Monthly Archives: October 2013

Ayn Random


In a cavern deep below the Earth, Ayn Rand, Paul Ryan, Rand Paul, Ann Druyan, Paul Rudd, Alan Alda, and Duran Duran meet together in the Secret Council of /(b[plurandy]+b ?){2}/i.

Ayn Random
Mon, 14 Oct 2013 00:00:00 GMT

Robert Graboyes: Enabling Supply-Side Innovation in Health Care

I generally like the thrust of this, but I’m not sure that market innovation will ever really address broader access to healhcare.  On the other hand, reduced costs will help the poor the most.


When my column “Don’t Believe Anyone Who Claims to Understand the Economics of Obamacare” appeared, Robert Graboyes sent me a link to his October 2, 2013 post in the Mercatus Center’s “McClatchy Tribune” blog also emphasizing the importance of innovation: “Paging Dr. Jobs.” (Here is a link to the article in the Dallas Morning News.) I liked it so much I asked to reprint it here. He kindly gave me permission. Here it is. One action Robert caused me to take is that I bought the Kindle edition of  “The Innovator’s Prescription” by Clayton Christensen, Jerome Grossman, and Jason Hwang.


American health care has no Steve Jobs or Bill Gates. No Jeff Bezos, Elon Musk, Burt Rutan, or Henry Ford. No innovator whose genius and sweat deliver the twin lightning bolts of cost-reduction and quality improvement across the broad landscape of health care. Why not? Either we answer that question soon and uncork the genie, or we consign our health care to a prolonged, unaffordable stagnation.

America leads the world in health-care innovation — but not the innovation that sends costs plunging and unleashes previously undreamed-of quality improvements. That kind of innovation occurs only in isolated pockets of health care. In the aggregate, health care spending rises rapidly and relentlessly.

If implemented as planned, the Affordable Care Act ensures the health-care industry will never have the flexibility it needs to generate a Steve Jobs. Tightly constricted, top-down micromanagement will deprive health care of the oxygen essential to attract and incentivize cost-cutting innovators. This suffocating environment predated the ACA, but the law worsens things considerably by tightly controlling providers, patients, and employers.

Unfortunately, advocates of decentralized, market-oriented approaches have never offered the electorate convincing alternatives to centralized, bureaucratic command and control.

If the ACA crumbles, market-oriented health care reformers have one more chance to articulate a vision. A quick Internet search already churns up chatter (some gleeful, some mournful) about replacing a failed ACA with a single-payer system. Decentralizers will need to formulate and articulate — quickly — why American health care never produces a Steve Jobs and how markets could usher in cost-cutting innovation. Importantly, their narratives would need to ring true to people who are not already persuaded that markets can function in health care.

To illustrate the conceptual and rhetorical rut we are in, imagine if people in early 1964 had discussed computers the way we in 2013 discuss health care. (At that time, computers were mostly room-size mainframes costing millions in 2013 dollars, at least). Discussing computers as we today discuss health care, all the parties in 1964 would agree there is a “computer crisis” — out-of-control prices, a widening gap between haves and have-nots. Only rich companies, they fret, can afford computers.

Some would offer an array of solutions: The government could become the sole manufacturer of mainframes. Alternatively, the government could become the sole purchaser of mainframes — using its great market clout to force IBM to sell its mainframes for, say, $950,000 rather than $1 million. Or the government could tightly regulate mainframe manufacturers — prohibiting them, say, from charging more than $900,000 for a computer.

Others, conversely, would argue that the answer to the hypothetical computer crisis is a more open market. We need more stores, they say, in which to buy mainframes. Mainframe stores in every shopping mall — and a greater capacity to buy and sell mainframes across state lines.

Apolitical business end-users would seek to band together in purchasing cooperatives — demanding as one that IBM moderate its mainframe prices.

Meanwhile, the industry would still be mainframes, mainframes, mainframes all the way down. No minis, micros, laptops, or smartphones. In fact, in our allegorical world of 1964, everyone would agree to laws and regulations and institutions that virtually forbid the emergence of a Steve Jobs or Bill Gates.

