Healthcare Reform Explained

Alter Reiss explains the healthcare bill that just passed in the US:

Some myths about the current healthcare bill explained.
There’s been a lot of talk about this lately, so I figured that I’d clear up a few common misconceptions people seem to have about the recently passed Health Care Reform bill.

Myth 1:
With the passage of HCR, bears will be allowed to roam hospitals, devouring those patients too sick to hide or flee.

Status: FALSE
The ursine provisions of the health care bill remain controversial with the AMA and other organizations, but, basically, all they do is recognize that in some rural areas, particularly in the Dakotas and Alaska, bears have been acting as health care professionals for decades, and puts them into the category of other alternative health professionals, such as acupuncturists, osteopaths, and killer bees. Bear attacks may be available under some health plans, but those treatments are entirely at the discretion of the insurers.

Myth 2:
MRIs are once again to be termed “Nuclear Magnetic Resonance Images”, and once again, a small percentage of those undergoing this procedure will gain super-powers that will allow them to perform great feats, at a cost to their humanity.

Status: FALSE
While this provision was included in earlier versions of the bill, it was dropped in the face of a strong opposition by Senator Keene and others.

Myth 3:
ObamaNaziSocialismAntichristApocolpyseRevalations4:15SicSemperTyranisTaxedEnoguhAlready!

Status: That’s not a myth, that’s a bunch of words, some of which are misspelled.

Myth 4:
A provision of the HCR bill calls to the Lord Above, to send down a dove, with beak as sharp as razors, to cut the throats of them there blokes, what sells bad beer to sailors.

Status: Partially true.
While this language does exist in the current version of the bill, it is unlikely to stand judicial scrutiny, as it will probably be seen as a violation of the separation of church and state. However, this is merely echoing faith-based programs enacted by individual states. The dove attacks on campus area bars selling Rolling Rock to University of West Florida Argonauts, for instance, can only be applauded, as Rolling Rock is swill.

Myth 5:
In order to pay for the mandates of this bill, President Obama has traded the treasury of the United States for a handful of magic beans.

Status: FALSE
Only one government-owned cow was traded for these beans, which have already more than earned back the initial investment. Also, since the treasury of the US currently contains less than negative fourteen trillion dollars, wouldn’t you want to trade it, for just about anything?

Myth 6:
The HCR bill will allow communists control of our vital bodily fluids.

Status: TRUE
Yeah, this one is totally real. But, to be fair, there aren’t that many communists left, and those that there are don’t actually want that many bags full of lymph and phlegm.

For the humor impaired, this is sarcasm.

The US Government is NOT like a Household

The US Government (and it’s budget) is NOT like a household or a corporation.  Anybody who uses this time-worn analogy is simply not telling the truth and is likely either ignorant or is trying to pull the wool over your eyes.  Randy Wray explains the many reasons.  You (your household) must finance your spending (either use your income, sell your assets, or borrow).  A corporation must do the same.  A state government must do the same.  The US Government (or any other sovereign national government with a non-convertible currency) does not.  Modern banking and money simply don’t work that way.  When sovereign governments DO try to balance their budgets but acting as if they have to finance spending, bad things happen. For the full impact, read past the “more”.

L. Randall Wray takes the fear and loathing out of understanding federal budget deficits.

Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences. Continue reading

More on Modern Banking – end of fractional reserves

More on MMT & end of fractional reserve banking:  From Naked Capitalism and Washington’s Blog. There’s more in the entire post to see, but this is a critical part (bold is mine):


From Fractional to Fictional Reserves

But whatever you think about fractional reserve banking, whether or not you agree with its critics, the truth is that we no longer have it.

As the above-linked NY Fed article notes:

In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels.

And as Steve Keen notes – citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, 2007-54, Washington, D.C:

The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.

So huge swaths of loans deposits are not subject to any reserve requirements.

