Archive for the ‘Economy’ category

Is America Behind in Not Having High Speed Rail?

January 31, 2010

With the State of the Union Address and President Obama’s chat with the Republicans there is an ocean of … well, call it stuff to sort through. In the mix is the idea of building a high speed rail system to both create jobs and strengthen the country’s infrastructure. The pundits who have been feasting on Obama’s pronouncements have largely come up short on this subject. In my view, high speed rail is (1) a wondrous thing, (b) expensive, © best suited to densely populated countries, and (d) perhaps impossible to implement here. If it can be done at all, jobs would probably be a decade away.

A Wondrous Thing

I have been an enthusiastic user of the Japanese high speed rail system. It is reliable, comfortable, and hassle-free. Air travel was once pleasant, but is now an ordeal of long lines, intrusive searches, and horrendous service. Airplanes have no room, no food, and no ventilation. Terrorists cannot be forced to hold uncomfortable postures, but air travelers can. As air travel deteriorates, the calm space of a high speed train is more appealing than ever. One sips tea as the landscape whooshes by, and you end up in the heart of your destination city, not at a remote airport where another hassle awaits. It is a grand vision.

Alas, it is not a cheap vision. Rail fares for any reasonable distance are slightly more expensive than air. Even that does not cover the costs. High speed rail systems are almost always built with government funds that are never repaid. Roads are built with public monies, but users pay gasoline taxes and license fees in compensation. Air travelers pay ticket taxes that more than repay airport costs. Airlines and highway users have to buy their own vehicles. The high prices for rail tickets only keep up with operating costs and do not pay the capital costs.

Rail Is Economic For Dense Populations

In Europe and Japan, high speed rail connects to local mass transit systems. Mass transit then takes travelers to their ultimate destination. In the U.S., the more common model is to rent a car at an airport to complete travel. There are a few U.S. cities that have useful urban mass transportation systems, but most do not. The reason is that most of our urban centers are too thinly populated.

To be effective, there must be a transit stop within walking distance of the ultimate destination. If a neighborhood is mostly ten story buildings, then there will be many more destinations within walking distance of station that if there are two or three story buildings. If each building has a large parking lot around it, then the number of destinations within walking distance from a station drops further. As density drops, the number of transit stations must increase and the transit lines must stretch to cover the thin landscape.

Urban areas of the U.S. are thinly populated in comparison to Europe or Asia. Sure, New York and Chicago are well-suited, but they are exceptions. Most of Silicon Valley has a law against four-story buildings. Even Los Angeles has only a small city center amid a vast sprawl. that’s the rule for American cities.

One of the more-discussed rail projects is to link Orlando with Tampa. Both have small city centers. The model for travel would be driving to the train station, taking the high speed rail link, then renting a car. The trip by car alone takes about an hour-and-a-half. The rail link itself might take only half an hour, but with the termination car rental, the prospect is to pay something like a hundred dollars for a trip that is no faster.

One may find viable routes, like San Francisco to Los Angeles, and the obvious Washington to Boston corridor that already has a form of high speed rail. These are exceptions.

American Exceptionalism in Transit Systems

As the rail links become longer, high speed rail becomes less attractive. The drive-fly-drive paradigm allows for cross-country travel between suburban locations in perhaps twelve hours. By high speed rail, it might be done in thirty hours, and it could be expected to cost whole lot more. That’s not a realistic alternative, yet advocates say we cannot have mere isolated rail links, but rather a whole country wide system.

My point is that America is not like other countries in important aspects related to transit. Long distances and sprawling cities limit prospects. It’s no more reasonable to suppose that America is behind the rest of the world in rail systems than to suppose that the rest of the world is behind us in domestic air transportation. The goal is to find what best suits the situation.

The Steps to Completion

There is another bit of American exceptionalism that may rule out high speed rail altogether. That would be the legal system. The time sequence for building a rail link comprises: (1) pick the route, (2) perform an environmental study, (3) fight lawsuits over the politics of the route, (4) fight lawsuits over the environmental impact, and, if the legal barriers are overcome, (5) lay tracks.

Route planning involves legislators who demand that the link go through their district as a condition for supporting it and, at the same time, cities and towns who do not want their tranquility shattered by a whooshing train. These factors seem to about double or triple the cost over what it might be. The cheapest way to get from A to B is through empty land, but empty land has no voters. The train from San Francisco to Los Angeles will probably have to be routed through Fresno to get political support, but that will at the same time make it likely to raise someone else’s objections along the populated route.

