope numbers seem to say $1500 lost taxes per month per employee and with an added 7 million unemployed we lose almost $125 billion per year. Large but it does not explain the shortfall. You do not get to a trillion and a half from that number. Add unemployment and it may double the number but you are still not there. Keep trying and trying and you must go line item by line item...where is my CFO and my staff when I need them.

When will they ever learn, when will they ever learn... thanks to Pete Seeger and friends ....