Inflation: A Look at the Baseline Portfolio

In December 2008 we assembled a Baseline Portfolio of stocks which we used to track market sentiment and inflation anticipations. The market all too often reflects anticipated moves. In view of the fact that interest rates are artificially low, and that we now believe that inflation is in the wings if not already starting, and that the other leading indicators show a 10% or plus inflation, we felt it worth a return to the Baseline.

Recall that the Baseline was assembled to reflect the following:

1. A 5.5% dividend payout which in December 2008 was a reasonable limited risk return.

2. The elements were broadly reflective of major elements of the economy.

3. None of the elements were considered as trendy.

4. We would take the position and do nothing thereafter while the current Administration was in place.

The first results are above. We see an annualized return of 30%. That is before any dividends. Why that return, are these companies doing so well, and the answer is not really. Perhaps in an environment anticipating zero inflation we would see say 8-10%. The added amount we believe reflects inflation. Current and anticipated. We argue that there is about a 10% contribution from current inflation plus an added 10% from anticipated.

The above is the same data but showing the return slightly differently. Note the flat return on an on going forward basis.

The above shows the daily returns. The problem we see here is the sudden increase, that we believe is anticipated high inflation rates. People are streaming in for protection.

This analysis thus anticipates a 10% inflation on a going forward basis.

GDP, Inflation, and Q1 2011

The Government has released the first estimate of Q1 2011 GDP and its details.

In summary it states:

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.8 percent in the first quarter, compared with an increase of 2.1 percent in the fourth. Excluding food and energy prices, the price index for gross domestic purchases increased 2.2 percent in the first quarter, compared with an increase of 1.1 percent in the fourth.

Real personal consumption expenditures increased 2.7 percent in the first quarter, compared with an increase of 4.0 percent in the fourth. Durable goods increased 10.6 percent, compared with an increase of 21.1 percent. Nondurable goods increased 2.1 percent, compared with an increase of 4.1 percent. Services increased 1.7 percent, compared with an increase of 1.5 percent.

Real nonresidential fixed investment increased 1.8 percent in the first quarter, compared with an increase of 7.7 percent in the fourth. Nonresidential structures decreased 21.7 percent, in contrast to an increase of 7.6 percent. Equipment and software increased 11.6 percent, compared with an increase of 7.7 percent. Real residential fixed investment decreased 4.1 percent, in contrast to an increase of 3.3 percent.

Real exports of goods and services increased 4.9 percent in the first quarter, compared with an increase of 8.6 percent in the fourth. Real imports of goods and services increased 4.4 percent, in contrast to a decrease of 12.6 percent.

Real federal government consumption expenditures and gross investment decreased 7.9 percent in the first quarter, compared with a decrease of 0.3 percent in the fourth. National defense decreased 11.7 percent, compared with a decrease of 2.2 percent. Nondefense increased 0.1 percent, compared with an increase of 3.7 percent. Real state and local government consumption expenditures and gross investment decreased 3.3 percent, compared with a decrease of 2.6 percent.

The change in real private inventories added 0.93 percentage point to the first-quarter change in real GDP after subtracting 3.42 percentage points from the fourth-quarter change. Private businesses increased inventories $43.8 billion in the first quarter, following increases of $16.2 billion in the fourth quarter and $121.4 billion in the third.

Now we can look at some of the details. Remember that GDP or Y is:

Y=C+G+I+Ex-Im

First, it is worth a quick look at the Monetary Base. It may be useful to read our paper from mid 2009 on the Monetary Base as a refresher. The FED has done QE1 which we see with TARP gave rise to the first bump up and then did QE2 with the second recent bump up. This is simply the printing of money.

Now we show M2 and the MB. Note that QE1 has leaked out into the M2 flow, the lag being almost a year. We see the start of QE1 in later 2008 and we see the rise in M2 a year later. Slow but there it is. We expect a similar rise in M2 after QE2. Remember that M2 will drive inflation.

Using classic economic theory we can calculate the inflation based upon GDP, M2 and the velocity. This is shown above. We see a 2% pa rate based upon the past data. Remember this is past and the spikes in M2 will be significant.

The above shows the details in this calculation. V has decreased a bit which means that people are really not turning their money over as quickly.

The above shows PPI and CPI. The major concern is PPI increases, a leading indicator. We show the present changes below.

The above is the worrisome chart. We see a steady rise in PPI and a 6 month moving average annualized rate of increase of 10%. Now the CPI is at 5% but it is a lagger. Our concern is that:

1. The GDP backward looking inflation of 2% is deceptive since the MB is lagging in terms of the M2 impact.

2. PPI is a leading indicator and quarter to quarter fluctuations are acceptable but 6 month moving averages with 100% increases are quite worrisome.

3. CPI is a lagger and we expect it lags the PPI by a year at times. This means that we can expect a 10% inflation rate in the summer of 2012.

Interesting.

Chronic Disease and Costs

There once was a time that people got sick and died. One of the major achievements of modern medicine is that we can now keep many of these people alive for a very long time and at a very high cost. Thus one of the drivers for the ever increasing health care costs is the ever increasing prevalence of chronic disease and the ever increasing ability of medicine to keep these people alive longer yet at an ever increasing cost. Yet these are preventable chronic diseases which for the most part are preventable as we had shown in our book on Health Care.

Science states today:

Diabetes, heart disease, and cancer now cause more deaths worldwide than all other diseases combined, according to the first global status report on noncommunicable diseases (NCDs) released at the WHO Global Forum in Moscow today. Communicable diseases such as malaria and AIDS are now outpaced by NCDs in every region except Africa. Chronic diseases, many of which are preventable, accounted for 63% of the 57 million deaths worldwide in 2008. Of those 36 million deaths, 80% occurred in low- or middle-income countries. 