Rail lines cover lots of ground. That increases the chances that the line will cross the habitat of a listed endangered species. Anyone can sue to stop a project and the Courts are empowered, indeed required, to stop any project that threatens. A massive flood gate that might have saved New Orleans was funded for construction when a court order killed the project. Closing the gates during a hurricane might have interfered with the breeding habits of certain fish, and that was pre-emptive. Too bad for New Orleans, but no tradeoffs are allowed.

I wonder if it is possible to build any large construction project like a rail line. It seems doubtful. Anything large is bound to cross paths with an endangered moth or lizard. If construction is possible at all, figure a decade to settle the legalities. If there were no legal obstacles the ordinary surveying and engineering of a few hundred miles of rail line would take at least two years, but the politics of routing and the legal challenges will not vanish, so figure a good decade.

Why are we discussing high speed rail right now? Because, we are told, it would create jobs to lift us out of recession. The business cycle is roughly a decade, so if we jump on this thing, the jobs might appear in time for the next recession.

Let Cap and Trade Die

November 18, 2009

Tyler Prochazka

Former Vice President Al Gore tells us that the world is on the brink of disaster. Global warming, he says, will destroy the planet. According to him, there is no room for debate. The government must save us. Despite these claims of catastrophe, be cautious of global warming hysteria and calls to take “drastic action.”

In the 1970s, scientists seemed to overwhelmingly agree that a devastating ice age was imminent. It would last for “10,000 years” they said. Famine and nuclear wars would result from this global cool down. Obviously, this didn’t exactly pan out. [1]

Since that time, it has been global warming that will doom us all.

Fool me once, shame on you.

According to the U.N. World Meteorological Organization, there has been no global temperature increase in over a decade. [1]

Moreover, a group of over 30 thousand scientists signed a petition that said greenhouse gasses have no negative effect on the environment. It went on to say that extra carbon dioxide actually helps the environment. [2]

To solve this non-crisis of global warming Congress is proposing a cap-and-trade system where the government sets a limit on the amount of pollutants a business can emit.

The current cap-and-trade bill being considered would cause severe damage to the economy. The Heritage foundation found that millions of jobs would be permanently lost and incomes would contract sharply. [3] It would likely amount to the largest tax increase in American history, costing the average American about $1,000 more a year directly. [4] It would hit people in poverty the most who would have to devote more of their income to energy instead of food and shelter.

Even with the destructive distortions to the economy, cap-and-trade would not have any noticeable effect on carbon dioxide levels. EPA administrator Lisa Jackson even admits this saying, “U.S. action alone will not impact world CO2 levels.” [5]

The real solution, if global warming is a problem, is to allow for the economy to grow so that people can innovate and create adaptations to natural disasters. Some scientists that believe in global warming say that adapting to the new environment will be far cheaper and far more effective than something like cap-and-trade. [6] Stifling the economy only undercuts the effort to innovate and create these adaptations, which would save us from any potential global warming crisis.

Furthermore, the encroachments on freedom perpetrated by this bill should not be even on the table. It seems as if every supposed crisis is just another way for politicians to defy the constitution and defy individual liberty. It should not be up to a bureaucrat how much energy I use.

Global warming likely won’t destroy the world, but the hysteria surrounding it just might.



Insurance Industry Profits are an Insignificant Part of Total Health Costs

November 2, 2009

Advocates of increased government involvement in health care frequently cite the profits of private health care providers as a major part of the costs of health care. The numbers, however, show that health insurance and managed care industry profits are 0.36% of the national bill for health care. If the compensation of industry executives is added as part of the alleged problem, then the industry accounts for 0.37% of total costs. The notion that industry profits are responsible for rising health care costs is a fraud.

An example of the criticism is that of Representative Anthony Weiner (D-NY) on the Rachel Maddow show, who said, speaking of proposed legislation that would heavily tax the health insurance industry:

“Well, the one behavioral change we are clearly not going to see is the insurance companies aren’t going to suddenly start saying, ‘You know what, we are going to stop making 30 percent profits and cut it down to 10 percent or 5 percent because of this bill.’ “

So are the insurance company profits really 30%, as claimed?

