Angry Bear

STILL the most important sentence in the House HC Bill

2009-11-11T15:08:00.004-05:00

by Bruce Webb

Much of the criticism about the House Health Care Bill coming from the left revolves around the 'fact' that it has no meaningful premium and so profit controls. Moreover most of those same people are promoting HR676 as an alternative. Frankly those people simply haven't read either bill with attention to detail. And this includes a lot of people sporting the title 'Dr.'

In both cases the key language comes right up front. In HR3962 it is as follows:

SEC. 102. ENSURING VALUE AND LOWER PREMIUMS.
(a) GROUP HEALTH INSURANCE COVERAGE.—Title XXVII of the Public Health Service Act is amended by inserting after section 2713 the following new section:
‘‘SEC. 2714. ENSURING VALUE AND LOWER PREMIUMS.
‘‘(a) IN GENERAL.—Each health insurance issuer that offers health insurance coverage in the small or large group market shall provide that for any plan year in which the coverage has a medical loss ratio below a level specified by the Secretary (but not less than 85 percent), the issuer shall provide in a manner specified by the Secretary for rebates to enrollees of the amount by which the issuer’s medical loss ratio is less than the level so specified.

That final sentence simply guts the insurance companies current business which involves widening the spread between premium dollars collected and medical care actually provided. This sentence sets a hard limit on raising premiums while managing the risk pool to exclude those actually being likely to make claims. The tighter you manage your enrollment the harder it is to actually hit your mandated MLR, and every time you raise premiums you have to demonstrate that you have increased payouts to that same degree. Or else you have to rebate the difference.

In the original House Tri-Committee Bill this language was included in Sec. 116 and a site search on that term will pull up a series of posts on this dating back to July. And I have diaried on this elsewhere, yet somehow almost everyone has simply missed the significance of this. Or maybe I have overstated the case. If so explain it to me in comments. I will post a parallel post on the paragraphs that show HR676 to be a ridiculous piece of legislation, a case of a wolfish socialization program hidden in a Medicare for All sheep's clothing, but for the moment I don't want to distract from this key provision.

Simple Answers to Simple Questions

2009-11-11T07:32:00.002-05:00

by Tom Bozzo

Yves Smith:

[D]o you think any CEO would dare pull the crap Benmosche has if, say, Warren Buffe[tt] held an 80% stake?

No.

Seasonal Posting: NYTFail, Part 2

2009-11-10T20:25:00.001-05:00

First, David Leonhardt argued that this recession was good for workers.

Now, Floyd Norris apparently has decided to mix and match data. (I wonder if the fact many NYT employees who are looking at their 45-day severance offers is having an effect on its economic coverage.)

One of the standard "economist jokes" is about the one who died because he forgot to "seasonally adjust" his pool. In that tradition, Norris declares:

The adjustments are for seasonality. For some reason, October is the month with the largest seasonal adjustment down in jobs. So the increase in the unemployment rate does not reflect people actually losing jobs. It reflects the belief that seasonal factors should have added more jobs than they did.

All this may be very reasonable, and there is no way I can think of to test whether the seasonal adjustments are reliable. [emphases mine]

Gosh, I wonder why October would have a larger seasonal adjustment, and whether there is any BLS data to support that adjustment?

Apparently, employers traditionally hire a lot of people in October for "the Holiday Season." And while it's possible that they will be doing all that hiring in November this year, it hasn't been the way to bet during this millennium.

Norris continues:

But I suspect seasonal factors are less important this year, when the economy may be changing directions, than they normally are.

It was with such optimism that Napoleon went to Russia, people bought VA Linux at $100 a share, and the Bush/Cheney/Rumsfeld axis decided to run a two-front war in Afghanistan and Iraq. With statements similar to Norris's:

In reality, the government report says unemployment rates remained steady at 9.5 percent. And the number of jobs actually rose, by 80,000. And the number of jobs for college-educated Americans rose more than in any month in the last six years.

Well, the number of jobs rose (as one would expect, given the Holiday Sales push) but Table B-1 is closer to 40,000 than 80,000:

Where we do see an 80,000 job increase is in the private sector, which is more than 500,000 workers lower than it was in August. If you want to play a non-seasonally adjusted, private-sector only game with the data, you should at least be honest about it.

More vitriol and data below the break.

The details of that 80,000 look even worse: declines in all Goods-producing areas (except about 200 new jobs in primary metals, 300 in "miscellaneous manufacturing," and 1,100 in motor vehicles and parts; cash for clunkers, anyone?) which are balanced by the Service sector, most notably the 63,500 new Retail jobs. Can you say "seasonal employment"? Floyd Norris apparently cannot.

The rest of the Non-Seasonally Adjusted figures are even less encouraging. Table A-8 of the report shows more than 100,000 people added to "not on temporary layoff":

while Table A-9 is depressing: a larger number of unemployed at all durations, with the median duration of unemployment increased by more than one month (in a month):

And while the BLS has not updated their Job Openings data for October, the graphic through September isn't exactly pointing to a decline in that median (or a robust recovery):

Is there a recovery in process? Maybe, though I'm not convinced, since most of the positive data seems, as Paul Krugman noted, "unrepresentative."

But things are not so good as Floyd Norris wants to pretend, even (or especially) using the data he chooses to highlight.

11 Nov 1775

2009-11-10T17:26:00.000-05:00

Good night Chesty, wherever you are.

Greenspan Commission Staff Alumni on Bi-Partisan Commissions

2009-11-10T12:19:00.004-05:00

by Bruce Webb
I get e-mail

Everyone,

Over the weekend, eight of us who worked on the Greenspan commission drafted a joint written statement (attached and pasted below.)
We have just submitted it to the Budget Committee. We are hoping it gets as wide a distribution as possible. In that regard, if any of you are able to post it on your web sites, and get it in the hands of bloggers, reporters, etc., I and the other signatories would really appreciate it.

Best, Nancy

(Update: the below now available as an linkable online Doc: http://docs.google.com/View?id=dc36qc9g_1crqqnpdt )
STATEMENT OF
STAFF TO THE 1981-83 NATIONAL COMMISSION
ON SOCIAL SECURITY REFORM

HEARING ON BIPARTISAN PROCESS PROPOSALS
FOR LONG-TERM FISCAL STABILITY

THE BUDGET COMMITTEE
U.S. SENATE

NOVEMBER 10, 2009

Chairman Conrad, Ranking Member Gregg, and Members of the Committee:

This statement represents the views of eight individuals who helped craft and secure the enactment of the Social Security Amendments of 1983.[1] Those amendments, which followed the recommendations of the National Commission on Social Security Reform (the so-called Greenspan commission), eliminated Social Security’s then-projected short-range and long-range shortfalls. Our involvement with the Commission’s work may provide useful insights into the advisability of using a commission or task force to eliminate, as part of an effort to control the overall federal deficit, the long-range shortfall now being projected for Social Security. Social Security’s current projected shortfall, it should be noted, is much less immediate and severe than the shortfall Congress eliminated twenty-six years ago.

Fast-Tracking Social Security Legislation Is Unprecedented

An expedited procedure, which limits debate and prohibits all amendments, would be unprecedented: Since its enactment in 1935, Social Security legislation has always had the benefit of (1) full hearings before the House Ways and Means Committee and the Senate Finance Committee; (2) executive sessions which provided all members the opportunity to offer amendments; (3) unlimited debate and opportunity for amendments in the Senate; and (4) debate and amendment in the House of Representatives, consistent with its rules. This was the procedure that was followed in the enactment of the Social Security Amendments of 1983, which eliminated the then-projected Social Security deficit.

Throughout Social Security’s long history, advisory councils have been used frequently to recommend changes. Congress has always used the normal legislative process when considering those recommendations. The normal legislative process was followed in 1983, when Congress considered the Greenspan commission recommendations. Indeed, the decision to raise the retirement age was the result not of a commission recommendation, but of an amendment offered by Representative J.J. “Jake” Pickle (D-TX) during consideration of the legislation on the floor of the House of Representatives.

The Greenspan Commission Succeeded Because of its Broad, Diverse Composition

In addition to recommending that the normal legislative process be employed, we advise that any task force or commission that is established with respect to Social Security be broadly representative, including members from business, labor, and the general public. This was the composition of successful Social Security advisory councils and commissions of the past, including the Greenspan commission.