Health leaders from around the world are continuing to meet in Moscow the rest of this week to prepare for the United Nations summit on NCDs in September. It will be only the second U.N. summit convened to address a health issue; the first, held in 2001, focused on AIDS and led to the creation of the Global Fund. 

The 100-page report aims to establish a baseline for the risks of NCDs, measure their prevalence, examine the progress various countries are making in dealing with NCDs, and outline what steps countries can take to both prevent and combat NCDs. 

"The good news," WHO Director-General Margaret Chan said in a press conference today, "is that these diseases are preventable." The report identified smoking, alcohol use, insufficient physical activity, and poor diet as the major risk factors. The report predicts that even African countries will suffer more deaths from NCDs by 2020 than from transmissible diseases and poverty-related issues such as malnutrition and maternal deaths. A 15% increase in mortality from NCDs is expected worldwide in the next decade. 

We have argued quantitatively that if we treat and prevent then we can almost half our current health care expenditures. One wonders why no one in the current Administration has raised this issue.

The Grocery Store

Boudreaux presents an excellent metaphor for Government control in describing what if the Government controlled grocery stores as compared to Government controlling schools. The problem is that was the way it was in the old Soviet Union.

I remember the late 70s in Moscow, February, 20 below in F, the dry crunch of snow, the limited lights, the empty streets, the smell of kerosene and Borstch coming from the compounds of apartments hidden behind the carriage entry ways, and of course the ever present KGB. The Magazin, the stores, with no signs, each carefully set at basement level, each assigned in a well planned manner to distributed the planned foods to the workers. Vodka always cheap, food always rather poor if you were truly just a worker.

I believe Boudreaux needs to see the reality of this view, for it is much worse than what he could imagine, it is like many NYC public schools!

Are They Both Wrong?

Between Ryan and Krugman we have two extremes. Ryan wants to throw folks on the market, even folks who may have been paying into Medicare for 40+ years, yes I stated working at 12 and paid SSI at 14! Child labor, no, NYC gave work permits to deliver newspapers and somehow at 14 I worked in an HMO in NY as an assistant to a group of physicians. Could never do that now but that is another story.

Back to Ryan, if I were 15 years or more younger then I would get Ryan Care, namely a check for something at some age most likely letter than 65 and told go fish, namely find an insurer. Krugman is spot on this time, try and find a policy. I can get auto insurance pretty simply because I have been doing it for more than half a century. It was also around before that. But old age health insurance, the frauds will be explosive, it will make the banking collapse look like Sunday School efforts. It just will not work and no matter how you try to fix it ab initio there will be a plethora of unintended consequences, just watch the current health care plan.

On the other hand the current Health Care Plan has the same problems, ACO, IFAB, etc etc, it just goes on. Government employees on top of Government employees, it will be the land of zombies.

Somewhere there must be a middle ground. I have made several detailed suggestions but no one in DC seems to even try such an approach. Pity.

Poverty, Chastity and Obedience

Boudreaux presents an interesting counter argument to Krugman. There may very well be a subtext here which could be missing. You see, we pay for attorneys, unless we are unable to and then the state pays for them. We do pay for physicians, unless the state decides it wants to intervene and then the state does pay. We do not have the option to pay for economists, the state chooses them and we are forced to pay for them. What if we could individually choose our economists. You see a bad lawyer, doctor, even an engineer may loose clients or patients but a bad economist may often get a tenure position at a politically correct institution, apparently not George Mason, they seem to put their necks out. What if Princeton, Harvard and even MIT had to?

You see as best I can figure out, you have to take courses from these elite, you cannot select say a different dermatologist because Doctor X is a hack. You cannot select a better lawyer or accountant. As a student you have been convinced that this degree has worth and they you pay based on others decisions. Economics somehow fails the test of the market.

Now for physicians. There is as best I remember no vow of poverty, chastity and obedience in medical school. There was a time when I was in a Franciscan Seminary, but I did not stay, had problems with being told what to do all the time, that obedience problem. So physicians do have to sell themselves. Some are real, well how shall I say it, real jerks, there, it is simple, they may or may not be good, but they are dullards. For many you just memorize the tests and pray you cram through, they are not the ones who asked why. But there is a true market for physicians.

A patient is not forced, at least not yet, to go to a specific physician. They have reputations, for better or worse. There are market decisions made by patients all the time. If a patient has cancer, perhaps they make the market decision of Memorial Sloan Kettering Cancer Center, a long drive, added costs, but most likely a better outcome. There is a decision there, an economic one, even if Krugman fails to see it.

Boudreaux states:

Admittedly, the politically engineered wedge separating the receipt of health-care services from the responsibility for paying for these services creates problems.  But the best way to address these problems is to remove the wedge rather than to arrogantly suggest that some mysterious transcendent force will more reliably look after individuals’ health-care needs than will those individuals themselves as they operate in markets in which insurers and physicians must compete for consumer dollars.

 I would argue that there are elements of economic decisions already in the equation. The problem all too often is the early stage of decisions that led to a life style choice which causes the disease state in the first place. Obesity, smoking, STDs, drinking to excess, all life style choices and all leading to chronic and possibly terminal diseases and costs. Why not charge for that externality, since as it is we all share the pain.

But back to the argument, physicians are not Franciscans, although some people think they should be. They are also economic animals, and with the costs of medical school, and the way funds are politically distributed to students the results may be less than favorable. Think public school teachers!

Medicare: Damned if You Do, Damned if You Don't

There are two threatening clouds for Medicare on the Horizon. One is Ryan and his voucher system. I will get to that shortly. The second is IPAB, the Independent Payment Advisory Board mandated by the new Health Care law.

First the Medicare Facts. The chart below based upon Medicare data shows the growth of enrollees and expenditures. Of the almost 48 million enrollees in 2009 about 20% of them are NOT over 65. Frankly they should not be in medicare. They use most of the funds. You see 70% of the Medicare expenditures are used by 10% of the enrollees, and that 20% just mentioned is 90% of that 10%! You see numbers really count.