With the repeal of Glass-Steagall, deposits have been used to speculate in every type of investment under the sun, using insane amounts of leverage. Instead of the traditional 10-to-1 ratio…

The Way to Maximize Corporate Profits is not to try to Maximize Profits

From Naked Capitalism (Yves Smith) (emphases are mine):

the blind pursuit of “maximizing shareholder value” is not all it is cracked up to be:

The recent productivity report received much attention. But I did not see anyone point out that the spread between nonfarm corporate prices and unit labor cost was 5.25%, the widest spread on record.

This spread is the single most important variable driving corporate profit margins and implies that you should expect major positive earnings surprises.

Yves here. Translation: employers are continuing to squeeze down on workers to improve their margins. And the US has been pursuing that strategy for some time, of shifting the composition of GDP growth away from increases in worker incomes (via hiring and/or paying them more) to increases in corporate profits. The shift was dramatic in the last supposed expansion; it was called a “jobless recovery” for good reason. In every previous postwar growth period, the labor share of GDP growth was never less than 55% and had averaged not much less than 60%. In the pre-crisis expansion, it plunged to 29%.

Before some readers contend that this pattern is inherent to the “maximizing shareholder value,” let’s start with one consideration: strategies that focus on that goal actually do less well than ones that pursue broader aims. John Kay notes in a 2004 Financial Times article (sadly, no longer available on line):

Paradoxical as it sounds, goals are more likely to be achieved when pursued indirectly. So the most profitable companies are not the most profit -oriented, and the happiest people are not those who make happiness their main aim. The name of this idea? Obliquity….

Obliquity is characteristic of systems that are complex, imperfectly understood, and
change their nature as we engage with them…..

Obliquity is equally relevant to our businesses and our bodies, to the management of our lives and our national economies. We do not maximise shareholder value or the length of our lives, our happiness or the gross national product, for the simple but fundamental reason that we do not know how to and never will. No one will ever be buried with the epitaph “He maximised shareholder value”. Not just because it is a less than inspiring objective, but because even with hindsight there is no way of recognising whether the objective has been achieved.

For most of the 20th century, ICI was Britain’s largest and most successful manufacturing company. In 1987, ICI described its business purpose thus: “ICI aims to be the world’s leading chemical company, serving customers internationally through the innovative and responsible application of chemistry and related science. “Through achievement of our aim, we will enhance the wealth and well-being of our shareholders, our employees, our customers and the communities which we serve and in which we operate.”….

In 1991, Hanson, the predatory UK conglomerate that had successfully acquired and reorganised sluggish British manufacturing businesses such as Ever Ready and Imperial Tobacco, bought a modest stake in ICI. While the threat to the company’s independence did not last long, the effects were galvanising. ICI restructured its operations and floated the pharmaceutical division as a separate business, Zeneca. The rump business of ICI declared a new mission statement: “Our objective is to maximise value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world competitive cost base.”….

ICI made the opposite shift – from a grand vision of the responsible application of chemistry to a narrow concentration on established, successful activities. The aim of bringing benefit to a wide range of stakeholders was replaced by the specific objective of creating shareholder value from narrowly focused operations. The company translated this into an operational strategy by disposing of the company’s interests in bulk chemicals to acquire a niche group of speciality businesses: ICI, once the main supplier of chemical products to one third of the world, was reinvented as a smells company.

The outcome was not successful in any terms, including those of creating shareholder value. The share price peaked in 1998, soon after the new strategy was announced. The decline since then has been relentless. After two successive dividend cuts the company was ejected in early 2003 from the FTSE 100 index, the transition from industrial giant to mid-cap corporation had taken only 12 years…..

Obliquity gives rise to the profit -seeking paradox: the most profitable companies are not the most profit -oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self -defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations….

Collins and Porras….found the same result in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.

Yves again. Simple-minded profit seeking is not what it is cracked up to be. And worse, squeezing worker wages to not simply preserve, but increase profits, is destructive on an economy-wide level (note the rising gap between wages and prices disproves the canard that the wage pressure is necessary to preserve competitiveness).

US business used to operate with the idea that the returns resulting from productivity gains would be shared by workers and the company; that notion now seems as dead as the dodo. But not allowing workers to participate in improvements in corporate returns blunts overall economic growth. Companies are fattening their current bottom lines at the expense of future top line growth. But in our current climate, this strategy looks just dandy….until government stimulus starts to be withdrawn.