Part of the success of the Greenspan commission was its diverse membership, which included the then-President of the AFL-CIO, Lane Kirkland; four business leaders, including the then-President of the National Association of Manufacturers, Alexander Trowbridge; a leading advocate for the elderly, then-Congressman Claude Pepper (D-FL); and a leading women’s advocate, former Congresswoman Martha Keys (D-KS). We believe that good public policymaking demands that any Social Security task force or commission be broadly representative of labor, business, seniors, women, and other groups vitally affected by Social Security.

Base Closure and Realignment Commission Analogy Overlooks Fundamental Differences
Those who advocate a fast-tracked procedure for reform of Social Security and other entitlements frequently invoke the example of the Base Closure and Realignment Commission (“BRAC”). The political context and constitutional structure of BRAC, however, are completely different. Because the national interest in closing unnecessary bases was in sharp tension with preventing the adverse and localized economic consequences of closing a particular base, success depended on all members agreeing to elevate national interest over local interest This posed a classic prisoner’s dilemma: If only some members acted in the national interest and against the localized interest of those they represented, while others acted solely in defense of their localized interest, the ones acting in the national interest would “lose,” because the national interest would be defeated but their local interest would not be protected. Consequently, without a mechanism to require everyone to act in the national interest, the natural tendency would be to engage in logrolling, forming alliances to prevent one’s own base from being closed, and the obvious result would have been that no base would be closed. BRAC provided a mechanism which permitted escape from this prisoner’s dilemma. An impartial expert panel determined which bases to close and Congress agreed in advance to accept the entire package of recommendations unless a majority of both Houses objected in a single up-or-down vote.

In stark contrast to base closings, where local and national interests may diverge, local and national interests are aligned perfectly with respect to Social Security, because every state and every district includes beneficiaries and FICA-paying workers. Consequently, every member of Congress has comparable interests and concerns, though, of course, they may differ on principles and preferences. Those principles and preferences should be open to full unrestricted deliberation in the Congress. Members have been elected to apply their principles and preferences to hard decisions; a commission with responsibility over Social Security, where its recommendations are considered under expedited procedures with no power to amend, improperly shifts responsibility and shields members from accountability.

In the case of the base closings, Congress could have simply provided guidelines and delegated the decision to the Department of Defense. Instead, Congress chose to retain greater control and accountability by establishing a commission and preserving the power to reject, on an all-or-nothing basis, its determination. Unlike the decision about which specific bases to close, Congress lacks the constitutional authority simply to delegate the decision to change Social Security’s income or outgo. Exercise of the power to tax and spend under Article I of the Constitution requires that Congress itself, not a delegate of Congress, make the relevant decisions and take full constitutional responsibility for them, together with full accountability.

Establishing a commission and considering its recommendations under expedited, extraordinary rules blurs accountability and therefore breaches the spirit of that basic principle of constitutional accountability. History shows that Social Security reform can take place through the normal legislative process, without recourse to extraordinary arrangements. We witnessed it in 1983.

Social Security’s Vital Importance to the Nation Requires Public Accountability

Because Americans in the last year have lost trillions of dollars in home equity and retirement savings, it is more important than ever that Social Security reform be addressed in the sunshine. Social Security today provides an economic lifeline more crucial than ever to the millions who receive its benefits and the millions more who are insured in the event they, or workers on whom they depend, lose wages as a result of disability, premature death, or old-age. In 2009, more than 52 million people are receiving monthly benefits, including 33 million retired workers, 2.4 million spouses or divorced spouses of retired workers, 4.4 million aged widow(er)s, 7.7 million disabled workers, and 4.1 million children of deceased, disabled or retired workers.

Our brave soldiers wounded in Iraq and Afghanistan receive Social Security benefits, as do their spouses and children, and so do the families of soldiers who have given their lives in defense of the nation. Though little noted, Social Security continues to provide benefits to the families of those who lost their lives in the 9/11 attacks. Its benefits -- which are crucial to the vast majority of its beneficiaries and the communities in which they live and spend -- are modest by any measure. Indeed, average benefits are less than what is paid for full-time minimum-wage work. Nor is there waste: the program is efficient, returning in benefits more than 99 cents of every dollar collected in income.

The importance of Social Security demands that proposals for change receive careful consideration, with public participation through its representative groups, so that the implications of all changes are closely examined and clearly understood. Any kind of expedited procedure would be a disservice to the American people.

Social Security, Currently in Surplus, Is Not Part of the Deficit Problem

Moreover, there is no need for hasty action with respect to the program. Social Security is currently in surplus. According to the 2009 Annual Report of the Board of Trustees, published May 12, 2009, Social Security ran a surplus of $180 billion last year and had accumulated a reserve of $2.4 trillion. (Even excluding the interest income, there was still a surplus of $64 billion.) [2] The Trustees’ Report projects that Social Security’s accumulated reserve will continue to grow until about 2024,[3] and, the program can continue to pay full benefits until 2037 to the millions of children, disabled workers, retired workers, and spouses (including widowed and divorced spouses) dependent on those benefits. Indeed, the most recent projections of the Congressional Budget Office, published in August, forecast that full benefits can continue to be paid until 2043. Consequently, Congress has the time to undertake careful, deliberate action through the normal legislative process.

Social Security Is Already Prohibited under Current Law from Deficit Spending

Though few realize it, Social Security already contains an automatic built-in trigger to restore it to balance, if it should ever have insufficient assets to cover scheduled benefits. The law prohibits Social Security from paying any benefits with respect to which it has insufficient revenue. Consequently, if at any point in the future, it has insufficient revenue to cover the costs of benefits, those benefits will be automatically reduced, without any action by Congress.

Social Security Helped the Country Avoid a 1930s-Style Depression

The recession that almost turned into a depression holds lessons for the future. The banking and financial systems almost collapsed, requiring unprecedented federal help. Millions of Americans lost trillions of dollars in private pension wealth. In fortunate contrast, Social Security proved rock solid, providing guaranteed benefits that help offset lost earnings and stimulate the economy by maintaining purchasing power. Hidden in the shadows of the unemployment and foreclosure statistics of the 1930s were elderly parents dependent on and living with adult workers. That added suffering has been largely avoided today, thanks to Social Security.

For all these reasons, while we support efforts to bring the federal deficit under control, we urge members of this Committee and all members of Congress to refrain from employing a fast-tracked procedure for Social Security, and instead allow Congress to consider Social Security legislation through the normal procedure which has resulted in successful legislation in the past.[4]

Respectfully submitted,

Nancy J. Altman, J.D. (Executive Assistant to Chairman Alan Greenspan, 1982-83)
Merton C. Bernstein, LL.B., Coles Professor of Law Emeritus, Washington University
(Principal Consultant to the Commission, 1982-83)
Suzanne M. Blouin (Executive Assistant to Executive Director Robert J. Myers, 1982-83)
Patricia E. Dilley, J.D., LL.M, Professor of Law, University of Florida
(Professional Staff to the House Subcommittee on Social Security, 1981–87)
Elizabeth T. Duskin (Senior Staff Adviser to the Commission, 1982-83)
Lori L. Hansen (Technical Adviser to Commission Member Robert M. Ball, 1982-83)
Eric Kingson, Ph.D., Professor of Social Work, Syracuse University
(Policy Advisor to the Commission, 1982-83)
Bruce D. Schobel, FSA (Staff Actuary to the Commission)

[1] Seven of the eight signatories of this statement served on the staff of the Greenspan commission. Nancy J. Altman, J.D. served as executive assistant to Alan Greenspan, who chaired the Commission; Merton C. Bernstein, LL.B.., Coles Professor of Law Emeritus, Washington University, served as principal consultant to the Commission; Suzanne M. Blouin served as executive assistant to Robert J. Myers who was executive director of the Commission; Elizabeth T. Duskin served as Senior Staff Adviser to the Commission; Lori L. Hansen served as technical adviser to Commission Member Robert M. Ball; Eric Kingson, Ph.D., Professor of Social Work, Syracuse University, served as policy advisor to the Commission; and Bruce D. Schobel, FSA, served as staff actuary to the Commission. The eighth signatory of this statement is Patricia E. Dilley, J.D., LL.M, Professor of Law, University of Florida, who served as professional staff to the Subcommittee on Social Security of the Ways and Means Committee of the U.S. House of Representatives from 1981 to 1987, and worked closely with the staff of the Greenspan commission.