 Now below we show the costs per enrollee per year. That is what Medicare pays, not what it really costs. Beware Government numbers. The annual growth rates are between 6% and 12%, the highest in 2007 for some unexplained reasons from Medicare. But we now spend $10,500 per annum per recipient. Remember that and remember the growth rate, Ryan does not seem to remember that, because he places that on the backs of those who already paid in!

 Now let us look at a simple example.

1. Let us take our simple example of a real worker, say a high school teacher, a police officer, not one of the highly paid Boston ones, but say a New York patrolman. They start work in say 1970 and retire in 2010. They start at say $12,000 pa after their Rookie Year and then work a real 40 years till 65. They get paid say $105,000 in their final year. Not unreasonable, unless of course you are in Boston and have packed your final year with excess overtime watching man holes.

2. Now assume you paid 3% of your pay each year to some fund, any fund other than the Government, and the fund invested in say Treasury bonds, notes, Ginnie Maes, whatever. The average return would be well in excess of 5% pa. So by 2010 you have $170,000 in that account.

3. Now you retire. You statistically have 12 years left to live. Yes, that is all, some will live longer some less, but you can bet that the average in this large group is 12.

4. Let us assume that health care can be capped at say 6% annual increase and that it starts at $12,000 pa. You can make book on the fact that on average it will cost $127,000 present value to pay for these expenses. Yes, that is $43,000 LESS than what you contributed. But it gets worse you see, since you are also paying $1,200 pa in addition, which is a present value at 65 of say $20,000. That means you are stiffed for not $43,000 but $63,000! Paul Ryan where are you!

5. Now along comes Ryan who proposes:

"When fully phased in, the average payment is $11,000 per year (the average amount Medicare currently spends per beneficiary), and is indexed for inflation by a blended rate of the CPI and the medical care component of the CPI. For affected beneficiaries, the payment replaces all components of the current Medicare Program (Medicare fee-for-service, Medicare Part B, Medicare Advantage, and Medicare Part D). Payment amounts are income-related and risk-adjusted. They also are partially geographically adjusted, with the geographic adjustment phasing out over time."

Why do we not get what we put in! The Ryan Plan clearly sets an instant gap! Medical costs are increasing and the increase if due highly to the people in Medicare who should not be. Do we kick them out? What of all that money we put in? Many left wing haters of the old argue that Medicare beneficiaries are getting a free ride, even some ersatz right wing folks, because some number cruncher took the lower decile of workers and showed they get a free ride. Yes, if you worked at McDonald's as a floor sweep for your entire career you would benefit. But if you did you most likely have other problems as well and may not make it 12 years!

 Now the current Health care Plan has a number of equally troubling issues the most troubling for Medicare is the IPAB. As stated in NEJM:

The ACA alters the landscape for control of federal health care spending by creating new institutions
intended to facilitate progress toward reform and by directly altering payment formulas for Medicare and Medicaid. The new Independent Payment Advisory Board (IPAB) and the Center for Medicare and Medicaid Innovation are charged, respectively, with stewardship of Medicare spending and piloting and diffusion of payment and delivery-system reforms. The IPAB is required to recommend
cost-saving measures for Medicare in years when spending growth exceeds a set target; the changes must be adopted unless equivalent alternatives are substituted or Congress intervenes.

As the CBO stated in December 2009:

The legislation would establish an Independent Payment Advisory Board, which would be required, under certain circumstances, to recommend changes to the Medicare program to limit the rate of growth in that program’s spending. Those recommendations would go into effect automatically unless blocked by subsequent legislative action. In its original estimate, CBO wrote that: “Such recommendations would be required if the Chief Actuary for the Medicare program projected that the program’s spending per beneficiary would grow more rapidly than a measure of inflation (the average of the growth rates of the consumer price index for medical services and the overall index for all urban consumers).” That statement is correct for fiscal years 2015 through 2019. After 2019, however, the threshold for Medicare spending growth that would trigger recommendations for spending reductions would be higher—specifically, the rate of increase in gross domestic product (GDP) per capita plus 1 percentage point.

With this corrected reading, savings from changes to the Medicare program (along with other changes to direct spending that are not associated directly with expanded insurance coverage) would increase at a rate that is between 10 percent and 15 percent per year during the 2020–2029 period, compared with a growth rate of nearly 15 percent reported in the initial estimate. The long-run budgetary effects of the other broad categories of the legislation are unchanged from the initial estimate. All told, CBO expects that the legislation, if enacted, would reduce federal budget deficits over the decade after 2019 relative to those projected under current law—with a total effect during that decade that is in a broad range between one-quarter percent and one-half percent of GDP. In comparison, the extrapolations in the initial estimate implied a reduction in deficits in the 2020–2029 period that would be in a broad range around one-half percent of GDP. The imprecision of these calculations reflects the even greater degree of uncertainty that attends to them, compared with CBO’s 10-year budget estimates. The expected reduction in deficits would represent a small share of the total deficits that would be likely to arise in that decade under current policies.

In effect the IPAB becomes a de facto rationer of health care for those on Medicare. They are NOT medical practitioners, they are politicians! Have we not learned anything over the past couple of years? Do we really want to leave choices for life saving procedures to those who could not find employment elsewhere?

Energy, NASA, the Academy, the Entrepreneur and the Future

Energy, NASA, the Academy, the Entrepreneur and the Future; what do these have in common? In talking with an old friend of mine whose early career was at NRL and then NASA, and who in many ways is the quintessential engineer, I remember the days on the late 50s and early 60s with the space race when NASA and DoD funded many graduate students and the management of these agencies were in many cases the folks who came out of WW II. They were dedicated devoted and driven. The early NASA teams, before Johnson turned it into a political hack factory, were very bright folks and could always find ways to solve engineering problems.

