Law of diminishing returns

We spend more on health care than ever before, but we are less healthy.  We spend more on education than ever, but our children are poorly educated.  And in all the ups and downs of the economy of the last decades, we are about where we were in the 1970s.  Also, the internet has had far less impact on productivity and economic growth than we think.  Our economy is plagued by the law of diminishing returns.  So says economist Tyler Cowen, as discussed by Steven Perlstein:

Cowen’s thesis is that the period of 3 percent annual growth in incomes that stretched back to the 19th century ended in the middle of the 1970s as the pace of innovation slowed. Before the slowdown, he argues, industrial economies realized rapid income and productivity gains by picking the “low-hanging fruit” offered by the industrial revolution’s key innovations. While we like to think the Internet, the iPhone and microsurgery have dramatically altered the way we live, those changes pale in comparison to the impact on living standards from the introduction of electricity, motor cars and penicillin. Cowen’s claim is that the industrial world has hit a growth plateau as innovation confronts one of the most enduring principles in economics: the iron law of diminishing returns.

As you might imagine, a spirited debate is underway on economics blogs about Cowen’s view that the Internet may not really be the productivity bonanza that was once predicted. So far, he notes, the Internet has generated far less income and far fewer jobs than earlier innovations – think of the automobile – and the benefits it has yielded have been confined largely to the upper end of the income scale.

For me, however, the more intriguing argument in “The Great Stagnation” is that much of our recent growth may, in fact, have been a mirage. It is no coincidence, he writes, that during the recent decades of slow growth in incomes and productivity, three of the fastest-growing sectors of the economy have been education, financial services and health care. And while government statistics show productivity in those sectors growing at the same pace as the rest of the economy, other data suggest otherwise.

Although the United States spends at least twice as much on health care, per person, as other industrial countries do, Americans do not live any longer and often have measurably worse health.

Although spending on education has doubled in recent decades, average scores on standardized math and reading tests have remained about the same.

And what does the average American have to show for all that innovation and job growth in financial services over the past 20 years? A series of booms and busts that has left stock prices roughly where they began.

For Cowen, the central economic reality of the past three decades is that median household incomes have barely budged, even after adjusting for inflation and other factors. And his hypothesis is that too much money and talent and effort have gone into sectors where real productivity gains are hard to find. Once Americans became rich enough to satisfy ourselves with the basic necessities of life, it was only natural that we would decide to spend our additional income – our marginal dollars – on health care, education and financial services. We now discover, however, that each of those marginal dollars has generated less than a dollar of real value.

via Steven Pearlstein – Much of nation’s recent growth may have been a mirage.

Does he have a point?

The end of the store?

What the big chain bookstores did to the mom & pop shops, Amazon.com is doing to the big chain bookstores.  At least Borders, which may be in its death throes.  (Barnes & Noble is hanging in there.)  Border’s woes are not just the internet.  The Washington Post published a fascinating article about Borders in the context of the larger book business:  Borders struggles amid rapid changes in book sales.

We have discussed the pro’s and con’s of Walmart, which gives customers good prices and thus a higher standard of living, at the expense of wiping out small local businesses.   I wonder, though, if even the big corporate department stores are at risk from the internet.   My daughter (a grown-up) buys virtually everything online–shoes, clothes, vitamins.  Will we even need hard-copy shops, except to buy food and maybe staples from Wal-Mart, which will surely survive?

Would this be yet another phase of gigantism, as the big stores themselves get outdone by even bigger nation-wide virtual stores?

In the early days of the internet, it was thought that small, even home-based businesses would flourish, since the new medium would allow them to compete on an even playing field with the big corporations.  Maybe that is so.  The online companies that get my daughter’s business are in some cases small ventures run by stay-at-home moms.  Or is internet commerce itself getting taken over by the big players?  Might the human impulse to “go shopping” mean that there will always be bricks and mortar shops, including bookstores?