Let’s return, now, to 2013 and health care. To unleash innovators, we have to recognize what leashes them in the first place. Consider some candidates: Medicare’s reimbursement formula muffles prices and distorts resource allocation in ways that impact private insurance. Tax laws effectively bind employees to their employers’ health plans. State regulations protect insiders through scope-of-practice regulations, protectionist licensing, and certificate-of-need requirements. The structure of medical education (heavily influenced by state regulations) locks obsolete management practices in place. Tort law discourages heterodox innovation. Even more challenging, fixing one of these at a time may not do the trick.

Building the case for market solutions in health care, then, demands that market advocates think large. For inspiration, they should look beyond their usual array of reading sources. Cost-cutting innovation, also known as “disruptive innovation” is brilliantly described in “The Innovator’s Prescription” by Clayton Christensen, Jerome Grossman, and Jason Hwang.

A key insight from that literature is that cost-cutting innovation almost always comes from the supply side, not the demand side. It emerges from the protean genius of previously unknown people who see our wishes and hopes before we ourselves do. Tellingly, most of today’s policy prescriptions from the left, right, and center focus on the demand-side incentives. But the problem is that consumers can’t visualize what the disruptive innovations in health care will be — any more than they could have known in 1964 how the laptop, smartphone, and internet would soon restructure their lives.

Message to market enthusiasts: The clock is ticking. One more chance to get health care right may be in the offing. There’s no time to waste. And you had best learn to persuade those who don’t already agree with you.

Robert Graboyes: Enabling Supply-Side Innovation in Health Care
Wed, 16 Oct 2013 00:30:46 GMT

The Agreement: What I’d Like to see–no more debt ceiling

AMAN to this!  What is the logic of allowing politicians to vote on programs that require funding, vote on taxes to do so AND THEN VOTE ON BORROWING WHEN NEEDED TO BE CONSISTENT WITH DECISIONS ALREADY MADE!  Politicians do not need an opportunity to grandstand, and that’s all the debt ceiling does.

This is what I’d like to see (and many other analysts and economists would too):
• Eliminate the “debt ceiling”. It is superfluous. As former Fed Chairman Alan Greenspan and others have said, the “debt ceiling” is just arithmetic. We have approved expenditures. We have revenue. The shortfall is borrowed. If we don’t get rid of the debt ceiling, increase the level through 2014.
• Pass a Continuing Resolution (CR) for fiscal 2014 that reduces the impact of the sequester. As Republican advisor Mark Zandi said last week:

As part of any budget deal, lawmakers should reverse the sequester. The second year of budget sequestration will likely have greater consequences than the first, affecting many government programs in ways that nearly all agree are not desirable. A sizable share of the sequestration cuts to date has involved one-off adjustments, but future cuts will have to come from lasting reductions in operational budgets.

• In the long run (not this decade), the US will be challenged by health care costs.  This requires some adjustments to both spending and revenue.  As Mark Zandi said last week:

It would of course also be desirable for lawmakers to address the nation’s long-term fiscal challenges. … Both cuts in government spending and increases in tax revenues will be necessary to reasonably solve these long-term fiscal problems.

As I noted last week, perhaps another super-committee with long term consequences if the committee fails (not more short term cuts like the sequester). The consequences should be distasteful to both parties – and both cut spending and raise revenue in the long term so there is some motivation for the committee to reach agreement.
• It is important to note that the deficit is declining, and declining rapidly. Over the next few years (the short run), the deficit will not be a problem (great news!), as long as the economy continues to grow (government shutdowns and threats to not “pay the bills” hurt the short run).
Final comment: It is sad, but predictable, that this shutdown and threat to not “pay-the-bills” is happening now.  As Goldman Sachs chief economist Jan Hatzius wrote in April:

The federal budget deficit is shrinking rapidly. … [T]here is still a great deal of room for the economic recovery to reduce the deficit for cyclical reasons. … In our view, the most important implication from the reduction in the budget deficit for the near-term economic outlook is reduced pressure for further fiscal retrenchment.