Now the energy problem is hard but doable. It is somewhat akin to separating uranium in 1942, many options, not knowing the best, but the science of separation was understood, it became a big chemical engineering issue. It got solved.

Now the energy problem has been driven by DoE, not one of the swiftest parts of the Federal Government, if I remember Carter had appointed a dentist at its head at one time. You see DoE rally makes bombs, the old Atomic Energy Commission, and it spends billions on other stuff, including electric cars which goes back to the early 70s at least. Nothing has ever come out of this mess. Unlike the early days of NASA, or the Manhattan Project, it became a Government institution with no well defined and targed goal.

But energy alternatives is well defined. NASA did work early on, the Academy is a place to start, and the Academy produced may of the entrepreneurs. You see I had a 64K memory computer on the Apollo capsule to integrate my star tracker into, yes 64K, not 64G, a million times less. That meant you really had to think.

From this amalgam of really smart people and a really good Government agency, we solved some really hard problems. Instead, today we send our entrepreneurs to Facebook, another web based sale approach, which may have the ability to provoke social change but the "value" of that change is problematic. After all people spend tons of time tweeting, facebooking, and the like. I got rid of my Facebook stuff, it was just too dumb. My MIT students had me sign up early on but after a few years I made a value judgement, it was negative. I relly dd not care what my nephew ate last night for dinner! Now I really like my nephew, but it just went too far.

So back to energy, leadership in Washington, focus, the right motivation, and I think we can make great progress. But first, move DoE to, well, West Virginia, south of Morgantown. Far enough away but close to CMU, WVU and a few others. In the coal belt, motivate folks. It has been done before, it can be done again.

An Interesting Cancer

Melanoma is an interesting cancer to study. First one could surmise based upon many studies that a primary caused of its incidence is the UV radiation which the skin is subjected to. Then there appears to be some genetic correlation. However there are families where one sibling was a lifeguard for five years and managed to get to seventy and where the other sibling dies at 24 and was never exposed to the sun.Thus the true causal relationship may still be some what up in the air.

However the genetic profiles of certain melanomas, after the fact, and their pathways, are starting to be identified. A recent NCI study states:

In one approach, the team searched for mutations that occurred in multiple patients. They found mutations in the gene BRAF, previously implicated in melanoma, and in 9 other genes. Mutations in a gene called TRRAP occurred at the same position in 6 separate people with melanoma.

To test whether TRRAP is an oncogene—a gene that can prevent normal cell death and cause cancer—the researchers disrupted TRRAP in melanoma cells. As expected for an oncogene, disruption of TRRAP caused an increase in cell death.

In another approach, the researchers looked for genes with a higher-than-expected mutation rate. Of the 16 identified genes, only BRAF had previously been implicated in melanoma. Another, GRIN2A, is one of the most highly mutated genes associated with melanoma to date. The identification of GRIN2A, along with other data from the study, implicate the glutamate signaling pathway in melanoma.

Thus the pathways are becoming a key element. As we have discussed before, there is some experimental evidence of a stem cell model for melanoma. Thus one would ask if the genetic markers are stem cell markets are otherwise. It will become critical to be able to look at markers on a cell by cell basis and not on a larger cross section. Also it will be essential to correlate this with the controlling pathways, again on a cell by cell basis. Large scale cell by cell analysis will be a key driver. Perhaps indicators of cell surface proteins may be a reasonable proxy. Just a thought.

A Financial Warning From China

China Daily sent out a note stating that China had formally sent a "warning" to the US regarding its failure to address its debt crisis, particularly regarding the recent change of status.

They state:

If investors start demanding higher returns for holding riskier US debt, the rise in bond yields could erode the value of Treasuries held in currency reserves and push borrowing costs up, putting the global economic recovery in jeopardy.

"We hope the US government will take responsible policies and measures to safeguard China's foreign exchange reserves, the world's biggest, rose by nearly $200 billion in the first quarter to $3.05 trillion. About two-thirds are estimated to be invested in dollars.

Beijing has repeatedly warned that loose US monetary policy threatens the dollar, but it has continued to accumulate dollar assets at the same time, adding about $260 billion of Treasury securities last year, according to US data.

Policymakers in Europe, where interest rates are rising and debt is being cut, have also voiced concern.

However Washington seems yo have a deaf ear. China is in the early stages of its own internal inflation and the ability to move forward in financing from the Treasury perspective may be pushed back to the FED merely printing dollars. We have gasoline up 75%, milk 33%, bread is up 25% and the list goes on. No inflation? Hardly! It is just that home sales prices are low, low demand, driven by back room money.

Great Interpretation of Two Views: The Future Of Medicare

Mankiw at Harvard presents a great view of the two visions of Medicare. Strange how the deficit has suddenly been focused on one issue, the old folks! Everyone seems to feel it is open season on this one issue, albeit an important one. "Kill grandma" may now become acceptable.

But why are we having such a deficit! Medicare was and is an insurance program and perhaps it should be run that way. Instead it is run like a piggy bank. The truth of the matter is that using January 2008 employment data we have a 12.8% unemployment from a 4.5% number and that is a lot less tax revenue. True fact, and the problem is not all Medicare.

So perhaps we reform Medicare; increase the 3% to 4% and move the eligibility date to a rolling 10 years before the average age of death of the recipients, increase the monthly fee to be 3% of the gross annual income number and use a 30% deductible. That not only save the program but makes money. Perhaps we have a non-Governmental agency do this. Then again such a thought is from an engineer not an economist, one who has started and run companies, not played politics. By the way, China is still  run by us engineers!

Then there is DoD and the rest of the Washington mess. Just look at DoE, Education, DoT, and the list goes on! Why pick on Medicare? Because they think the old people will just die. Watch out, they may live a long time, and remember!

