Where is Keynes?

Britain is moving to massive spending cuts to get their house in order. They seem to emulating Canada. The Telegraph states:

George Osborne is planning to eradicate Britain's budget deficit by emulating Canada, where borrowing was brought under control within just three years by spending cuts of 20 per cent.

The Chancellor will announce a "once-in-a-generation" revolution in public spending inspired by Canada in the mid-1990s, when the government turned a budget deficit of nine per cent of GDP into a surplus.

Canada brought public spending under control guided by the principle that people should ask "what needs to be done by government and what we can afford to do".

The Guardian also makes its statement on this step:

David Cameron will warn tomorrow that Britain's "whole way of life" will be disrupted for years by the most drastic public spending cuts in a generation. The cuts, he will say, will have an impact on Britain's entire population.

In his most gloomy remarks since taking office, the prime minister will declare that Britain's public finances are worse than expected and are forcing him to take "momentous decisions".

Cameron will say: "How we deal with these things will affect our economy, our society – indeed our whole way of life. The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades to come."

On Tuesday George Osborne, the chancellor, will set out the first steps towards what Nick Clegg described last year as "savage" spending cuts when he outlines a framework for an autumn spending review that will introduce department-by-department cost savings.

The most radical plan will involve importing a Canadian-style "star chamber" in which members of the cabinet will be forced to justify their budgets in front of a group of ministerial and civil service heavyweights.

This would appear to fly in the face of Keynes, on his home territory, something akin to a prophet in his own land. If it worked in Canada and if the Brits are doing it why are we not even considering it.

Obesity, Diabetes, Big Words, and Confusion

Ah, the Harvard campus, no fat folks there I would presume. This is mid day in February, middle of class periods, and not a soul out exercising.

But I digress, you see I have always been a supporter of the carb tax as a way to reimburse those of us who have been careful, and avoid the perils of excess liposity. Let me reiterate:

1. Obesity is the primary cause of Type II Diabetes. True fact, you see Diabetes is a carbohydrate metabolism disorder. Type I is a result of an immune system attack and unavoidable, Type II is a personal choice issue, you eat too much.

2. Type II Diabetes causes a plethora of diseases, all chronic, and costs over $300 billion a year in 2010.

3. Obesity is a disease of choice, you choose the carbs, and like many other such diseases, it has costs, well defined costs, and these costs can be quantified on a per carb basis. Recall 3500 kcal per pound, and we can see that 30 gm carb yiels 200 kcal. Thus 600 gm carbs is 1 pound.

4. We can now propose a carb tax which says that if your BMI is 2000 kcal per day, this means 300 gm of carbs, and anything is excess should be pro rated to the $300 billion costs. Then the money raised should pay for the costs. Simple.

This is a real and simple example of an externality. It is akin to the Coase example of the railroad and the farmer. A fat person is fat because they eat too much. The major cause of that is carbs, not fats or proteins. The fat person chooses to do this act, like the alcoholic, cigarette smoker, drug addict, person afflicted with a sexually transmitted disease, these are all diseases of choice. They have well determined costs. In the current system the costs are distributed to those who choose not to behave as such.

In a fair system these people should be burdened with the costs of their behavior. There is a one to one quantitative nexus and thus there is a basis for a remedy. In a Coasian sense perhaps we should just create a class action suit and seek the remedy out of court. Yet the transaction costs are too high and thus it is a Governmental issue.

Now some economists have compared such management of externalities with the Pigou Tax, and have applied it to CO2 emissions. First, people do not always choose to emit. There is no alternative. People choose to eat, there is a safe and health alternative, stop. You cannot say that to the poor person driving to work. What would you say, walk, stop working, find a new job in walking distance? How ignorant are you who proposes such a solution. Would such a person walk from Wellesley to Cambridge, doubtful!

Now today in the NY Times the good Harvard based Prof Mankiw, a strong proponent of the Pigou Tax, that confiscatory tax which I have never understood, takes shots at the carb tax! You cannot make this logic up.

He, in my opinion, in less than a fully informed manner states:

There is, however, an altogether different argument for these taxes: that when someone consumes such goods, he does impose a negative externality — on the future version of himself. In other words, the person today enjoys the consumption, but the person tomorrow and every day after pays the price of increased risk of illness.

This raises an intriguing question: To what extent should we view the future versions of ourselves as different people from ourselves today?

To be sure, most parents have no trouble restricting a child’s decisions on the grounds that doing so is in the young person’s best interest. Few teenagers are farsighted enough to fully incorporate the interests of their future selves when making decisions. As parents, we hope that someday our grown-up children will be grateful for our current restrictions on their behavior.

But people do not suddenly mature at the age of 18, when society deems us “adults.” There is always an adolescent lurking inside us, feeling the pull of instant gratification and too easily ignoring the long-run effects of our decisions. Taxes on items with short-run benefits and long-run costs tell our current selves to take into account the welfare of our future selves.

IF this is indeed the best argument for “sin” taxes, as I believe it is, we are led to vexing questions of political philosophy: To what extent should we use the power of the state to protect us from ourselves? If we go down that route, where do we stop?

Taxing soda may encourage better nutrition and benefit our future selves. But so could taxing candy, ice cream and fried foods. Subsidizing broccoli, gym memberships and dental floss comes next. Taxing mindless television shows and subsidizing serious literature cannot be far behind.

No Professor, this is not protecting us from ourselves. This is charging for the costs that a person will incur for their choice of behavior. Plain and simple. Who cares about mindless shows. This is almost 12% of the total health care costs.

You are the one wanting to tax gasoline for the poor fellow trying to get from Milford, NH to his job in Norwood, MA.