Cooking the books on health care reform

Democrats are saying that the Republican attempt to repeal Obamacare would add to the deficit.  Saying that our only hope of controlling the deficit is to have health care reform, they cite numbers from the non-partisan Congressional Budget.   Charles Krauthammer exposes the way the Democrats are cooking the books:

Suppose someone – say, the president of United States – proposed the following: We are drowning in debt. More than $14 trillion right now. I’ve got a great idea for deficit reduction. It will yield a savings of $230 billion over the next 10 years: We increase spending by $540 billion while we increase taxes by $770 billion.

He’d be laughed out of town. And yet, this is precisely what the Democrats are claiming as a virtue of Obamacare. During the debate over Republican attempts to repeal it, one of the Democrats’ major talking points has been that Obamacare reduces the deficit – and therefore repeal raises it – by $230 billion. Why, the Congressional Budget Office says exactly that.

Very true. And very convincing. Until you realize where that number comes from. Explains CBO Director Douglas Elmendorf in his “preliminary analysis of H.R. 2″ (the Republican health-care repeal): “CBO anticipates that enacting H.R. 2 would probably yield, for the 2012-2021 period, a reduction in revenues in the neighborhood of $770 billion and a reduction in outlays in the vicinity of $540 billion.”

As National Affairs editor Yuval Levin pointed out when mining this remarkable nugget, this is a hell of a way to do deficit reduction: a radical increase in spending, topped by an even more radical increase in taxes.

Of course, the very numbers that yield this $230 billion “deficit reduction” are phony to begin with. The CBO is required to accept every assumption, promise (of future spending cuts, for example) and chronological gimmick that Congress gives it. All the CBO then does is perform the calculation and spit out the result.

In fact, the whole Obamacare bill was gamed to produce a favorable CBO number. Most glaringly, the entitlement it creates – government-subsidized health insurance for 32 million Americans – doesn’t kick in until 2014. That was deliberately designed so any projection for this decade would cover only six years of expenditures – while that same 10-year projection would capture 10 years of revenue. With 10 years of money inflow vs. six years of outflow, the result is a positive – i.e., deficit-reducing – number. Surprise.

If you think that’s audacious, consider this: Obamacare does not create just one new entitlement (health insurance for everyone); it actually creates a second – long-term care insurance. With an aging population, and with long-term care becoming extraordinarily expensive, this promises to be the biggest budget buster in the history of the welfare state.

And yet, in the CBO calculation, this new entitlement to long-term care reduces the deficit over the next 10 years. By $70 billion, no less. How is this possible? By collecting premiums now, and paying out no benefits for the first 10 years. Presto: a (temporary) surplus.

via Charles Krauthammer – Everything starts with repeal.

Opium economics

From a news story on American frustration with the drug war in Afghanistan:

KABUL – After several years of steady progress in curbing opium poppy cultivation and cracking down on drug smugglers, Afghan officials say the anti-drug campaign is flagging as opium prices soar, farmers are lured back to the lucrative crop and Afghanistan’s Western allies focus more narrowly on defeating the Taliban.

That combination adds a potentially destabilizing factor to Afghanistan at a time when the United States is desperate to show progress in a war now into its 10th year. The country’s Taliban insurgency and the drug trade flourish in the same lawless terrain, and are often mutually reinforcing. But Afghan officials say the opium problem is not receiving the focus it deserves from Western powers.

“The price of opium is now seven times higher than wheat, and there is a $58 billion demand for narcotics, so our farmers have no disincentive to cultivate poppy,” said Mohammed Azhar, deputy minister for counternarcotics. “We have gotten a lot of help, but it is not enough. Afghanistan is still producing 85 percent of the opium in the world, and it is still a dark stain on our name.”

via As opium prices soar and allies focus on Taliban, Afghan drug war stumbles.

The article suggests that the campaign against opium production has failed.  But it seems to have succeeded too well.  If the price has shot up, that means that the supply has become much smaller.  Also, high prices could be expected to mean a drop in the use of heroin and other opium-derived illegal drugs.