Provenge, Prostate Cancer and Costs

There is a brief article on Provenge and its use for prostate cancer in NEJM. Now Provenge is a new and supposedly targeted drug for metastatic androgen resistance prostate cancer. As NEJM states:

...sipuleucel-T (Provenge), a novel cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic, metastatic, castration-resistant (hormone-refractory) prostate cancer The pivotal clinical trial demonstrated the benefits of sipuleucel-T: an increase in median survival of 4.1 months as compared with placebo and fewer side effects than occur with docetaxel. Priced at $31,000 per treatment, with a usual course of three treatments, sipuleucel-T is one of the most expensive cancer therapies ever to hit the marketplace.

 Yes that is $30,000 per treatment! The question is then should one have Medicare pay for this for all AR PCa patients. It does not really cure and has a limited ability to improve quality of life and survival as best as one can ascertain. This is a question which goes to the heart of the health care debate.

This is a difficult question, since there are many tens of thousands of men in that state at any one time. At roughly $100,000 per patient per year, the number is in the billions, and the benefit is questionable. Men should be able to choose, but at what price, what should Medicare cover? Worth a discussion.

Man and Bear

There is a note about the polar bear Knut in today's NY Times. Now let me state at the outset that I know bears. I saw the polar bears at Churchill, the very same who consumed some prior humans I believe and there is of course Bernie Bear, a 400 pound black bear who lives behind our home in New Hampshire. Bernie comes and goes, and at times sits at the edge of the driveway to greet us as we arrive. Man and bear have a strong if at time distant affinity. Bears walk on two feet, frequently, and are often at the top of the food chain, humans included.

The Times article seems to state the coolness and aloofness of the Berlin Zoo head, well for those of us who have worked in Germany that is no surprise. The best oxymoron is German humor, and the second best is German sympathy. Just does not exist in my experience. Russian are "great bears", bolshoi medveds, we Americans respect our bears, Ms. Palin included, yet I never met an Alaskan bear or any brown bear for that matter.

Bears are wonderful creatures at a distance. They are fearless, intelligent, and respectful. Perhaps the German zoo should take notice.

More Confusion on Medicare

David Brooks has a piece on the Ryan plan and in it he addresses Medicare. I had commented earlier that when he made similar quotes that they were at best irrelevant and at worst fallacious. He states:

Second, we can’t let the oldsters get off scot-free. As my colleague David Leonhardt reported in The Times, two 56-years-olds with average earnings will pay about $140,000 in dedicated Medicare taxes over their lifetimes. They will receive about $430,000 in benefits. This is an immoral imposition on future generations. The Ryan budget wouldn’t touch this generation, but a bipartisan budget deal should ask middle-class and affluent boomers to make a sacrifice for their country. Slow the growth in health care benefits now and dedicate that money to paying down the debt and investing in the young. 

The problem is that Leonhardt is also wrong. For he states:

Mr. Steuerle — along with his Urban Institute colleague Stephanie Rennane — has done some of the most careful work comparing Medicare taxes and benefits. They added up all the taxes people at different points on the income spectrum would pay over their working lives and then translated these amounts into a single sum, expressed in today’s dollars. Mr. Steuerle and Ms. Rennane likewise added up the value of Medicare benefits (net of premiums) that men and women could expect to receive...Their results show that no cohort of Americans, with the possible exception of the very affluent, pays enough Medicare taxes and premiums to cover their costs. The gap is growing over time, too....Two married 66-year-olds with roughly average earnings over their lives will end up paying about $110,000 in dedicated Medicare taxes through the payroll tax, including the portion their employers pay. They can expect to receive about $340,000 in benefits. Two average-earning 56-year-olds will pay about $140,000 and get back about $430,000 in benefits. 

The fact is that if one looks at the Urban Institute Study,  and then compare it to our analysis of a couple of years ago, one can note:

1. We look at the distribution of incomes and not at the lowest level. Their study looks at a 65 year old whose salary equals the average of all workers. In reality the average salary may be at the age of 32 not 65 and when the adult reaches 65 the salary has increased often two fold.

2. One must look at Medicare across all salary levels. Not just one low value.

3. The costs stated in the study are wrong by more than a factor of 2! Look at our study then look at the real data. I have no idea where they got their numbers.

4. They also fail to note that Medicare participants pay a substantial amount, namely $1,200 per year and then 20% or more plus drugs if not in Part D.

The study is flawed to the extreme by not dealing with the full distribution of the population. If one looks at our analysis one sees we have taken into account all of the factors. On average the contributors never get back what they put in!

Now why did Leonhardt and Brooks not catch that flaw, well because the answer plays into their theme. It is a shame that writers who opine on things which they do not understand do so with almost total ignorance of the facts. Pity the Press is so poor.

Vouchers and Health Care

Somehow or the other the current Ryan proposal for eliminating Medicare is akin to one of the structures proposed by the financial whiz kinds in the last decade. In a NEJM article by Aaron the author states:

Under the House Budget Committee plan: (i) Traditional Medicare would end for everyone turning 65 in 2022 or later. (ii) Newly eligible Americans would receive a voucher worth $8,000 on average. As people aged, their vouchers would be increased to reflect increasing use of health care. The value of all vouchers would be indexed to consumer prices. Vouchers for the 8% of enrollees with the highest incomes would be reduced. (iii) Low-income Medicare beneficiaries (“dual eligibles”) would cease to be covered by Medicaid. Instead, they would get a medical savings account equal to $7,800 (also indexed to track consumer prices). (iv) The rest of Medicaid would become a block grant, also indexed to consumer prices.The plan would repeal all major elements of the Affordable Care Act (ACA), including subsidies, Medicaid extensions, insurance exchanges, and requirements that businesses provide insurance and that individuals buy it.