In another year, the House will have lost the short term deficit as an argument (actually for those paying attention, the short term deficit is no longer a serious concern). However this doesn’t mean we shouldn’t pay attention to the long term issues, and maybe we could find some common ground on moving forward on those issues – without hurting the short term.

The Agreement: What I’d like to see
Bill McBride
Mon, 14 Oct 2013 16:10:00 GMT

The amazing decline in American poverty

The main gripe I have with the wave of complaint  about inequality is that it seems to focus on just how rich the rich are, or are becoming.  I’d argue that I don’t care as long as everyone is becoming better off at a very perceptible rate, and maybe they are.  I’ve added some emphasis below:

I get criticism from liberals when I claim that the poor are doing much better than in 1973, despite figures showing flat medium incomes and rising inequality.  Floccina directed me to a Timothy Taylor post that discusses a study by the Brookings Institute.  Yes, the liberal Brookings Institute, I presume there is only one:

However, in a paper published in the Fall 2012 issue of the Brookings Papers on Economic Activity, Bruce D. Meyer and James X. Sullivan present some alternative interpretations and more cheerful conclusions in “Winning the War: Poverty from the Great  Society to the Great Recession.” They conclude: “Despite repeated claims of a failed war on poverty, our results show that  the combination of targeted economic policies and policies that support  growth has had a significant impact on poverty. … Noticeable improvements have been made in the last decade; although not as big as the improvements in some earlier decades, they are comparable to or better than the progress made in the 1980s. We may not yet have won the war on poverty, but we are certainly winning.”

.  .  .

Here’s one of their illustrative calculations. The official poverty line is in blue. They then calculated income in a way that included taxes and the value of noncash benefits. They set up the calculation so that the two measures would have the same poverty rate in 1980, and then adjusted the poverty rate over time using the inflation rate. But when after-tax income is used in the calculation, the poverty rate falls more sharply over time, including during the last 30 years.

But perhaps their most striking result uses data on consumption, rather than data on income, to calculate the change in poverty rates over time. Consumption data comes from a different national survey than does income data (the Current Expenditure Survey rather than the Current Population Survey). Meyer and Sullivan point out that at the bottom of the income distribution, the answers about income on the Current Population Survey clearly understate the amount of income received. For example, only about half of welfare payments seem to be reported in the Current Population Survey. The proportion of economic activity that goes unreported to the tax authorities–and to the government survey–is probably higher at the bottom of the income distribution, too. In addition, when we talk about poverty what we are really worried about is more accurately captured by consumption rather than by income.

Meyer and Sullivan used consumption data, and again they set up the calculation  so that the poverty rate for consumption data is the same as the poverty rate for income data as of 1980. Again, the blue line shows trhe official poverty rate. The red line shows the poverty rate with a broader definition of income, adjusted for after-tax income. The green line shows the change in the poverty rate if consumption is used to measure poverty. By this measure, the poverty rate almost reaches zero percent in 2007, before the Great Recession.

Thus, they write: “The results in this paper contradict the claim that poverty has shown little improvement over time and that antipoverty efforts have been ineffective.  We show that moving from traditional income-based measures of poverty to  a consumption-based measure, which is arguably superior on both theoretical and practical grounds—and, crucially, accounting for bias in the cost-of-living adjustment—leads to the conclusion that the poverty rate declined by 26.4 percentage points between 1960 and 2010, with 8.5 percentage points  of that decline occurring since 1980.”