[2] While Social Security is in surplus with or without inclusion of its investment income, we believe that the investment income should be treated identically to all other sources of income. Some have argued that Social Security’s investment income should be ignored because it involves inter-fund transfers which are not shown when the federal budget is displayed on a unitary basis and are irrelevant for the limited exercise of macroeconomic analysis. In contrast, we believe that in determining the financial status of Social Security, it is illogical to exclude its investment income, which has been a source of Social Security revenue starting in 1937, and is dedicated, by law, to the exclusive use of its beneficiaries.
[3] See footnote 2.
[4] We have limited our statement to Social Security, but many of the same arguments apply to other programs, such as Medicare. It too is vitally important to the nation, has lower administrative costs than private insurance despite its coverage of the most expensive part of the population, and has rising costs primarily as a result of the same pressures that are driving up the nation’s health care costs, private as well as public. Like Social Security, it has never been subject to an expedited fast-track procedure. The only reason to subject it to one seems to be simple avoidance of accountability.

Evaluating Cash for Clunkers: The Case of the Missing Denominator

2009-11-10T07:19:00.007-05:00

by Tom Bozzo

An AP story (via Felix Salmon) based on an analysis of "Cash for Clunkers" transactions is circulating with the non-news that a number of the transactions involved trades of gas-guzzling trucks for only modestely less gas-guzzling trucks. Here's the lede:

The most common deals under the government's $3 billion Cash for Clunkers program, aimed at putting more fuel-efficient cars on the road, replaced old Ford or Chevrolet pickups with new ones that got only marginally better gas mileage, according to an analysis of new federal data by The Associated Press...

The single most common swap — which occurred more than 8,200 times — involved Ford F-150 pickup owners who... trade[d] their old trucks for new Ford F-150s. They were 17 times more likely to buy a new F-150 than, say, a Toyota Prius....

Whoa now. It isn't until the 6th paragraph that readers are told the analysis involves more than 677,000 transactions, so the most common swap accounts for just 1.2 percent of cash-for-clunkers transactions. The seventh paragraph finally deigns to mention the average fuel economy statistics: 15.8 mpg for the traded clunkers, 24.9 mpg for the purchased vehicles — if you invert the mpgs, that's a 36.5% reduction in fuel consumption at the means.

Salmon for whatever reason reckons this makes cash-for-clunkers the administration's worst policy initiative yet, which brings a lolcritter to mind. Even William Buiter granted in an otherwise cranky post that, under conditions clearly met by the program (i.e. a temporary incentive that's big enough), the programs are "bound to work" as Keynesian stimulus which arguably the administration hasn't pursued in sufficient quantity. [*]

More below the jump.

None of this is news because the ability to trade old trucks for slightly more fuel-efficient new trucks was a widely reported feature of the enacted program design, which was biased towards the stimulus end of things, given the truck-heavy product lines of the domestic three. Participants could get $3,500 for a 1 mpg improvement in a light truck-for-light truck trade. Still, program participants generally used the credits for something better than 2 mpg improvements. Here's the full distribution of differences between the old- and new-vehicle MPGs as reported in the CARS public transaction database:

mileage_diff | Freq. Percent Cum.
------------+-----------------------------------
-3 | 4 0.00 0.00
-2 | 5 0.00 0.00
-1 | 20 0.00 0.00
0 | 116 0.02 0.02
1 | 9,961 1.49 1.51
2 | 37,486 5.61 7.12
3 | 31,130 4.66 11.78
4 | 36,584 5.47 17.25
5 | 50,526 7.56 24.81
6 | 56,730 8.49 33.30
7 | 50,187 7.51 40.80
8 | 49,397 7.39 48.19
9 | 41,127 6.15 54.35
10 | 62,020 9.28 63.62
11 | 71,757 10.74 74.36
12 | 47,101 7.05 81.41
13 | 38,482 5.76 87.16
14 | 26,377 3.95 91.11
15 | 16,205 2.42 93.53
16 | 10,801 1.62 95.15
17 | 5,433 0.81 95.96
18 | 3,019 0.45 96.41
19 | 1,478 0.22 96.63
20 | 896 0.13 96.77
21 | 1,530 0.23 97.00
22 | 475 0.07 97.07
23 | 1,576 0.24 97.30
24 | 1,016 0.15 97.46
25 | 870 0.13 97.59
26 | 717 0.11 97.69
27 | 361 0.05 97.75
28 | 333 0.05 97.80
29 | 141 0.02 97.82
30 | 95 0.01 97.83
31 | 64 0.01 97.84
32 | 5,504 0.82 98.67
33 | 1,965 0.29 98.96
34 | 2,401 0.36 99.32
35 | 2,276 0.34 99.66
36 | 1,223 0.18 99.84
37 | 680 0.10 99.94
38 | 303 0.05 99.99
39 | 60 0.01 100.00
40 | 7 0.00 100.00
------------+-----------------------------------
Total | 668,439 100.00

The distribution is a bit bimodal, with peaks at 6 and 11 mpg improvements; the latter is the most common swap in mpg improvement terms, or to borrow the AP article's reporting style, that's around 9 times more common than F-150 for F-150 trades. Fuel economy improvements of more than 30 mpg over the trade-in vehicle (roughly, trading a very large truck for a Prius) are more common than F-150 for F-150 trades. The 1 mpg minimum improvement likewise was not overly common at 1.51 percent of transactions.

In addition, fuel consumption reductions and stimulus aren't the only potential benefits from the program. While current emissions regulations hold light trucks to the same standard as cars for regulated pollutants (as of 2009, in fact, though notably not [yet] including carbon dioxide), trucks previously were allowed to meet lower emissions standards. All cars and light trucks have been held to higher standards since the mid-1990s as stricter emissions regulations have phased in. Indeed, as the following table shows, fully 30 percent of trades predate the 1994 start of the phase-in for the Tier 1 emissions regulations. New Tier 2 vehicles are much cleaner than pre-MY2003 vehicles, which account for 99 percent of Clunkers trades.

Trade_in_Year | Freq. Percent Cum.
------------+-----------------------------------
1984 | 1,835 0.27 0.27
1985 | 9,703 1.43 1.70
1986 | 10,771 1.59 3.29
1987 | 12,171 1.80 5.09
1988 | 18,537 2.74 7.83
1989 | 23,826 3.52 11.35
1990 | 23,993 3.54 14.89
1991 | 28,036 4.14 19.03
1992 | 32,248 4.76 23.80
1993 | 41,652 6.15 29.95
1994 | 57,145 8.44 38.39
1995 | 66,363 9.80 48.19
1996 | 61,430 9.07 57.26
1997 | 65,955 9.74 67.00
1998 | 65,876 9.73 76.73
1999 | 62,441 9.22 85.95
2000 | 43,758 6.46 92.42
2001 | 29,183 4.31 96.73
2002 | 16,114 2.38 99.11
2003 | 4,472 0.66 99.77
2004 | 1,226 0.18 99.95
2005 | 254 0.04 99.99
2006 | 52 0.01 99.99
2007 | 23 0.00 100.00
2008 | 17 0.00 100.00
------------+-----------------------------------
Total | 677,081 100.00

There's also a cautionary lesson in here investigating large databases. In a 677,000-record dataset, there will be hundreds or thousands of errors unless the data are meticulously cleaned. The AP report takes note of the 145 transactions listed above where the mileage of the trade was no worse than that of the new vehicle, which could indicate frauds against the program if correct. Among the putative horror stories:

A driver in Negaunee, Mich., traded a 1987 Suburban that got 18 mpg for $3,500 toward a new Silverado pickup that got only 15 mpg. An Indianapolis driver traded a 1985 Mercedes 190 that got 27 mpg for $3,500 toward a new Volkswagen Rabbit that got only 24 mpg.

The article is correct based on the mpg for the trades as coded in the database. However, other information in the database suggests that the transactions actually may have involved valid fuel economy improvements. The database includes the vehicle identification number (VIN) of the trade, which provides important eligibility information on the cars when decoded.