Economic Alchemy: How to Raise Tuition but Lower Student Costs

I know I’ve been posting mostly about macro and banking lately, but here’s one for the micro students.  Let’s look at how a community college could collect more revenue while lowering the cost of education for students.

We studied about how there’s a relationship between the demands for any two products.  Suppose we have product X and product Y.  X and Y can be either complements to each other, substitutes for each other, or totally unrelated to each other.  We also study how we use the cross-price elasticity of the products (see here and here).  And of course, we interpret the resulting cross-price elasticity number (Ex,y) accordingly:

  • if Ex,y > zero (is positive), then the two products are substitutes. The consumer/purchaser views them as alternatives, a choice — it’s either x OR Y, but not both.
  • if Ex,y < zero (is negative), then the two products are complements. The consumer/purchaser views them as a package deal.  They want to buy both X and Y together.  It’s really the price of the bundle they’re thinking about.
  • if Ex,y = zero, then there’s absolutely no relationship between the two products. Typically this means there’s no overlap between the purchasers of X and the purchasers of Y.

In class and textbooks, we typically give retail store examples of these relationships:  Coke and Pepsi are substitutes.  Hot dogs and hot dog buns are complements.  Concrete blocks and candy bars are unrelated.  We also usually talk about how knowing cross-price elasticity is important to retailing tactics.  For example, knowing two products are strong complements allows Kroger to display products in a way that “suggests” an up-sale: put the hot dogs on sale, but display the full-price buns, ketchup, and charcoal right next to them.

Cross-price elasticity is also very important in larger business contexts such as strategy.  Let’s think about the typical community college and tuition. The community college sells “credit for courses” to the students. Think of this as product X (yeah, it’s a service but we economists still think of it as a product). When most folks think of tuition, they think of it as the price of X, the price of the CC’s courses. If that’s all we think of, then there’s a tension between the two.  The college (seller of X) wants more $, but the students want a lower price.  In reality, though, there’s another player here:  the textbook publishing industry.  The publishers sell a different product: textbooks.  Of course (pardon my pun), courses and textbooks  are strong complements. They have a very large negative cross-price elasticity. After all, if you’re going to buy the course, you’re gonna buy the book, and vice versa.  (yes, occasionally a student tries the course without the book, but that never ends well).

If we think of students as having only a limited amount of money to spend on education (an assumption most of you will agree with, no doubt!), then the complementary relationship between courses and textbooks means that colleges actually in competition with the publishers over how the student’s money will be split.  If  Stuart Dent only has $1000 to spend on education this summer, then the issue is how the money is split between the college and the publisher.

I’ve seen both sides.  I’ve taught in a college (obviously) but in a former career as a strategic planning consultant I became familiar with the thinking on the publisher side.  In my my experience, the publishers definitely see the relationship and view the college as a competitor.  Their goal is to capture as much of the student’s money as possible.  As a result, they implement many strategies and tactics intended to do that (material for later post). Unfortunately, I don’t think enough colleges understand this.  Most colleges express concern about the rising costs of higher education (some are serious, some only give lip-service).  But most of them, in my opinion, still think of it only from their perspective as the party who sets tuition prices. If colleges put a concerted effort toward developing alternatives that dramatically lowered the costs of textbooks to students, then both students and the college benefit. Students could have lower prices for the bundle they are buying (the education), yet the college could charge higher tuitions and get more revenue for what they are selling.  Let’s work an example of this alchemy:

Suppose Pleasantview Community College presently charges $80 per credit for a 4 credit economics principles course. The course requires one of the latest, greatest textbooks from the publishing oligopoly that retails for $180 (typical for an econ text these days – although Mankiw has a list price of $220).  For the student, the course as a bundle costs $500.  We have 4 x 80 = 320 for tuition plus 180 for book.  Now suppose the college and professor identify an open source textbook, or a low-cost print-on-demand text from some new start-up firm (like the one my students use).  Let’s suppose further the student wants a printed copy, not just an online version.  The printed copy of the open or low-cost book costs $30, which produces a total cost of the course as $350, a savings of $150 or 30%.