Just to be clear, the notion that the consumption-based poverty rate nearly reached zero percent does not mean that the war on poverty is won. After all, the poverty rate was originally set back in the early 1960s, and although the poverty line has been adjusted upward by the rate of inflation over time, it has not been adjusted for the amount of economic growth that has occurred. All poverty lines are set in the context of the society’s overall level of income: thus, a very low-income country the poverty rate per person might be set at $1.25/day or $2/day, while in the United States, the  poverty rate for a family of 3 is around $16-$17 per person per day. One can argue that because the U.S. economy has grown dramatically in the half-century since the poverty level was set, the poverty line should be higher. But still, it’s worth knowing that the U.S. has made progress in terms of the existing poverty line–when using more appropriate standards of well-being like consumption or broader definitions of income

After-tax and transfer data is better than income, and consumption data is still better.  Liberals are focusing on “inequality” when they should be focusing on poverty level consumption (as they were in 1973.) That’s the real problem.

PS.  One of my earliest memories of college was when I took intermediate micro as a sophomore at Wisconsin.  My professor once showed some data on what the US distribution of income would look like without transfer programs.  He derived the estimates by looking at market income.  I raised my hand and pointed out that if there were no transfer programs then surely the market income figures would be different.  For instance, those on welfare might be forced to work in order to stay alive.

This Brookings study reminds me of another problem, the underground economy.  Transfers to the poor don’t just discourage people from working, they also encourage people to work in the underground economy.  Thus transfer programs have two effects.  First, they make market income less equal than it would otherwise be.  And second, they make reported market income less equal than actual market income.  Both factors contribute to the much better performance of consumption than reported market income at the lower end of the spectrum.  Which is obvious to anyone who travels around America and observes how the poor actually live.

PPS.  I will be traveling the next few days–not much time for blogging.

The amazing decline in American poverty
Sat, 12 Oct 2013 17:52:43 GMT

The deadlock/shutdown/debt ceiling

Among our fervent GOP friends should be consideration of this: if the affordable care act had not been enacted in 2010, and Obama had been defeated in 2012, but the senate remained in the Democrat’s hands, would they refrain from calling it blackmail if Harry Reid via senate procedure bottled up the budget, caused a government shutdown based on insistence that the ACA, seemingly a settled issue, be brought back from the grave before the government could go on with its business?  They will insist otherwise, I think, but only by being dishonest with themselves.

Basically, they’ve convinced themselves that the ending “Obamacare” is so important that the end justifies the means. Terms like hostage taking, terrorism, or I think suicide bombing best fit the GOP’s behavior at this point.  This mindset has already become dangerous, but with it now bleeding into the debt ceiling issue, the stakes and the dangers seem much grater.   I think we may weather a  failure to raise the debt ceiling better than the most alarmist claims, but I ‘d prefer not to test  if I’m right all the same.

Zandi Testimony: Economy Poised for Growth, Congress must Fund the Government and Pay the Bills


Economist Mark Zandi is providing testimony this morning to the Joint Economic Committee: Written Testimony of Mark Zandi Chief Economist and Co-Founder Moody’s Analytics

The impasse in Washington over funding the federal government and increasing the Treasury debt ceiling is significantly damaging the economy. Stock prices are grinding lower and consumer confidence is weakening. The economic harm will mount significantly each day the government remains shut and the debt ceiling is not raised. If policymakers are unable to reach agreement on these issues by the end of October, the economy will face another severe recession.
To resolve the budget impasse, policymakers should not add to the significant fiscal austerity already in place, which is set to last through mid-decade. Tax increases and government spending cuts over the past three years have put a substantial drag on economic growth. In 2013, this fiscal drag is as large as it has been since the defense drawdown after World War II.
Moreover, because of fiscal austerity and the economic recovery, the federal government’s fiscal situation has improved markedly. The budget deficit in just-ended fiscal 2013 was less than half its size at the recession’s deepest point in 2009. Under current law and using reasonable economic assumptions, the deficit will continue to narrow through mid-decade, causing the debt-to-GDP ratio to stabilize.
As part of any budget deal, lawmakers should reverse the sequester. The second year of budget sequestration will likely have greater consequences than the first, affecting many government programs in ways that nearly all agree are not desirable. A sizable share of the sequestration cuts to date has involved one-off adjustments, but future cuts will have to come from lasting reductions in operational budgets.
It would of course also be desirable for lawmakers to address the nation’s long-term fiscal challenges. Although the fiscal situation should be stable through the end of this decade, the long-term outlook remains disconcerting. If Congress does not make significant changes to the entitlement programs and tax code, rising healthcare costs and an aging population will swamp the budget in the 2020s and 2030s. Both cuts in government spending and increases in tax revenues will be necessary to reasonably solve these long-term fiscal problems.