In the case of the 1987 Suburban, to get 18 mpg it would need to be a RWD model equipped with a 6.2-liter diesel engine. That's what the database record says, but according to the VIN, the Suburban was a 13 mpg gas-engined model. Likewise, the VIN of the 1985 Mercedes is consistent with the car being an eligible 18 mpg gas-engined 190 rather than a 27 mpg diesel 190. In both cases, the database is ambiguous as to the validity of the transactions; if the VINs are correct, then they were allowable.

The Cash for Clunkers program pretty clearly was not designed as an efficient environmental program, and there have been questions as to its efficiency as stimulus, too. However, as its costs are spread over aims of stimulus, reducing fuel consumption (which has costs external to car owners), and reducing emissions pollutants other than fuel consumption-related GHGs, it doesn't have to be. To call it the Worst Obama Program Ever is to go overboard.

[*] Buiter, who takes the line that it's crazy per se to destroy a portion of the capital stock, doesn't carefully consider that automobiles don't just magically produce transportation services; they consume other inputs and emit various wastes doing so.

More on the Looming Structural Unemployment Crisis

2009-11-10T07:18:00.004-05:00

Rdan

Martin Ford continues his theme in the following post, on comparative advantage:

More on the Looming Structural Unemployment Crisis, and on Comparative Advantage

In my previous post, I suggested that job automation technology might someday advance to the point where most routine or repetitive jobs will be performed by machines or software, and that, as a result, we may end up with a serious structural unemployment problem. I’d like to respond to some of the objections that were raised regarding that idea.

I thought I would start with a response at the Economist’s Free Exchange blog, which said:

… in general I am pretty sanguine about the long-term prospects for continued voluntary employment of humans. Technology isn't free, and even if we arrive at a world where some pieces of technology are better at everything than humans, the principle of comparative advantage nonetheless suggests that people will find work.

The idea is that, since everyone has a comparative advantage in something, just about everyone should be able to find some sort of a job. Thus we can be “sanguine.” Nearly every explanation of comparative advantage I have seen involves either individual people or countries. I haven’t seen examples where machines or automation technology come into play, so I thought I’d take a shot at it here.

Suppose we have a tractor and a team of oxen. Both can be used to plow fields, pull wagons or do other things around the farm. Clearly, the tractor out-performs the oxen in every task. Still, there ought to be some area in which the oxen don’t perform quite so badly relative to the tractor. Maybe the tractor is a little less efficient at plowing smaller fields since it has to make many turns. Or maybe fuel for the tractor is much more expensive in some regions, and so the oxen ought, in those cases, to have some sort of comparative advantage. So why have oxen been completely put out of work in developed countries like the United States?

It seems to me that there are two reasons. First, there is the magnitude of the absolute advantage that the tractor has. A tractor is a disruptive technology relative to the oxen. In order to have a meaningful comparative advantage, it’s probably helpful if you can get fairly close to the competition in at least one area.

The second reason is, perhaps, even more important: tractors, being machines, can be replicated on demand. If we imagine that a shortage of tractors existed, then comparative advantage would work. The available tractors would be deployed in their most productive uses, and the remaining work might well go to the oxen. But, in reality, the farmer can acquire as many tractors as he needs to do all his work, and in fact, he has no choice but to do so in order to remain competitive with other farmers.

As another example, suppose you are a brain surgeon who is also an excellent cook. Now, you might choose to employ a cook who is not quite as good as you are because doing so would free up your time and energy to do more brain surgery. So comparative advantage works there. But suppose you develop a machine (or two machines) with a dramatic absolute advantage in both cooking and brain surgery. Then, you could replicate your machine, and pretty soon there would be no jobs for cooks or brain surgeons.

So it seems like that might be a rule: If an affordable machine (or software algorithm) achieves a dramatic absolute advantage in a job or task, it will most likely be replicated and deployed until all competitors are eliminated. Comparative advantage is not much of a defense against that.

It seems to me that over time (not next week, but over years and decades), machines and software automation applications are likely to achieve that type of dominance in a great many areas, and they will be replicated until they consume all the available work. Any enterprise that failed to deploy this new technology would be less competitive.

All of this, of course, really amounts to nothing more than a restatement of the principle of obsolescence: in the long run, disruptive new technologies don’t find an equilibrium with old technologies. Old technologies get replaced. This applies equally to biological technologies like oxen—and perhaps it will someday even apply to human workers.

That’s an idea that economics is probably not ready to accept. Interestingly, other disciplines like biology or physics don’t give any special status to people. We are assumed to be subject to the same overall rules of nature as anything else. No so, with economics. For economists, people are very special; people are labor, and people get a special “L” in all the equations. Economists assume that people—and not just a few people but the vast majority of available workers—are indispensable to the production process. That has been true historically, but will it always be true?

Then again, maybe I’ve missed something. Maybe there is an area where human workers will always have an absolute advantage: in jobs that require uniquely human qualities or creativity, artistic ability and so forth. A lot of the conventional wisdom seems to suggest that we simply need to retrain, re-educate and redeploy workers into these areas, and everything will be fine. Is that likely to be the case? I’ll look at that idea in my next post.
__________________________
Martin Ford is the author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future and has a blog at Econfuture

Pigou Club

2009-11-09T17:29:00.002-05:00

Robert Waldmann

is joining The Pigou Club and hopes for at least some discussion in comments.

That is all.

The Changing Face of Health Care Fraud

2009-11-09T13:58:00.000-05:00

Tom aka Rusty Rustbelt

The Changing Face of Health Care Fraud

Every President since Gerald Ford has campaigned against Medicare and Medicaid “waste, fraud and abuse.” Ditto many people campaigning for Congress.

The primary fraud prevention systems are aimed at providers, with the Office of Inspector General (DHHS – CMS) and the FBI taking the lead on large fraud cases. States are also very active in Medicaid fraud investigations. Providers spend vast sums every year to prevent fraud, usually in the form of compliance plan activity.

The leading presumption is fraud will be perpetrated by providers via double billing, upcoding, kickbacks, and etc., but the face of health care fraud is changing.

Exact numbers are hard to find, but by monitoring several sources it appears non-providers (some mobbed up and some immigrant groups) are combining ID theft and computer driven fraud to suck funds out of Medicare and Medicaid.

60 Minutes did a program recently on phony pharmacies and DME* shops in Miami, and one informant guessed there may be 2000 phony shops in the Miami area alone. Wow.

The key is to do a real credentialing process before issuing a provider ID number. Physicians jump many hurdles to get a number, despite piles of credentialing paperwork, but apparently phony suppliers can begin billing almost immediately.

The feds are still aiming at legitimate providers with the Revenue Audit Contractor (RAC) program. Likely the contractors will find some billing errors at every single provider, sweeping up crumbs while real criminals are abusing the treasury.

*Durable Medical Equipment
_______________________________________
Tom aka Rusty Rustbelt

Airlines, A La Carte Pricing, Deregulation and Executive Pay - A Hodge Podge

2009-11-09T05:00:00.002-05:00

by cactus

Recently the ex-GF and I were traveling, and we ended up flying on United. I haven’t flown on United in recent years, as it hasn’t been a major carrier in a number of the places I’ve lived recently. Now maybe things have changed since the previous time I was in a plane (a month earlier, Delta Airlines) but it seems to me that United is taking a la carte pricing a bit further than other airlines.

When we went through automatic check-in, we were offered two different choices for upgraded leg-room. We were also charged $20 buck for checking one bag. It wasn’t overweight, it is just that now there is a charge for luggage.

It seems most people on that flight were aware of the $20 charge; overhead compartments were filled up completely, mostly with “carry-on” bags significantly larger than the one piece of luggage we had checked. As a result, a number of people had to check bags at the gate. Now here is the interesting thing… because so many people had to check bags at the gate, and those bags had to be available upon deplaning, none of us were allowed to exit the aircraft until after the bags that had been gate checked were brought up. Because so many people were trying to avoid a) waiting at the baggage carousel and b) paying twenty bucks for a piece of luggage, everyone had to wait longer. Perverse incentives lead to undesirable outcomes.

I don’t think the a la carte pricing is working so well in other ways either. See, on the flight back, I had the seat with the most leg room in the entire plane – I was sitting in the emergency row. And I wasn’t charged extra for it either. See, we had the opportunity to leave early, which means we flew standby. We were literally assigned the last two seats on the entire plane… and nobody who had the opportunity to do so had paid for the upgrade, so the emergency row was all that was available.