Now this is akin to selling options where the Government hedges itself. Now if we look at people, they fall into the following categories related to health care usage:

1. Young and Unfortunate: This would be the young who come down with some deadly disease like leukemia or who have some severe disability. Unfortunate and costly but not really that many and society has agreed to help them.

2. Middle Aged Bad Luck: These are the group who are mid life and are struck with say breast cancer. Bad genes, bad luck, whatever, but they did nothing that got them there and they are hit in the middle of their lives. Again we agree to help.

3. Life Style Choosers: These are the drinkers, smokers, eaters, and other life style based diseases. Type 2 Diabetes and Obesity account for almost 15% of this total. The problem here is that their costs remain. Unlike the first two who often die or are healed, this group takes a long time to die and their costs grow greater each year as do their numbers. Somehow this should be an issue but is not.

4. Older and Unlucky: This is the group with Parkinson's, and other debilitating diseases of old age as well as cancers hitting before 75. They may have breast, colon, pancreatic, kidney, and other cancers. Some may be mitigated against others not so. Alzheimer's disease is in this batch as well. This is the target for Medicare. It is catastrophic.

5. The Real Old Folks: It is often the case that when one gets to say 75 with no disease then there is a good chance you will hit 90 and drop of a plain old heart attack or the like. But if somehow we keep them away from heart attacks then perhaps they die of a cancer, more costly. Also more painful. This group may very well be kept off of the armory of blood thinners and pacemakers, and just let nature take its course. This of course is a personal choice but it should be an informed personal choice.

Thus Medicare is really targeted at those who get old and are unlucky. It has been expanded to the Life Style Choosers because we often can keep them alive. The drinker, the smoker, the obese individual, we can pump them up and treat their symptoms and it adds to the costs. In addition we have a group who want every little discomfort remedied. Yet at what cost?

Aaron presents the argument in a superb manner. Medicare serves a purpose. It has gotten out of control, but so has all health care. Vouchers are rant with problems. The solution in my opinion is not a voucher.

Great Cartoon

From xkcd we have the following:

Perhaps this also typifies the glut of economic verbiage! In a sense this tells a great story. We should all take it to heart.

Predatory Pricing: It Exists

Prof Boudreaux has a post regarding predatory pricing, and a prior post apparently rejecting its existence, if I read it correctly. He states:

A key to understanding the economics of predatory pricing is to realize that the predator must lose more money than do any of its prey. The reason is that the predator can force the preys’ prices down only by taking away their customers. And to take away the preys’ customers requires that the predator expand its sales during the price war. In contrast, the prey are free to reduce their sales to levels that minimize (if not eliminate) their losses.

How, then, can predation be a lucrative strategy? The answer must be that the predator is better able than the prey to absorb price-war losses. Fortunately for consumers, predators are not better able to absorb such losses. In fact, any prey that is as efficient as the predator has just as much access to funding for the price war as does the predator....

But suppose that the observed low prices really aren’t predatory; suppose, instead, that these prices reflect the price-cutter’s superior efficiency. In this case, a mistaken belief by private investors that these low prices are predatory does no social harm. Investors lend money to a firm that doesn’t deserve the funds, while the genuinely more efficient firm keeps its prices low. Consumers never suffer. And eventually the mistake is revealed because the less-efficient firm cannot compete over the long haul with the more-efficient price cutter.

Now I see this as a rejection of predatory pricing as a social evil. Let me give a real counter example. In 2001 I was selling, amongst other services, VOIP into Poland. Unbeknown to me a second international carrier, a state carrier, was also selling into Poland. Week by week the prices dropped and week by week we matched it, until we saw that we could no longer do so. We actually had the lowest cost structure and we even went further than we should have to retain our market, but the Board said stop. Good thing, for our competitor just kept going, and against himself!

Two years later I meet the head of the same company and over lunch he recounts the tale. Allegedly he got the job because his predecessor lost $100 million on this predatory pricing scheme.

Yet what of the consumer? Both carriers were out of the market replaced by the over bloated incumbent. Prices rose, the public had no alternative, and predatory pricing had a negative effect.

Just a thought from the real world. Oh, and telecom is filled with this stuff.

The Ryan Plan, Health Care. and Which Way to Go

Rep Ryan has detailed at a high level his plan. He states:

In 2010, health-care costs rose by over 7 percent, compared to around 1 percent for all other goods and services.

This is putting enormous pressure on Medicare and Medicaid. But these programs aren’t just affected  by rapidly rising health-care costs – they are actually a key driver of inflation in the  health-care sector. Nearly 50 cents of every dollar spent on health care in this country is spent  by federal, state or local government. Because of the design and structure of these programs, much  of the government’s money gets wasted – and shows up as inflation in the cost of care.

Everyone who is on Medicare or knows someone on Medicare has stories about waste in the system – unnecessary tests, redundant treatments, and the cost in both time and money of mistaken billings  and misplaced records.This kind of waste is inevitable in a top-down, government-run system, and it’s a big  reason that costs have spiraled out of control.

Yes, these costs are rising as we had examined two years ago. The reasons are several fold. First  people take poor care of themselves and when the reach Medicare age they have already placed themselves at risk. Second we can do a great deal more. Third people are living longer, albeit with increased costly care. He continues:


Real reform – especially with respect to Medicare – must eliminate this unsustainable waste and reduce inefficiencies and costs by giving beneficiaries themselves more control over their own  health-care benefits and decisions.

Waste has always been a factor focused upon as a cost reduction. However that can and should be done in the system as it stands. It does not require a another new law.

He does make a useful point regarding the new health care bill:

Nevertheless, even if these efforts worked, the tradeoff in terms of lost freedom would be completely unacceptable. This approach would transform the relationship between citizen and state, leaving individuals helplessly dependent on their government. On a more practical level, it would substantially diminish quality of and access to care. There is no way for “experts” in Washington to know more  about the health care needs of individual Americans than those individuals and their doctors know.