But my example is too easy. After all, my students are too smart to buy a full-retail copy of a mainstream text.  They  go to the used book market or to amazon.com (or they used to until I switched to low-cost book).  Typical used book retail prices are 50% of new.  So the expensive book would cost $90.  That’s still a total cost of course for student of $410.  Even compared to the used book market, the open option could save $60 or 15%.

But let’s suppose the college is in tight financial condition. The buildings budget needs more money and the (very deserving) faculty want more money.  Suppose the school switches from the high-priced textbook to the low-cost and simultaneously raises tuition by 5%.  Tuition goes from $80 to $84 per credit.  The book drops from $90 (the used price) to $30. The total cost of the course drops from either $500 or $410 (depending on used choice) down to $366.

  • The college gets a 5% increase in revenue to pay for much needed buildings, systems, and even more valuable faculty.
    • which also means the students get a better education because the infrastructure and faculty are better
  • The students experience a cost savings of between 27% to 11% depending on whether they would have purchased used books.

Of course, the large publishing company will experience a significant drop in revenue.  This part does cause me to lose some sleep (not really) because it may mean less money for the $1 million advances paid to Ivy League professors to write books.  Or the publisher might have to make do without the in-person sales force standing outside my office door so often and instead learn to use the Web to sell things.  Or the publisher might not afford the tall deluxe New York office building.  I don’t know. I’m sure they can figure out that part.

For more information about open textbooks and low-cost textbook options see these posts on my teaching blog or my e-learning blog:

    Links on Modern Monetary Theory (MMT)

    Hyperinflation is not just more inflation.  Additional conditions are needed to go from inflation to hyperinflation.  From New Deal 2.0′ s Rob Parenteau

    The Hyperinflation Hyperventalists

    <!– Friday, 03/19/2010 – 10:57 am by Rob Parenteau | 2 Comments –>Rob Parenteau explains why the the hyperinflationist deficit hawks need to take a deep breath.

    After a two day blogging slugfest on fiscal deficits, I find that the question of hyperinflation now demands an answer.  And here it is: fiscal deficit spending may be a necessary condition of hyperinflation, but it is hardly a sufficient condition…..

    Money is created by creating credit. Credit comes from nothing – banks make loans first. The loans create the deposits and reserves, not vice -versa.  From Washington’s blog and cross posted by Yves Smith at Naked Capitalism:

    German Central Bank Admits that Credit is Created Out of Thin Air

    Most people think that banks lend solely from their base of deposits. Some also know that with fractional reserve banking, they can loan out many times more than they actually have in reserves.

    But very few people – with the exception of those in the banking industry and financial experts – know where credit really comes from.

    Germany’s central bank – the Deutsche Bundesbank (German for German Federal Bank) – has admitted in writing that banks create credit out of thin air.

    As the Bundesbank states in a publication entitled “Money and Monetary Policy” (pages 88-93; translation provided by Google translate, but German speaker and economic writer Festan von Geldern confirmed the basic translation):….

    ….more at:  http://www.bundesbank.de/download/bildung/geld_sec2/geld2_gesamt.pdf (in German)….

    Do you get it now?

    Private banks don’t make loans because they have extra deposits lying around. The process is the exact opposite:

    (1) Each private bank “creates” loans out of thin air by entering into binding loan commitments with borrowers (of course, corresponding liabilities are created on their books at the same time. But see below); then

    (2) If the bank doesn’t have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank);

    (3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.

    It’s not just Bernanke … the central banks and their owners – the private commercial banks – have been running the printing presses for hundreds of years.

    Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won’t even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II’s capital requirements – but since governments are backstopping their giant banks by overtly and covertly throwing bailout money, guarantees and various insider opportunities at them, capital requirements are somewhat meaningless).

    The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new debts, and then backfilling from there.
    It is – in fact – a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing presses (with some limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans).

    See this and this.

    At the very least, the system must be changed so that it is not – by definition – perched atop a mountain of debt, and the monetary base must be maintained by an authority that is accountable to the people.