My guess is that the perennial problems of the airline industry are self-inflicted, and date back to the period when the industry was deregulated. Until deregulation occurred, prices were set by government fiat, and airlines could only differentiate themselves on quality. After deregulation, they began competing on price. Companies that had previously trained their passengers to believe that flying was a special occasion that merited wearing formal attire retrained their passengers to think about price alone. When you make your product or service into a commodity, prices drop to marginal cost and that means if you have the kind of fixed costs the airline industry does, profits have to go negative.

So… if you were an executive at an airline, what would you do to change the passenger mindset? What can you convince the cattle passengers to pay for, and how? For what it is worth, I can’t imagine how any airline executive should earn more than minimum wage if they can’t come up with a credible answer to those questions. Slowly taking their companies bankrupt is something anyone can do.
____________________________________________
by cactus

(Rdan here...leaving for Chicago this week, and Southwest has an option for $10/person to upgrade to the A line so to speak from B and C lines, which determines when you can board. There is no limit to who can purchase the upgrade to the A line, so there is no guarantee the A line won't include everyone if everyone upgrades, which is allowed to date. It presents an interesting pricing dilemma as well.)

One of These Things is Not Like the Others

2009-11-08T16:55:00.000-05:00

I try to like the NYTimes Economics Reporting. I really do. Heck, any place that publishes Uwe Reinhardt can't be all bad.

But David Leonhardt, as he does often enough that I hesitate to read his work, again goes beyond the pale today, and clearly does so deliberately. The offending paragraph:

Twenty-two months after the start of the mid-1970s recession, real weekly pay was down 7 percent. For the early 1980s recession, the decline was 4 percent. Today, thanks to moderate pay growth and scant inflation, pay is 1 percent higher than when the Great Recession began in December 2007.

Let's (1) remember that wages are sticky and (2) look at this declaration.

Both of the previous recessions are cited as being about 16 months. The current one probably ran 18 for economists's purposes, and is in its 23rd month for the rest of us. But let's give him a pass on that.

Note, however, the careful phrasing at the end of the paragraph: "thanks to moderate pay growth and scant inflation." What does that mean? Well, let's look at the Annual inflation Rate (CPI) for the actual recessions under discussion:

Gosh; quite a difference! I wonder if Leonhardt is aware of it.

A finger exercise below the fold.

Just for fun, let's look at the wage changes over those periods. Now, unlike Leonhardt, I'm not going to use real wages. Let's see if we can figure out what the nominal change in wages is for each of those periods.*

1973-1975 Average Inflation Rate: 10.75. Real wage loss: 7% Wage increase in period: 3.75% (including the residual effects of wage and price controls)

1980-1982: Average Inflation Rate: 7.5% Real wage loss: 4% Wage increase in period: 3.5%

2007-present: Average Inflation Rate: 1.8% Real wage gain: 1% Wage increase in period: 2.8%

I don't know about anyone else, but I wouldn't be celebrating the wage "gains" of the current era. (And let's not even talk about actual wages received, since Barry Ritholz has that territory well-covered and then some).

*If you want to make the case that I should be using real wages, as Leonhardt does, please demonstrate (a) that all wages are renegotiated during a period of inflation, (b) that all parties are able to estimate inflation—even when at relatively unprecedented levels—accurately, and (c) that such negotiations were legally and commercially allowed during the period.

Musical Interlude

2009-11-07T22:37:00.003-05:00

Among the people who have been updating The Theory of Finance for the ObamaNation is Gregg Sommerville, whose job depends to some significant extent on people not believing the following riff:

More music below the fold.

The Bailout Rap

and the Subprime Mortgage Blues

A scaled model of debt driven stimulus

2009-11-07T21:45:00.004-05:00

by divorced one like Bush

Well, here is what I'm doing to support the US of A's economy. It's a lesson in the real model of economics. It is a scaled version of the concept of stimulus. I even did it by using financing just to make the model as close to real as possible. (OK, I had to finance it but...I used my credit union.) Yes, I'm driving up the debt, but I'm creating jobs and I'm build wealth.

I purchased locally to assure my bank supplied money (debt) is multiplied as much as possible. When this garage is done, I will have created over a dozen or more jobs directly and who knows how many as the debt money goes from the first exchange of hands (me to who ever) to the second exchange (whoever to whoever's whoever). Notice, that this is all happening via a producer economy not a financial economy. Any rescuing of banks is taking place by moving money into the hands of people first.

I'm even adapting to these hard economic times. I'm looking else where to earn a living. Actually, I'm looking to reduce my expenses by improving the effectiveness of my time. The practice (yes, health care has taken a hit) and the flower shop are slow so I will be honing my mechanic skills and fixing my vehicles my self.

Alas, there is a down side. The wealthy rent collector will no longer be collecting the rent.

Pre-view new template

2009-11-07T14:53:00.001-05:00

Rdan

Quick look at the new template, unfinished form. Any wishes?

Open thread Nov.7, 2009 (no GW)

2009-11-07T08:08:00.003-05:00

Political economy of lobbying

2009-11-07T05:47:00.004-05:00

Rdan

David Zetland at Aguanomics had some fun with a lecture and thought exercise.

02 November 2009
The Political Economy of Lobbying

Last week, I taught my students about different auction techniques. After I auctioned four books under different rules, I auctioned $1.00 for $3.75.

Now before you say "WTF?" (or perhaps I am too late!), let me explain.

First, it was an all-pay auction, which requires that all bidders pay their highest bid to the auctioneer, even if they do not "win."

Second, watch this video of the auction (4 minutes! drama! laughter!): (rdan...use this link)

Third, what happened? There were four bidders. Mr. A bid $0.25; Ms. B bid $0.50; Ms. C bid $0.75; Mr. D bid $1.00. Then Ms. B raised her bid to $1.25 before Mr. D won the auction with a $1.50 bid. Mr. D got $1.00, and I got $3.75 ($2.75 net).

Nice money maker, that all-in-auction :), which is why you should see five, below.

Fourth, why did this happen? Consider this:

1.If you bid $0.25 for $1.00, you stand to make $0.75.
2.If someone raises you (to $0.50), you lose that $0.25.
3.If you bid $0.75, then you still make (net) $0.25.

This set of incentives ("on the margin") makes it rational to keep raising the stakes given that you have bid because winning always has a higher payoff than losing. The "right strategy" is, of course to not bid at all. (As Joshua, the computer, says in Wargames: "Strange game. The only winning move is not to play.")

Fifth, all-pay auctions reproduce the dynamics of political lobbying in which the politician is auctioning the wording to some law, and lobbyists from both (many?) sides are contributing money, perks and attention to get their version of the law. All of the lobbyists pay, but only the politician wins.

Oh, and we lose as well. A politician who represented "the People" would write a law that maximized the positive change in social welfare, regardless of lobbying.

Bottom Line: Politicians benefit from lobbying; lobbyists compete to receive our money and rights; and citizens suffer. [I could soften this language to "some politicians" or "sometimes," but I these are structural institutionalized flaws.]

Storing Energy Bleg

2009-11-06T19:56:00.002-05:00

Robert Waldmann

I am eager to learn from this blog again. A problem with solar and wind generation of electricity is the sun isn't always shining and the wind isn't always blowing and it is costly to store energy. I don't see why energy can't be stored using hydroelectric dams. They store huge amounts of energy in lakes. So what's the problem. More thoughts after the jump.

OK problem number one is that the hydroelectric plants are where they are not where we want electricity. This means that a national power grid which doesn't waste energy would be needed. I think that means very high tension direct current.

Such capacity would also be needed to use wind power much at all as the windy states are sparsely populated. I assume the problem is solvable and that the cost is not prohibitive.

A second problem is that the peak capacity of hydroelectric power plants would have to be increased. If they build up water during the day and release it at night, then they have to be able to convert the large flow to electricity. Dynamos would have to be added in some way. Now I Imagine that this can't be all that costly. I think of a huge siphon or a tunnel or a channel. Am I demonstrating my ignorance of engineering.

Open thread Nov. 6, 2009 (with GW)

2009-11-06T17:08:00.000-05:00

Opting Out and Individual Affordability Credits: a reply to DOLB

2009-11-06T11:57:00.003-05:00

by Bruce Webb

Divorced One and I are having what I think is a useful exchange that started with my post on Eligibility and Enrollment which he followed up with More on the Public Option. If you haven't read that please do as this piece won't make much sense otherwise.