Fortune magazine rated the health insurance industry as the 35th most profitable of 53 industries surveyed for 2008:

Health Care: Insurance and Managed Care 2.2%

In 2006, in better economic times, according to CNN, health insurance company profits were 7.1%. In the Yahoo Finance ranking of industries (they divide industry into more categories than Fortune) by profitability, “Health Care Plans” rank 84th, with a profitability of 3.3%.

Total insurance company profits were $12.87 billion in 2007 and $8.40 billion in 2008. Total health care spending in the United States was $2.2 trillion in 2007. Insurance company profits were therefore 0.59% of total health care costs in 2007. Since total costs have been rising at about 6%, the insurance company profits would be about 0.36% of total health care costs in 2008.

Ten companies account for the health insurance company profits. The highest paid executive received about $11 million, and the others much less, going down to a few million. In each company the top guy gets by far the largest compensation. The pattern I’ve seen is that the top person at any large company gets about half of the total pay. To be generous, I will suppose that the average top pay is $8 million, and that it is only a third of the total executive pay. So that would make the total for the industry 10 x $8 million x 3 = $240 million. The industry profits were $12.87 billion and $8.4 billion, so $0.24 billion would be added using Con’s definition of profit. that would make the contributions to total health care costs rise from 0.59% and 0.36% to 0.596% and 0.37%, respectively. Even if one were to indulge fantasies that executive compensation were much higher than I had supposed, it would not approach being a major part of health care costs.

Critics counting the numbers from public records for top execs claim that compensation was about $115 million in 2007 and less in 2008. That’s much less than the $240 million I’ve estimated. My estimate includes a factor for second-tier execs.

It’s worth noting that executives earn their pay by reducing costs. In Medicare, some put fraud as 20% of the programs costs. That would be 20% of $440 billion, $88 billion. Private insurance companies police fraud, so their losses to fraud are much less.

The hard numbers do not support critics arguments, so they avoid the numbers by spinning percentages. Percentage increases in profits do not mean the profits were significant. If your business made $10 last year and $100 this year, that’s a 900% increase, but it doesn’t imply you are ready to retire on the Riviera. Insurance companies have made billions, but as we have seen, the billions are not a significant part of the trillions involved in health care.

The health insurance industry profits rose “from $2.41 billion in 2001 to $12.87 billion in 2007.” Thus, I included the highest profit year, when the profits were 0.57% of total spending. Critics uniformly ignore the decline in profits since 2007. The profits in health insurance vary between about 2% and 8%.

To make a more dramatic story, critics ignore the 2008 data. It’s likely 2009 will be even worse, so of course that will have to be ignored as well. What the large percentage changes mean is that the industry is volatile. Anything that can go up rapidly is subject to coming down just as rapidly. Profit margins of 2% to 8% are well below the 9% average for the market as whole, so the picture is not particularly attractive.

Critics also try to spin the profit percentages by claiming that reserve funds keep by insurance companies should not be included in basis for calculating profits. That’s nonsense because the main way that insurance companies make money is by investing the funds held in trust. That’s true of life insurance and virtually all forms of insurance. An insurance company may actually pay out in benefits more than it receives in premiums. A large part of profit comes from investing the reserves, and an insurance company that does a better investment job earns more profit. That’s what they do for a living.

Besides, using a definition of profit that is not shared by anyone in the financial community is a scam in the first place.

Note that changing the definition of profit changes the percentages with respect to the company, but not to the total cost of health care. Even if it is deemed a million percent company profit, it is still $8.4 billion of the $2.2 trillion in health care costs. That’s 0.36%, an insignificant part of the total cost.

Can Government Compete Fairly?

September 23, 2009

I think it is possible for government to compete fairly with private enterprise, although I cannot think of an instance where it has happened. When the question is posed, what first comes to mind are subsidies by taxpayers to the government operation. That’s true, but there are also issues of access to and the cost of capital, costs of building market share, equatable rules of competition, and the risk of failure. All of these factors must be taken into account when considering if there is level playing field. I’m here to help.

If an ordinary citizen has identified a market and wants to start a business to serve it, one of the first concerns is securing the capital to buy facilities and hire employees. Few business start making money on day one, so financing is needed. If it’s very small business, the capital might come out of your saving or from a loan from Uncle Harry. The government isn’t going to do anything small, and, lord knows, it doesn’t have any savings. The avenue is then to write a business plan showing how much money is needed and how it will be repaid. Investors will then consider the risks and potential rewards, and decide if they will put up the capital.