Namely having some GS9 decide on your health care will not work. Yet the counter side is that you as an individual have a duty to refrain from personal choices which put you at risk and cost society. How to do that is the key.

His proposal in brief is:

• Save Medicare for current and future generations while making no changes for those in and near retirement. For younger workers, when they reach eligibility, Medicare will provide a Medicare payment and a list of guaranteed coverage options from which recipients can choose a plan that best suits their needs. These future Medicare beneficiaries will be able to choose a plan the same way members of Congress do. Medicare will provide additional assistance for lower-income beneficiaries and those with greater health risks.

• Ensure that the cost of frivolous litigation is not passed on to consumers in the form of higher health-care premiums by capping non-economic damages in medical liability lawsuits.

• Stop the raid on the Medicare trust fund that was going to be used to pay for the new health care law. Any current-law Medicare savings must go to saving Medicare, not financing the creation of new open-ended health-care entitlements.

• Fix the Medicare physician payment formula for the next ten years so that Medicare beneficiaries continue to have access to health care.

The first is in essence the elimination of Medicare. What he suggests has great risks in that it will throw a mass of society onto the health care system at their most vulnerable time in life. No company offers retirement health insurance, almost none, except Government and union workers. That means the people creating the wealth will be subsidizing those consuming the wealth. Second, as we have written, it is not clear that tort relief saves a great deal. As to the Medicare Trust fund, it has been robbed! As we have shown time and again if one has a reasonable job in life one contributes more to Medicare than one receives! But Congress took the money. Finally the fixing the reimbursement formula is essential.

Should those on Medicare be in fear? Not for the short run, but now that the shot has been sent across the bow they must be wary.

A Very Strange Shutdown

The impending shut down, if it happens, has set NIH a twitter. In Science they states:

Although government shutdowns are not uncommon, most recently in late 1995 and early 1996, the culture seems different this time around. While in the past many people, especially postdocs, came into work and were eventually paid, this time, "the impression I have is that you will have to show you're on some list" to enter a building, one lab chief said. Another investigator was told there will be fines for violators. This time, NIH staff members aren't even supposed to log into e-mail from home, a source said.  

This means that some where from the top down, they plan on a hard ball tactic. Professionals are not even allowed email! Typically good scientists are really thinking all the time. This is not the FCC or the Department of the Interior. This is NIH.

One should ask what is going on?

China and Inflation

China has raised its rates again. This is the fourth time in a year and it is a clear indication of strong inflationary pressure. As China Daily states:

After the hikes, the one-year deposit interest rate will climb to 3.25 percent while that of the one-year loan interest rate will reach 6.31 percent. Analysts said the move indicated that the central bank was enhancing efforts to ease stubborn consumer price increases. The consumer price index (CPI), a main gauge of China's inflation, jumped 4.9 percent in February from a year earlier, exceeding the government's full-year target of 4 percent. Food prices, which account for about one-third in the basket of goods used to calculate China's CPI, surged by 11 percent in February from a year ago.

There is clearly strong upward pressure in China and this will most likely get reflected in US prices, having the effect of a strong inflationary trend.

This is worth watching closely.

The Ryan Replacement for Medicare

Now I have been spending the greater part of the past two years plus commenting one way or another on the health care policy mess that Washington has created. As of today Rep Ryan has provided a succinct summary of what he proposes in the WSJ.

He states in part:

This starts with saving Medicare. The open-ended, blank-check nature of the Medicare subsidy threatens the solvency of this critical program and creates inexcusable levels of waste.... its reforms will not affect those in or near retirement in any way....Starting in 2022, new Medicare beneficiaries will be enrolled in the same kind of health-care program that members of Congress enjoy. Future Medicare recipients will be able to choose a plan that works best for them from a list of guaranteed coverage options. This is not a voucher program but rather a premium-support model. A Medicare premium-support payment would be paid, by Medicare, to the plan chosen by the beneficiary, subsidizing its cost....In addition, Medicare will provide increased assistance for lower- income beneficiaries and those with greater health risks. Reform that empowers individuals—with more help for the poor and the sick—will guarantee that Medicare can fulfill the promise of health security for America's seniors.

 Now there are a few problems:

1. If you are say near 50, as my children are, you have been paying into this Medicare fund for almost 30 years. Does that mean you will stop, or that you will not see an increase but will see a different benefit.

2. What happens to the pre-existing condition concern. By the time a person reaches 65-70 there may very well be a few pre-existing conditions making the cost for this group quite high. How does he deal with this issue?

3. What about all the restructuring underway under the new health care plans such as ACOs and the like.

4. What price private insurance and what coverage. What is the out of pocket. The new health care plan and the old Medicare drove carriers for retired people out of the market. Who will drive them back in.

The Congressman should be aware of the real issues here:

1. Many people have life style diseases, developed over many years of drinking, smoking, poor health care of their own choice.

2. Yet there are many with just a bad hand of genes. They get prostate, breast, colon, cancers at 60+, not their fault. How do we balance that risk?

3. We always need the 800 pound gorilla, and Medicare was that, at times a bit too heavy and getting worse. Yet we all remember HMOs. They were universally despised.

4. An increase in Medicare tax would cover everything if combined with a life style tax. We worked out the numbers well over a year ago. It would always be better for marginal changes for when there is a massive realignment many fall through the cracks.

5. Catastrophic coverage is essential, and waiting till you are 65+ is not the time to get that. Would the Government do that function, as say they do for flood insurance?

Ryan makes an interesting proposal but it really needs socializing. At least some one is doing something. Now if he can keep it below 2,000+ pages we are possibly moving forward.

Looking at the Employment Data

First we look at change from 2005, April specifically. Note that we have an increase in percent of Government workers and a dramatic increase in Education and Health Care. The latter being the greatest increase. Key sectors such as construction and manufacturing are still down. This represents a negative shift from production to Government operated employment. This means we are taking from our long term growth potential and putting an ever growing burden on future generations.