DOLB and I now agree that employees can opt-out of employer paid coverage and enroll in the Public Option. The key to entry to the PO is to not be ENROLLED in an employer plan. Now clearly there are ways to decline or drop employer paid coverage today. For example if you are retired military and covered under Tri-Care you don't need to accept coverage, or if you get married to someone with a family plan you can drop coverage, at worst you would have to wait until the annual Open Enrollment period. There is nothing in ether current law or this proposed legislation that binds you to the employer plan. On the other hand the system is set up as 'opt-out' rather than 'opt-in', if you accept a job with employer coverage and for whatever reason (perhaps you are a Christian Scientist) refuse to sign up for a plan option the employer is authorized to auto-enroll you in the lowest cost plan. But you can, if you choose take positive steps to opt-out of such coverage. So why does CBO project that so few people will choose to opt-out of employer coverage and into the Public Option? Well you would have to ask them, generally CBO doesn't discuss its specific methodology, but the answer seems to be that on their calculations such a choice would not be financially advantageous to the worker. This was explained in a response of a congressional staffer to DOLBs email question:

Any individual (but not any employer) can participate in the Exchange and therefore could sign up for the public option. BUT, to do so, they would have to dis-enroll in their qualifying coverage and meet the other requirements necessary to participate in the Exchange. However, there is zero incentive for anyone to do this since they’d be responsible for 100% of the cost of the care they chose in the Exchange. If they stuck with their employer sponsored or other qualifying care, the vast majority of the cost of coverage is picked up by someone other than the individual. That’s why so few people are projected to enter into the public option. Additionally, access to the Exchange, and the public option, IS restricted for employers. Only the smallest businesses can use it at first, and later slightly larger businesses. The Secretary can then choose to open it up to all employers if she feels the Exchange has the capacity to handle that. The goal is to do so.

Under Sec 411(3) Employers whose employees opt-out of coverage and enroll in an exchange plan, including the PO, have to pay a fee, but according to the congressional staffer the money does not explicitly follow the employee. So where does it go? What does it pay for? And there seems to be only one answer, one discussed below the fold.

The flat fee paid by employers for each opt-out employee goes into the general pot that funds individual affordability credits for Exchange Eligible employees which in this case includes the opt-outs. The rules governing affordability credits are laid out in Title III Subtitle C based on Income Determinations set out in Sec 345. Under the bill if you make more than 400% of Federal Poverty Level you are not eligible for affordability credits. Which means that any opt-out in this category would indeed be stuck with 100% of the cost of an Exchange Plan. But people earning between 150% and 400% of FPL would be eligible for affordability credits on a sliding scale. The question would be whether there are any circumstances under which the value of those credits exceed the value of the employer contribution to the employer plan. CBO seems to be calculating that in most cases the answer is no, the premium limits on those employer plans established in the bill being enough to maintain a rough parity between out of pocket costs between and individual plan under the Exchange and an employer group plan with enough advantage to the latter to keep employees from jumping ship. And maybe they have the balance right.

So when the staffer said that opt-out employees are stuck with 100% of the cost I think it was not quite right, if you are an Exchange Eligible Individual you are eligible for sustainability credits which reduce your cost. But per CBO not enough to actively induce large-scale opting out. Meaning that while everyone is theoretically ELIGIBLE for the Exchange, relatively few people will choose to ENROLL.

How to Explain Moral Hazard

2009-11-06T11:46:00.001-05:00

It took me many years to understand the phrase "moral hazard." It's a fundamental tenet of economics, usually used to explain that, since consumers are untrustworthy, businesses need to charge them more.*

It was finally cleared up for me in the midst of a presentation last year about how it's a "moral hazard" issue that divorce rates go up as more women work outside of the house/family business. So I asked the presenter, "You mean it's a moral hazard issue that women who have an independent income can now get out of an abusive relationship?"

Fortunately, one of the best Labor Economists in the world was in the room. He just looked up and said, "Or guys start leaving their wives because the wife can go to work now."

Aha! The light dawns: moral hazard is, indeed, about power relationships: it allows arseholes to be even greater arseholes. (One step further, and you start spouting Ayn Rand.)

Preceding is preamble to correcting an error made by a worker in today's Phialdelphia Daily News (h/t Dr. Black, of course):

Yesterday, Local 234 President Willie Brown said that the wage package was acceptable but that he was worried about the underfunded pension fund, funded only 52 percent. He said he believed that SEPTA had not contributed to it for 10 to 12 years....

"We could wake up and our pension could be completely gone," [Brown] said. "We don't want to end up like AIG," referring to the international insurance giant who got $173 billion since last fall in a U.S. government bailout.

Mr. Brown should not worry about that. AIG's creditors (e.g., The Great Vampire Squid) were paid in full, because Tim Geithner and Larry Summers want a veto-proof Republican majority by 2012, if not 2010.**

Pensioners, otoh, are subject to "moral hazard." Believing their contracts were viable, reasonable, and negotiated by people who were working in the best interest of the firm—that is, people who were not writing a check with their mouth that their pockets couldn't cash—clearly causes them not to do enough to save. Because they don't understand that mismanagement of their pension is their fault, and that the Pension Benefit Guaranty Corporation will only ensure that their pensions will be paid "up to certain limits," no matter how much extra Roger Smith or Michael Eisner or Jack Welch took from the company for performing almost as well as the rest of the stock market.

So, let us say to Mr. Brown and the rest of the workers who depend on their pensions being funded: Don't worry about being treated the way AIG was. You're going to be dealt with as a "moral hazard" problem for believing that the contract you negotiated will be enforced.

Why, if those workers were at all sensible, they would have taken the money upfront the way those Captains of Industry did, instead of gotten a false sense of security ("moral hazard") from contractual negotiations about future payments.

As noted by Dr. Black, while management claims that they are fulfilling their legal obligations, management's pension fund is almost 25% better funded than the workers fund (53% v 65%).

This is, of course, A Good Thing. After all, we wouldn't want workers to believe that what they think of as Contractual Obligations is anything other than a case of "moral hazard."

UPDATE: I see, via David Wessel's Twitter feed, that Ricardo Caballero puts forth standard Economics Reasoning:

His idea is likely to give heartburn to many economists and policy makers, who worry about “moral hazard” — the idea that if financial institutions know they’ll be saved in an emergency, they’ll take even greater risks that will inevitably lead to greater disasters.

Don’t fret, says Mr. Caballero: “this moral hazard perspective is the equivalent of discouraging the placement of defibrillators in public places because of the concern that, upon seeing them, people would have a sudden urge to consume cheeseburgers.”

After all, we just have to acknowledge that "moral hazard" exemptions are the rule, not the exception, for mismanaged businesses. After all, paying out more in bonuses than you make in a year is a Perfectly Reasonable Business Strategy.

*Seriously. The standard example is that people "don't tell the whole truth" on health insurance applications, so companies need to charge them more. The logical extension of this is that people who tell the whole truth are leaving money on the table, since no insurance company would ever take an ex poste action against people who omit or forget that sprained ankle from thirty years ago. For an alternate view, see Malcolm Gladwell.

**There may be an alternate explanation, but this one requires the fewest outlandish assumptions.

Employment Report

2009-11-06T09:58:00.008-05:00

By Spencer,

The unemployment rate jumped to 10.2%. Except for the peak rate of 10.8% after the 1982 recession this is the highest in the post WW II era.

The overall tenor of the report was very similar to the past three months reports and sent the message that the economy is no longer collapsing as it was earlier this year, but it is still in a recession. The encouraging news in the report was that temporary employment improved and that manufacturing hours worked and averge work week improved. This implies that the recession may be over in the manufacturing sector, but not in the service sector.

Because service employment is about 112.5 million versus 11.7 million in manufacturing the improvement in manufacturing was swamped by the continued fall in services. Consequently, aggregate hours worked fell 0.2%. This is similar to the numbers in yesterday's productivity report and implies that fourth quarter productivity will also be strong with all that implies for
weak employment.

Average hourly earnings did improve, as both average hourly earnings and average weekly earnings rose by 0.3%. But with oil up about $10 last month this is unlikely to generate an improvement in real wages or income. On the encouraging side, maybe the past years actual decline in nominal personal income growth may be ending.