That is usually a non-starter for government. Private markets would never risk the capital needed to legitimately fund a gigantic government operation like a health insurance venture, at least not without guarantees of the full backing of taxpayers. Backing by the taxpayers, however, would be unfair competition. Nonetheless, we don’t want to kill the idea of government ventures at the starting gate. Instead, we will charge the venture at the interest rates prevailing to commercial ventures comparable in size to the new government venture.

Taxpayers should receive not just the rate on government bonds, but rather the rates appropriate to risky commercial ventures. For a health insurance venture, we can use the rates at which large health insurance companies are borrowing money. That’s not quite fair, because the existing companies have a track record. But charging the rates at which, say, the government lent money to AIG will be close enough.

Usually, a new competitor starts small and builds market share slowly by establishing a record of positive performance. A new insurance company would have to start in one state, then expand later if and only if they were successful. It would be a good idea for a government venture to follow that route, and fair competition dictates that they must. Of course, that’s not how government works. So again we are forced to make allowances if they are to have a chance. We can put an additional charge on their books that taxpayers will get back for building market share. Ventures like FedEx, CNN, and USA Today lost money for years before they reached the scale needed to break even. We’ll just estimate the cumulative debt and put it on the books of the government venture.

Now we get to the rules of equitable competition. It would be grossly unfair for a government insurer to offer policies across state lines without private insurers being given an equal opportunity to do so. In that vain, if private insurers are subject to onerous state regulations and reporting requirements, then the Feds must operate under an equal burden. The is no need to make allowances, the Feds get the same regulations.

In the interests of equity, the government venture should conform to all the Securities and Exchange Commission regulations, Sarbanes-Oxley requirements and so forth that are imposed upon large corporation. the venture should fill out all of the tax forms and be subject to audit by all the government agencies whose job it is to audit them. The taxpayers ought to get all of this information anyway, since they are in effect the stockholders.

Ordinarily, the Feds get special treatment for lawsuits. They cannot be sued without their permission. That would have to be waived in the interests of fair competition.

Government ventures do not ordinarily pay local real estate taxes, sales taxes, or income taxes.Fair competition dictates that any government venture pay real estate and sales taxes or equivalent fees in lieu of taxes. While ventures like the Postal Service commonly exempt themselves from local taxes, there is precedent with some military installations paying equivalent fees. It can be done.

Private insurance companies do not to keep all of their profits. They pay state and federal income taxes, at the rate of forty to fifty percent of profits. thus private health insurance includes payments to states and the federal government into general revenues. If those taxes are not paid it would be unfair to taxpayers who would have to pick up the slack. Consequently, for fairness, a government venture ought to make payments in lieu of income taxes. Those payments could be keyed to the taxes paid by the private sector as a percentage of their revenues. If the private sector has a bad year and pays little income tax, then the government venture would be spared as well.

Private corporation cannot require customers to use their services, not can they impose price controls on their suppliers, so there will be none of that in the new era of fair competition by government. Hospitals, physicians, and nursing homes will be allowed to decline accepting patients at government rates, and customers can decline coverage at government rates.

Under present Medicare rules, investigations of gross fraud are charged to the Justice Department. Such investigations would only be charged to the Justice Department if similar fraud investigations are so chrged by private insurers. Otherwise, they are charged to the government insurance venture directly.

Ordinary ventures fail if they do not turn a profit or at least break even. Consequently, the length of time required for government failure will be established at the outset, and the government venture will close down or be sold off if the criteria are not met. Five years would be reasonable, since the operation starts at full scale. This avoids the trap of the Postal Service and public transit agencies that lose money virtually every year forever, but never go into bankruptcy. Fair competition requires that they be allowed to fail, and their assets taken over or liquidated on the open markets if they cannot compete.

So there you are. There are ways for government to compete fairly with the private enterprise. The question is whether proponents of fair competition from the government step up to the challenge.

No Stimulus Here

July 11, 2009

This week I went to a presentation on Stimulus Opportunities for Small Business, one of a series around the country slated to run through next February. One might think that talking about stimulus opportunities a year after passage might be too late, but not to worry, the stimulus rollout will take years. In fact, we were told that the plan was not designed to have an immediate impact, but rather to accrue slowly over time.

Depending upon who is adding up the numbers, about 10% of the stimulus money has actual gone into the economy since it was passed this past February. I’m sure that you remember how it was an emergency that could not wait a day. A Congressman was rushed from Ohio on a stretcher to vote. There was no time to read the bill, let alone obey Obama’s campaign pledge to post it for public critique. That was was right before the two day delay in signing in necessitated by arranging a proper ceremony in Colorado for the occasion.