He cannot afford a home in Norwood so he drives each day five hours. Or the guy in Allentown, PA who drives to Secaucus NJ to get the train to New York City. The good Professor apparently does not give a tinker's dam in my opinion for the guy creating value but screams for the porker getting a well definable free ride on the health care system.

This is a simple back of the envelope calculation, real simple. It is what we engineers do each and every day. You macro-economists cannot do it once in your lives, it appears.

What amazed me is that Mankiw, if I interpret him correctly, seems to reason as follows:

1. The Pigou tax is a valuable too to regulate human behavior.

2. The use of gasoline for driving generates CO2 and that is bad behavior.

3. Tax gasoline and that should reduce bad behavior.

Thus far so good, except, the consumer has no replacement for gasoline and the tax is used to pay the Government and as such takes money from the economy which could be best put to use generating new jobs. We all know the Government is a poor allocator of resources.

Now we look at what I believe Mankiw is saying about carbs. He seems to state that eating them and the consequences, obesity, Type II Diabetes and the sequellae are personal choices.

Yet again my logic:

1. Carbs cause Type II Diabetes

2. Type II Diabetes has a cost which is not paid for gets allocated to everyone and there is no incentive to reduce the created load on health care. The fatty gets a free ride, almost.

3. If one taxed carbs by a formula which collected the costs and then redistributed them to pay for the costs incurred, then there is no free ride. choice remains in the system, and health care for those complying is reduced accordingly.

My logic says vote against Pigou because it removes investment from the system and directly allocate costs to those who incur them. Simple, no?

Non Government Space Vehicles

Al Fin has published a brief blog about the number of new start up companies in commercial spacecraft, taking over where it appears that NASA has left off.

A few weeks ago I had a conversation with MIT Aero Prof. Annalisa Weigel, who is doing an interesting study of the Millennials in the Aero field. I asked here what are the top career goals for the grads and I was surprised, shocked in fact.

A short while ago it was to be an astronaut, so Aero is akin to playing college ball, with a 1 in 100,000 chance of hitting big.

Now they go off to the commercial rocket start-ups.

Thus Al Fin states:
The successful orbital launch yesterday, of the SpaceX Falcon 9 rocket and Dragon spacecraft, opens the door for the further expansion of private enterprise in space. The vast riches of outer space resources offer the best opportunity for a rejuvenated global economy, and perhaps the creation of the first human $trillionaire.

Thus given these trends, the smart students now finally focusing on the commercial world, we may actually see a change. NASA should be buried, it did its job, declare victory, move on.

The Gross Deception of the Employment Stats

The employment rate dropped to 9.7%. Not really. Look at the above stats from today. All of the growth was in Government hires, most likely the Census employees. The real problem is that the changes in the other categories add up to a negative number! Government spending is driving out private investment. Is there no common sense at all in Washington these days.

Look at April v May! This is terrifying.

Latest Romer Curve

As we have been doing for the past year and a half we track the Romer values to reality. And as usual her estimates reflect little of reality and again clearly demonstrate the inability of macro-economists to predict anything.



















The above is the actual to projections with and without the Stimulus of almost a trillion. Clearly it is still much worse than doing nothing. Either her logic and models are utter nonsense or the Stimulus is the wrong spending of money.



















The above are the errors in percent of her projections from reality. Quite substantial and no closing of the gap.

Apparent Inconsistencies: Dartmouth, The Truth and Health Care

In today's NY Times there is a detailed article which begins to chip away at the Dartmouth data used by the White House and others to justify the changes made to our health care system. It states:

In interviews, Dr. Fisher and Mr. Skinner acknowledged that there was no proven link between greater spending and worse health outcomes. And Dr. Fisher acknowledged the apparent inconsistency between his statements in interviews with The New York Times and those made elsewhere, saying that he was sometimes less careful in discussing his team’s research than he should be.

Apparent inconsistencies my foot! I have spent time in Hanover and had come to know Dartmouth and in my opinion these most likely were no inconsistencies but a political agenda. The article goes on to state:

Similar problems arise with Dartmouth’s regional data. In Dartmouth’s rankings, for instance, New Jersey comes in dead last because its costs per Medicare beneficiary are the nation’s highest. And yet, for the quality of care offered in New Jersey, independent of cost, federal health officials rank New Jersey second only to Vermont.

The good Dartmouth physicians would have us reduce compensation in New Jersey, the state with the highest population density and proximate to New York and Philadelphia based upon their less than consistent data!

We have been making this argument for well over a year. Yet selective data presentation was used in an ad hoc propiter hoc fashion. The results will penalize people in their pocket books and in their very lives!

The article states:

In other words, there is little evidence to support the widely held view, shaped by the Dartmouth researchers, that the nation’s best hospitals tend to be among the least expensive.

In interviews, Dr. Fisher and Mr. Skinner acknowledged that there was no proven link between greater spending and worse health outcomes. And Dr. Fisher acknowledged the apparent inconsistency between his statements in interviews with The New York Times and those made elsewhere, saying that he was sometimes less careful in discussing his team’s research than he should be.

In any case, the more-is-worse message has resonated with insurers, whose foundations now help to finance the Dartmouth Atlas. Dartmouth researchers also created a company, Health Dialog, to consult for insurers and others on Dartmouth’s findings. Valued at nearly $800 million, the company was sold to a British insurer in 2007 and still helps to finance the Dartmouth work.

The essence of the study as apparently promulgated by Dartmouth was less is better. The truth appears to be far from what they stated. Here is a clear case worthy of Congressional investigation. Where is the good Congressman Dingell who went after David Baltimore with a vengeance, there seems to be a smoking gun here, especially if the Times spends so much space on it.