One man's past experience with technological change and employment

2009-11-06T09:00:00.001-05:00

lifted from comments by run 75441

These are comments that I found interesting describing change to manufacturing processes over tha last few decades. It made for a foil next to Martin ford's projections and our understanding of past events. It is not a post but I learned a few things.

"The key example is stamps for bashing metal which shape metal into one form." from Robert's post on
.....made me smile.

No one buys a stamping press that will make only one part. Stamping companies do buy stamping tooling (that die going into the stamping press) for a particular part. It is very possible to dedicate a stamping press to one part given the capacity of the machine and the volume of the part; however, different tooling can still be inserted into the stamping press dependent upon the machine's bed. There is flexibility to buying a stamping press and it can be used for various parts, even in Henry Ford's days. There is also flexibility to the stamping tooling by buying progressive dies which will do multiple operations in one press.

There has also been an evolution from manual machines and automatics to NC and CNC machines over the years. Let’s talk about throughput first though. Everyone is familiar with Henry Ford's assembly line were the vehicle in some form of assembly moves down the line. At each station, another part is added until the end when the car is complete. This type of assembly is still being used. What most people didn't see was the departments of machines (annealing, stamping, grinding, deburring, welding, turret lathes, automatics, drill presses, etc.) dedicated by function and not by flow of parts to supporting that assembly line These departments were not dedicated to the flow of a part through the plant the same as one might see in the assembly of a car. Each of the departments could be located in the corners of the building creating distances of transportation, requiring multiples of forklifts and labor to move parts from one operation to another, to stock eventually, and then from stock to final assembly (not including the multiple amounts of part inspections).

Magnify this by economic order quantities determined by Demand (months or weeks), Machine Setup (manuals and automatics setups were frequently measured in shifts), etc. It was used to determine a hopefully optimum inventory manufacturing lot based upon constants such as purchasing cost, carrying cost, fixed lead times, demand; which all of them at one time never were constant. The supply chain from customer order, to 100% of the Lot order, and going out the door could be months long . . . i.e. a casting having a 12 week lead time, through, 8 weeks long, etc. There was also a constant battle between Manufacturing, who wished to optimize setup, and typically Materials hoping to optimize inventory (unless they were into build it to be safe mode).

You have a factory setup by machine function rather than throughput and the functions scattered through the plant. Is it is any wonder why, there was a huge requirement for Labor to move parts, to operate each of the machines by function, have excessive transit distances, and manufacturing times plus lead times??? A part processing spaghetti farm. Using Pareto analysis of the flow of parts through a factory from the routing of operations to make a part, it is, and was entirely possible to achieve a much more efficient layout of a factory by eliminating machine departments by function, layout the shop floor by major part flows from receiving to shipping, and in the end reduce internal transit time and labor required, improve throughput and delivery, and reduce EOQ for a part until manufacturing whined about "setups." All of this could be achieved without buying one CNC machine. It is the process of manufacturing that can make a huge difference.

So what did the CNC and or NC machine do for manufacturing? It combined operations such as drill, threading, boring, and lathe. No longer did a company need a drill press, lathe, etc functionality except for alternative runs, because all of those operations were resident to one machine. With tooling for each function resident to the machine; setups were reduced, and again there was a reduction of setup, machine, and forklift operators. It also cut down on the size of the plant needed as all of the operations were resident to one machine instead of taking up valuable floor space. The only thing it didn't impact was inventory as people like that “feelie-feelie” type of safety in it rather than rely upon capacity and speed of throughput.

I am going to disagree a little with your take on implementing new product or new parts. I would suggest it happened consecutively with the running of old product. While it is true that brown field analysis and change over of the shop floor might be disruptive, it was typically planned for and the necessary inventory laid aside to handle demand. In turn the plant people were used to move machinery around. In the end, the changes were implemented on weekends, holidays, Christmas shutdown, Summer shutdowns, etc.

Is it capital equipment or is it a process called kanban impacting throughput? Kanban doesn't have an outlay for its implementation other than to change the way we think about making parts and product, one part or product at a time, in the smallest increment of inventory possible, and correctly each time. It doesn't even require computerization (internally) to implement as it is a pull type system rather than a push or build to forecasted demand system. In each operation, the inventory, wait time, operation time, and transit time is minimized. Is the success of Toyota based upon CNC equipment or is it in the process of manufacture itself? You give way to much credit to computerization of machines. There is something else a brewing and I liked Spencer's explanation.

There was a time when one spent a lot of time as an apprentice to operate a lathe or to be a tool and dye maker. You are right; this is a vanishing "skilled" capability. Instead we rely upon computer cad cam to image parts and then apply the correct operations needed to shape the part in a Mazak or Cincinnati Milacron CNC. It does not occur quite a quick as you state does; but, it certainly is another consolidation point of various operations.

I consulted at a company called Miami Industries (taken over) in the glorious town of Piqua. I lived in MadCity WI and spent much of my time consulting in Ohio. They were meeting much of their customer order lead times when demanded of them; but, they had difficulties doing so. The process was simple (as I recall): slit and cut flat stock (came in rolls), draw over mandrill and weld, burnish outside to eliminate welding burr, cut to size, bend to shape, plate or coat. The company wanted to know how to improve delivery.

At 30-someting and looking like doogie-howser, I got no respect and always had an older consultant with me (colonel sanders this time). I went on the plant tour and listen to their spiel. They ran monthly lot sizes (20 day, 5 days/week) and wanted to improve deliver to weekly from whatever it was . . .

I looked at the VP of Manufacturing and said; with a 20 day manufacturing lot size, you are averaging 10 day deliveries on any order. "Oh no, we can get then out in 5 days if needed." Yes, but the average is 10 days. Given the size of the Manufacturing Lots planned from the customer orders accumulated, the company having an average throughput of 10 days made sense. If they wanted to improve delivery, than cut the lot sizes to 10 days from 20 days which would increase the turns of the orders on the shop floor. It would be a start towards a much quicker throughput, less inventory on the floor and in stock on either end, and improved delivery.

"We can't do that because of the setup." Change your setup by making it more efficient with tooling resident to the machine, handles instead of nuts and wrenches, and look at the costs of inventory as opposed to setup, etc. The excuses for not doing something were endless and this change did not involve one new piece of capital equipment. I have another word for them; but for now I will settle for . . . "whims." Oliver Wight used to call them “cement heads.”

The whole issue revolved around lot sizing. I set out to prove how silly they were and that my average of 10 days was spot-on. They had a shop floor system that collected data on each operation. I was able to look at each Mandrel and ascertain the amount of time for a lot to clear it, the setup times involved, the start of the next operation and total time, and transit times between operations. 75% was sit around time waiting for the operation, 8% was transit time, 10% was setup time and the balance was actual operational time making parts. Oh, an average lead time varied from 9.3 to 10.1 days for an order. Not only was my quoted average correct; but, there was adequate cost savings to be had in inventory reduction to also justify the change. I was hated . . . the life of a throughput analyst! Don’t chase technology for technology sake.

Could Advancing Job Automation Technology Cause Structural Unemployment?

2009-11-06T05:28:00.001-05:00

Rdan

Martin Ford offers one man's look into the future of a world in the USA of the results of continued increasing productivity, increasing income inequality, declining wage compensation, and consumption supported by debt.

Robert touched on the issue recently, and Sandwichman has developed a range of thoughts on labor at Econospeak. One post cannot handle the complexities, but here is a start to the conversation.

Could Advancing Job Automation Technology Cause Structural Unemployment?

The unemployment situation is looking increasingly dismal. Is it possible that there's something going on that no one wants to acknowledge?

There can be little doubt that computers, robotic technologies and other forms of job automation have been getting far more capable and that as this trend continues, more workers are certain to be displaced in the relatively near future. Most economists dismiss any concern that this might lead to long-term structural unemployment. At the risk of being labeled a "neo-Luddite," I'd like to explore this issue a little further.

I think I can make a fairly strong argument that a very large percentage of jobs are, on some level, essentially routine and repetitive in nature. In other words, the job can be broken down into a discrete set of tasks that tend to get repeated on a regular basis. It seems likely that, as both hardware and software continue to advance, a large fraction of these job types are ultimately going to be susceptible to machine or software automation.