But what we are seeing are the unintended consequences of the program to curtail opium production.  Eradicating all of those poppies now just means that the product is even more valuable than it was before.  Now more Afghanis have an incentive to get into the drug business.  And heroin users who support their habit via crime now have to commit even more crimes to service their addiction.

The laws of the marketplace operate no matter what.  The only way to curtail drug production is to reduce demand, and that requires a cultural and moral change in OUR country, not Afghanistan.

Housing allowance tax break may be doomed

Pastors and teachers, have you seen this?

As tax time begins, church legal expert Richard Hammar warns ministers, pastors and clerics to be mindful of a legal battle that has strong financial implications on their personal and church taxes in 2011.

In the January 2011 issue of Church Law & Tax Report, Hammar highlights tax developments, drawing special attention to a California court case that threatens to extinguish a federal tax break which dates back to 1954, the parsonage exemption.

Many churches give their pastors and ministers an allowance to help ease housing-related expenses, such utility bills, repair and yard work costs. The parsonage exemption allows ministers to receive this money free of any federal, and in parts of the country, state taxes.

However, a lawsuit set for trial in 2011 threatens the constitutionality of sections 107 and 265(1)(6) of the federal tax code, which establishes the housing allowance for ministers.

Atheist group Freedom from Religion Foundation filed the federal lawsuit in 2009. The group asserts the unique benefit set aside especially for “ministers of the gospel” is a violation of separation of church and state.

The FFRF cites the 1989 U.S. Supreme Court case Texas Monthly, Inc. v. Bullock to assert that tax benefits given only to religious institutions violate the Constitution’s Establishment Clause.

FFRF Co-President Annie Laurie Gaylor states in a 2009 press release that the benefit is unfair to those who are not religious ministers.

“All other taxpayers pay more because clergy receive this privileged benefit,” she proclaimed.

via Church Legal Expert: Minister Housing Tax Break Under Attack | Christianpost.com.

Granted that it is an important benefit to church workers and that we would be sorry to see it go, can anyone answer the objections to it?

Parts of the health care law that kick in

Now that it’s 2011, parts of the Health Care Reform Bill kick in.  The linked article summarizes changes in Medicare, giving seniors cheaper prescription drugs and giving them some free preventative tests.  Also a $2.5 billion tax on the pharmaceutical industry, which can only mean higher prices and less money to invest in new miracle drugs. Here are some of the changes that will affect everyone:

For those insured outside Medicare, 2011 starts a new requirement that insurers must spend 80% of revenue for small-group plans and 85% of revenue for large-group plans on medical care. The requirement is designed to rein in industry profit and administrative costs. Carriers that don’t meet the requirement will have to issue rebates to consumers, though those won’t go out until 2012.

Consumers will no longer be able to use their flexible spending accounts—tax-free funds set aside for medical costs—to pay for most over-the-counter items unless they are purchased with a prescription.

For many consumers, Jan. 1 will mark the first opportunity to tap into a slate of benefits that began taking effect Sept. 23. That’s when the law called for insurers to allow parents to keep a child on their policy until their 26th birthday, among other things. Employers didn’t need to make that batch of changes until they started a new plan year.

Nurse midwives also will see change in the new year. Until now, certified nurse midwives were paid 65% the rate of physicians for performing the same services by Medicare. Now they will be paid at the same rate.

via Big Health-Care Changes Arrive in New Year – WSJ.com.

I don’t understand.  First of all, 80% of revenue for one thing plus 85% percent of revenue for something else adds up to 165%.  That must be a misprint.  But it seems wrong for the government to “rein in profits and administrative costs.”  How does the government know how much administrative costs will be, much less how much profit a business should be allowed to make?

And why limit flexible spending plans?  How will that help consumers?  And how will paying midwives as much as doctors hold down health care costs?

How is any of this a good thing?


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