This is the month by month change by major sector. Despite what the press seems to say the Government supported sectors rose significantly as did manufacturing.

The percent change from 2005 is shown above and this rearticulates our concern. Just look at the above sectors and those are the value producing sectors.

Now for actual unemployment we use what we have been using namely total population and actual growth. Above is the total population growth and the total non farm seasonally adjusted employment. It is upticking but the employment base is still growing at a faster rate!

This is the unemployment numbers and what is would be if we kept the 2008 rate of employment as a percent of the population. Note we are still peaking at 12.2% unemployment based on the 2008 base numbers. There is a slight trending downward but not as provided by DoL.

The above is the detailed data we use for this analysis.

In summary unemployment is fundamentally stuck at over 12% per 2008 base numbers. DoL manages to reduce the base by assuming that those who have not found work are considered no longer looking. It is a nice trick but baseless.

An Interesting Technique for Cancer Cell Characterization

One of the major problems in determining the aggressive behavior of cancer cells is the genetic makeup of each separate cell. Perhaps this is a way to determine what the cancer stem cell is. A team from Cold Spring Harbor Labs has published a paper in Nature doing this for breast cancer cells.

They state:

Genomic analysis provides insights into the role of copy number variation in disease, but most methods are not designed to resolve mixed populations of cells. In tumours, where genetic heterogeneity is common^, very important information may be lost that would be useful for reconstructing evolutionary history. Here we show that with flow-sorted nuclei, whole genome amplification and next generation sequencing we can accurately quantify genomic copy number within an individual nucleus. We apply single-nucleus sequencing to investigate tumour population structure and evolution in two human breast cancer cases. Analysis of 100 single cells from a polygenomic tumour revealed three distinct clonal subpopulations that probably represent sequential clonal expansions. Additional analysis of 100 single cells from a monogenomic primary tumour and its liver metastasis indicated that a single clonal expansion formed the primary tumour and seeded the metastasis. In both primary tumours, we also identified an unexpectedly abundant subpopulation of genetically diverse ‘pseudodiploid’ cells that do not travel to the metastatic site. In contrast to gradual models of tumour progression, our data indicate that tumours grow by punctuated clonal expansions with few persistent intermediates.

We believe that this is worth following.

The issues we look at are:

1. Isolation of single cells.

2. Non destructive measurements and identification of cell surface markers, perhaps via NMR techniques.

3. Destructive marking of specific gene segments.

4. Non destructive temporal analyses.

5. Development and identification of pathway dynamics.

US Copyright Office: Slower Than a Snail!

If one wants to truly understand the gross sluggishness of the US Government the best place to look is the US Copyright Office. Now I decided to copyright something with these folks almost a half a year ago. This is all on line and you download a copy of what you want. Not as if it is necessary but it is a worthwhile experiment. Well almost 6 months and counting and nothing, zero, zip! What do they have to do, translate it to ancient Greek! These are the very same people we want to take over health care! By the by, we actually pay them to be slow! If anyone wants to see what the Government is really like try this out some time!

ACOs: The Last Move

Dr. Berwick, the interim appointee at CMS, has written about his accomplishment of issuing the rules for the ACOs, the Accountable Care Organizations. The NEJM article states:

Section 3022 of the Affordable Care Act (ACA) establishes the Medicare Shared Savings Program for accountable care organizations (ACOs) as a potential solution.1 The creation of ACOs is one of the first delivery-reform initiatives that will be implemented under the ACA. Its purpose is to foster change in patient care so as to accelerate progress toward a three-part aim: better care for individuals, better health for populations, and slower growth in costs through improvements in care. Under the law, an ACO will assume responsibility for the care of a clearly defined population of Medicare beneficiaries attributed to it on the basis of their patterns of use of primary care. If an ACO succeeds in both delivering high-quality care and reducing the cost of that care to a level below what would otherwise have been expected, it will share in the Medicare savings it achieves.

On March 31, 2011, the Department of Health and Human Services took a major step toward establishing ACOs by issuing a notice of proposed rule-making that will define how physicians, hospitals, and other key constituents can adopt this new organizational form. The issuing of the proposed rule follows months of obtaining informal and formal input from throughout the health care delivery system, but at this point the rule is only a proposal. The Centers for Medicare and Medicaid Services (CMS) will carefully review the comments we receive in response to the proposed rule before issuing a final rule later this year.

The ACOs are in effect hospital owned and controlled care organizations. For Berwick in my opinion, who allegedly was formerly related to one of the largest Massachusetts health care conglomerate this plan may be a God send. It drives the independent physician out of business while removing choice totally from the Medicare patient.

Let me explain why. First if a patient has say multiple problems, say prostate cancer, heart issues and say a tendency towards say melanoma, he will be "serviced" by a hospital based ACO. An all service vehicle. So if the melanoma can best be served by a regional cancer hospital, too bad, he is stuck with the ACO. The ACOs will in my opinion be the HMOs of the 1990s. CMS will in my opinion most likely use its heavy hand to drive those in Medicare into the ACOs.

The good doctor states:

Accountable care is not a panacea but rather one of a number of complementary initiatives chartered by the ACA to help achieve the three-part goal of lower costs, improved care, and better health. Other delivery-reform efforts such as expanded use of medical homes, bundled payments, value-based purchasing, adoption of information technology, and payment reforms are under way or under consideration. A critical success factor for ACOs will be their effective integration with these other efforts.

Yes it is not a panacea, it is in my opinion a way to recreate HMOs and even worse drive them into the hands of the mega hospitals! It is just one element of cost containment and rationing. Why rationing, because the ACO will become the gatekeeper. If the patient has the knowledge and wisdom to work their way through the system, the way will now in my opinion most likely be blocked with the developing Berwick rules.