And his conclusion:

Washington’s recent budget battles have been painful to watch and harmful to the economy. Political brinkmanship creates significant uncertainty and anxiety among consumers, businesses and investors, weighing on their willingness to spend, hire and invest.
Despite this, the economic recovery is more than four years old, and the private economy has made enormous strides. Business balance sheets are about as strong as they have ever been, the banking system is well capitalized, and households have significantly reduced their debt loads. The private economy is on the verge of stronger growth, more jobs and lower unemployment.
The key missing ingredient is Congress’ willingness to fund the government and make sure all its bills can be paid. If policymakers can find a way to do these things in the next few days, almost regardless of how awkward the process is, the still-fragile recovery will quickly become a self-sustaining expansion.
We are close to finally breaking free from the black hole of the Great Recession. All it takes is for Washington to come together.
emphasis added

A Republican advisor giving testimony to Congress, and telling Congress they are the problem. Ouch.

Zandi Testimony: Economy Poised for Growth, Congress must Fund the Government and Pay the Bills
Bill McBride
Fri, 11 Oct 2013 14:34:00 GMT

Jobs Endangered by a $15 Minimum Wage in Seattle


Both candidates in the Seattle mayoral race support an effort to raise Seattle’s minimum wage to $15 per hour.  Mayor Mike McGinn says he would even support an effort to set the minimum wage even higher.  Mayor McGinn and challenger Ed Murray are foolish if they believe that the Seattle mayor or City Council can ignore the laws of supply and demand.  A mandate that workers in lower paying occupations receive higher wages will lead to substantial job losses in these occupations.  The labor force in the city of Seattle is about one-third of the King County labor force and one fifth of the labor force in the Seattle metro area. This means that when Seattle laws make it more expensive to operate a restaurant, coffee shop, retail outlet or other business inside city limits, businesses will relocate to the suburbs and shoppers and customers will follow.

The economics of a minimum wage for a city is quite simple.  Employers in Seattle are price takers in the market for unskilled and less skilled labor.  It doesn’t matter how inelastic the demand for less skilled labor is in the aggregate, all that matters is the elasticity of demand for workers within city limits.  A large increase in the cost of hiring dishwashers or cashiers within Seattle merely shifts demand for these services to businesses outside city limits where the minimum wage is $9.15 and costs are lower.  The $15 minimum wage will destroy jobs in Seattle but will increase employment in some businesses in the suburbs.  The best substitute for shopping or dining in the city is shopping or dining in the suburbs.  Customers will be inconvenienced, unskilled workers in the city will be harmed and have to commute further to work.  However, business owners and unskilled workers in suburban areas could benefit from a $15 minimum wage in Seattle.

Mayors and mayoral candidates who support large increases in the minimum wage should also be required to specify which jobs in their cities would be endangered by their policies.  Following the International Union for Conservation of Nature which designates species as endangered, vulnerable or near threatened, I believe that politicians should acknowledge when their policies threaten the viability of certain jobs.  Politicians should also be required to use the same sort of designation to indicate the severity of the threat posed by their actions.  Politicians can make jobs extinct by raising the minimum wage so much that workers are priced out of the market for their services.

I propose that in Seattle:

  • A job is endangered if 90% of current workers earn less than the proposed $15 minimum wage.
  • A job is vulnerable if 75% of current workers earn less than the proposed $15 minimum wage.
  • A job is near threatened if 50% of current workers earn less than the proposed $15 minimum wage.

The Bureau of Labor Statistics (in its OES data) lists 637 detailed occupations in the Seattle metro area.   In 120 of those occupations, employing 27.7% (over 390,000 workers) of the workforce, the median wage less than $15 per hour.  The following tables provides examples of occupations that are most at risk due to a $15 minimum wage.