I'm not talking about far fetched science fiction-level technology here: this is really a simple extrapolation of the expert systems and specialized algorithms that can currently land jet airplanes, trade autonomously on Wall Street, or beat nearly any human being at a game of chess. As technology progresses, I think there is little doubt that these systems will begin to match or exceed the capability of human workers in many routine job categories--and this includes a lot of workers with college degrees or other significant training. Many workers will also be increasingly threatened by the continuing trend toward self-service technologies that push tasks onto consumers.

One of the most extreme historical examples of technologically induced job losses is, of course, the mechanization of agriculture. In the late 1800s, about three quarters of workers in the U.S. were employed in agriculture. Today, the number is around 2-3%. Advancing technology irreversibly eliminated millions of jobs.

Obviously, when agriculture mechanized, we did not end up with long-term structural unemployment. Workers were absorbed by other industries, and average wages and overall prosperity increased dramatically. The historical experience with agriculture is, in fact, an excellent illustration of the so-called "Luddite fallacy." This is the idea--and I think it is generally accepted by economists--that technological progress will never lead to massive, long-term unemployment.

The reasoning behind the Luddite fallacy goes roughly like this: As labor-saving technologies improve, some workers lose their jobs in the short run, but production also becomes more efficient. That leads to lower prices for the goods and services produced, and that, in turn, leaves consumers with more money to spend on other things. When they do so, demand increases across nearly all industries--and that means more jobs. That seems to be exactly what happened with agriculture: food prices fell as efficiency increased, and then consumers went out and spent their extra money elsewhere, driving increased employment in the manufacturing and service sectors.

The question we have to ask is whether or not that same scenario is likely to play out again. The problem is that this time we are not talking about a single industry being automated: these technologies are going to penetrate across the board. When agriculture mechanized, there were clearly other labor intensive sectors capable of absorbing the workers. There's little evidence to suggest that's going to be the case this time around.

It seems to me that, as automation penetrates nearly everywhere, there must come a "tipping point," beyond which the overall economy is simply not labor intensive enough to continue absorbing workers who lose their jobs due to automation (or globalization). Beyond this point, businesses will be able to ramp up production primarily by employing machines and software--and structural unemployment then becomes inevitable.

If we reach that point, then I think we also have a serious problem with consumer demand. If automation is relentless, then the basic mechanism that gets purchasing power into the hands of consumers begins to break down. As a thought experiment, imagine a fully automated economy. Virtually no one would have a job (or an income); machines would do everything. So where would consumption come from? If we're still considering a market (rather than a planned) economy, why would production continue if there weren't any viable consumers to purchase the output? Long before we reached that extreme point of full automation, it seems pretty clear that mass-market business models would become unsustainable.

One of the things that concerns me the most about this scenario is the potential influence of consumer psychology. If at some point in the future consumers look out the window and see a landscape where jobs are relentlessly getting automated away, and if it appears that getting additional education or training provides little protection, there's likely to be a significant negative impact on consumer sentiment and discretionary spending. If we someday get into a reinforcing cycle driven by fear of automation, a very dark scenario could ensue. It's difficult to see how traditional policies like stimulus spending or tax cuts would be effective because they wouldn't address consumers' concerns about long-term income continuity.

Most economists will likely object to my arguments here as speculative and lacking in objective data. I think that if you look at issues like stagnating or declining wages for average workers, growing income inequality, increasing productivity, and consumption supported by debt rather than income, you can certainly find evidence that generally suggests we might be approaching that "tipping point" where structural unemployment is going to become a problem. However, it seems unlikely that an econometric analysis of past data is going offer clear support for this theory--and if it ever does, it will be very late in the game.

I wonder about the wisdom of the extreme emphasis on quantitative data analysis that seems to characterize economics. Should we really steer the ship exclusively by focusing our telescope on the wake? There might be an iceberg ahead.

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Martin Ford is the author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future.

More on the Public Option in the current house bill HR 3962

2009-11-05T18:00:00.000-05:00

by Divorced one like Bush

Bruce Webb put up a post titled "Health Care Exchange: Eligibility vs. Enrollment". I have gained some clarification on the subject and have shared it with Bruce. I have asked him to comment also.

There is a concern as to whether access to the Public Option (PO) was limited. Bruce's reading of the bill was that everyone has access to the PO based on section 411(3) which reads:

3) CONTRIBUTION IN LIEU OF COVERAGE.—
Beginning with Y2, if an employee declines such offer but otherwise obtains coverage in an Exchange- participating health benefits plan (other than by reason of being covered by family coverage as a spouse or dependent of the primary insured), the employer shall make a timely contribution to the Health Insurance Exchange with respect to each such employee in accordance with section 413.

Thus, the PO is not as restricted as people thought and in the future the possibility is that it could grow and be what people are saying it would be; a force for controlling costs, especially regarding insurance premiums. Sounds good, no?

My reading was that section 411(3) was tied in some way to whether your employer was "exchange eligible" or not. There are provisions that would allow all employers in the future to be exchange eligible but it is dependent on a report or two being produced and then the "commissioner" acting on the report or congress acting on the report. To me, this leaves too much political wiggle room.

I think we both assumed that exchange eligible or not, if the employee chose the PO, the employer would have to pay for the choice by paying into the exchange, the result being that the cost to the employee would be the same regardless of what decision said employee makes.

Well, Bruce was correct. Everyone has the option to choose the PO. Though there is a financial barrier. A big financial barrier that in my opinion makes this bill crap. I'll post my thoughts more on this later.

I contacted my congress person's office. They put me in touch with their legislative person. I asked this person (via email) which of us were correct.

Turns out, as noted, Bruce is correct that everyone has the option for the PO. However, if you make this choice in lieu of accepting one of the employer provided options you, my friend are on your own. You are on your own and will have to accept the total cost of the PO plan because the payment your employer makes into the exchange does not follow you.

The reason given for such a set up in the house bill is that there is concern that the employers would push their employees into the exchange. The legislative person noted that HR 3962 specifically is attempting to discourage this.

This is the essential two responses by the legislative person:

Any individual (but not any employer) can participate in the Exchange and therefore could sign up for the public option. BUT, to do so, they would have to dis-enroll in their qualifying coverage and meet the other requirements necessary to participate in the Exchange. However, there is zero incentive for anyone to do this since they’d be responsible for 100% of the cost of the care they chose in the Exchange. If they stuck with their employer sponsored or other qualifying care, the vast majority of the cost of coverage is picked up by someone other than the individual. That’s why so few people are projected to enter into the public option. Additionally, access to the Exchange, and the public option, IS restricted for employers. Only the smallest businesses can use it at first, and later slightly larger businesses. The Secretary can then choose to open it up to all employers if she feels the Exchange has the capacity to handle that. The goal is to do so.

I then asked: 411(3) notes that the employer has to make a contribution to the exchange following the rules of section 413 if the employee chooses to get health care via such. How does this square with your statement that the employee would be 100% responsible for the cost of the exchange coverage? Is the employer contribution not tied to their employee's choice? That is, the employer is just simply being charged as a participate in the over all exchange pool to provide the exchange money and thus the payment is not an offset of the cost incurred by the employee to purchase coverage from the exchange?
There response:

Exactly—money does not follow the person in the House bill. The Senate Finance bill does attempt to have the money the money follow the person I believe, but that gets complicated and provides a potential incentive for employers to try and push employees into the Exchange, which is expressly discouraged in HR 3269.

This is a link to a section by section synopsis of the bill.

Productivity Growth

2009-11-05T10:24:00.010-05:00

By Spencer,

Third quarter nonfarm productivity rose at a 9.5% annual rate as output rose 4.0% and hours worked fell at a 5.0% rate. Historically, productivity has been a very good leading indicator of real GDP growth lagged two quarters.

Productivity is also highly cyclical and the first year of a recovery typically experiences the strongest productivity growth.

Compensation jumped to a 3.8% annual rate, but on a year over year basis it is only up 0.5%.
Consequently, the year over year change in unit labor cost was -5.2%, the largest drop in recent years. With productivity growth this strong and such weak compensation growth it is hard to see how anyone can be seriously concerned about a resurgence of inflation. Except for oil, even surging commodity prices would not have a significant impact on the overall price level since they account for such a small share of final prices. Moreover, since potential GDP is a function of productivity growth and labor force growth the argument that the very large GDP gap is overstated does not seem to hold much weight as long as productivity growth is so strong.

I also updated the chart on Labor's Share to show that this trend is actually accelerating.