There are 16 endangered jobs in Seattle.  These jobs are endangered because at least 90% of workers earn less than $15 per hour.  The following table lists some of the most common endangered jobs.  For example, there are 25,930 food preparation and servers in the Seattle metro area and 90% earn $14.07 or less.  A $15 minimum wage will likely cause restaurants in Seattle to lose business to suburban competitors.  Other jobs on this list are endangered by information technology.  For example, as the cost of hiring hotel and motel clerks increases, more businesses will use kiosks and encourage customers to check-in online.

Endangered Jobs in Seattle

At Least 90% of Employees Earn Less   Than $15.00 per Hour

Occupation Title

Number of Workers

90th Percentile Wage

Food Preparation and Servers, Including Fast Food



Personal Care Aides






Dining Room Attendants and Bartender Helpers



Home Health Aides



Hosts and Hostesses, Restaurants and Lounges



Hotel and Motel Desk Clerks



Baggage Porters and Bellhops



There are 33 vulnerable jobs in Seattle.  These jobs are vulnerable because at least 75% of workers earn less than $15 per hour.  The following table lists some of the most common vulnerable jobs.  For example, there are 12,590 cooks in the Seattle metro area and 75% earn $14.59 or less.  A $15 minimum wage will likely cause restaurants in Seattle to lose business to suburban competitors.  Other jobs on this list are vulnerable to technological change.  For example, as the cost of parking lot attendants and ticket takers increases, more businesses will use kiosks and other devices to substitute capital for labor.

Vulnerable Jobs in Seattle

At Least 75% of Employees Earn Less   Than $15.00 per Hour

Occupation Title

Number of Workers

75th Percentile Wage

Restaurant Cooks



Food Preparation Workers



Maids and Housekeeping Cleaners



Counter Attendants, Cafeterias and Coffee Shops



Packers and Packagers



Childcare Workers



Amusement and Recreation Attendants



Cleaners of Vehicles and Equipment



Parking Lot Attendants



Taxi Drivers and Chauffeurs



Ushers and Ticket Takers



Manicurists and Pedicurists






Laundry and Dry-Cleaning Workers



There are 71 near threatened jobs in Seattle.  These jobs are threatened because at least half of workers earn less than $15 per hour.  The following table lists some of the most common threatened jobs.  For example, there are 47,390 retail sales workers in the Seattle metro area and half of them earn $12.13 or less.  A $15 minimum wage will likely cause shops and stores in Seattle that employ these workers to lose business to suburban competitors.  Other jobs on this list are threatened by technological change.  As the cost of stock clerks and order fillers increases, more businesses will use computer and information technology to substitute capital for labor.

Near Threatened Jobs in Seattle

At Least 50% of Employees Earn Less   Than $15.00 per Hour

Occupation Title

Number of Workers

50th Percentile Wage

Retail Salespersons






Stock and Material Movers



Stock Clerks and Order Fillers






Nursing Assistants






Security Guards



Landscaping Workers






Counter and Rental Clerks



Hair Stylists



Bank Tellers



Preschool Teachers



Cafeteria Cooks



Meat, Poultry and Fish Cutters






Sewing Machine Operators



File Clerks



The mayoral candidates in Seattle may think they help workers in their city who are struggling in today’s economy by advocating a $15 minimum wage.  In fact, the mayoral candidates’ policies will harm the workers they would like to help.  These candidates tell Seattle residents that if they can’t find an employer willing and able to pay at least $15 per hour for their services, they will be prohibited from working inside city limits.  A $15 minimum wage in the city will cause Seattle residents to commute to the suburbs to work in stores, shops and restaurants. The only voters and businesses that should support this silly policy are those located outside Seattle city limits.

Jobs Endangered by a $15 Minimum Wage in Seattle
Stephen Bronars
Thu, 10 Oct 2013 19:27:33 GMT