Of the money that has gone out so far, nearly all has been in tax cuts and aid to the states to bail out Medicaid. Very few of the shovel ready projects are yet ready to receive funding. Projections are that by year end, optimistically 24% of the money will be spent, including continuation of tax cuts and such. The tax cuts officially end at the end of the year; Obama having promised to cut middle class taxes, but not for very long.

The emergency pretense under which the bill was passed was based upon the assumption that the economy needed an immediate boost. No one argued that spending a week reading the bill would produce the disastrous effect of having the money hit in the third week of July next year rather than the second week. So the question is then whether Obama and Congress actually realized the Stimulus Bill was not going to provide stimulus, or whether they actually thought the shovel-ready projects were shovel-ready.

I’m inclined to think they knew well that the effects would be a year or more down the road. The life cycle of a government project comprises (1) decide what the government wants to do, (2) prepare detailed specifications and bid documents, (3) put the contract out to bid, (4) select and qualify a vendor, (5) sign a contract, (6) have the contractor assembly the people, equipment, and materials to do the job, (7) start work, and (8) receive payment for work accomplished. If (1) has been accomplished, then getting to (8), which when the money flows in quantity, takes 18 months if the skids are greased. If a contractor has been awarded a contract and awaiting funding to start work, it would only be through an accident of timing. No one stands poised above their shovel awaiting a go ahead. If there are Congressmen too poorly informed to know this, there is no shortage of experienced bureaucrats and Congressional staff who would surely tell them.

Moreover, Obama knew there was really no rush, hence his unnecessary delay in signing. Now, the word is at the Opportunities seminar is that it was designed to roll out in 18 to 24 months. The reason for the story of it being an emergency was to cut off debate on what the $755 billion would actually accomplish. On top of that, there is an unspoken belief that having government spent money is “doing something” and that “doing something” is the wand that delivers government magic.

The history of past recessions is that recovery is likely to start around now. Perhaps this recession is much worse, so it won’t be until the fourth quarter or even the first quarter next year. So the stimulus is not likely to arrive until well after it would be a useful element in recovery. At the time the money is spent, the government will be competing with private enterprise to borrow the funds, burdening the productive private sector with higher interest rates. The government may alternatively print the money, causing inflation and still higher interest rates.

One may counter that, never mind stimulus, investment in infrastructure is a good long term investment. If so, then the hodge podge of projects assembled in a panic without debate is the wrong way to go about it. Investments should be shown to make a positive return. No one has bothered with any such analysis.

So what are the opportunities for small business? Nothing special, just register and bid on government contracts as usually. Most of the stimulus money will end up in construction projects unsuitable for small business. We did learn that the demand for small business loans is exceeding the supply, because many of the banks are not making the loans. The Small Business Administration only guarantees the loans to the banks, it doesn’t originate loans.

The Stimulus Bill was not designed to provide stimulus, so it is not surprising that it has provided negligible stimulus effect. So now we are hearing that is a good reason to enact another Stimulus Bill.

Suppose Social Security contributions were invested

June 1, 2009

Social Security was conceived as a pure Ponzi scheme. Contributions collected were immediately paid out to beneficiaries. That worked adequately back in the 1930s when payouts started at age 65 and life expectancy was 67. Over the years life expectancy has risen to 78 and substantial payouts have been added for surviving dependent children and other welfare functions. One substantial reform was initiated under Reagan, in which a trust fund was added to help cover the withdrawals of retiring baby boomers.

The trust fund is invested entirely in government bonds, which means that Social Security contributions have been funding the debt load. We know that most Social Security contributions are paid out without being invested, but it’s still interesting to see what would happen if the contributions were all invested in either government bonds or the stock market.

With the market having crashed last year, some say that should put an end to the notion that the risky stock market might be a viable alternative to safe bonds.

I have been contributing to Social Security since 1964. Like everyone, I received a year-by-year accounting of the my contributions from the Social Security Administration, so I put the data into a spreadsheet to see theoretically how alternatives might have fared. I found on the internet the ten-year Treasury Bill rates and the gains and losses of the S&P 500. The S&P 500 is a broader-based index than the Dow Jones Industrial Average, so I took it as a more stable investment.

My method in building the spread sheet was to begin each year with the balance from the previous year, adjust the balance with investment gains or losses, and finally add the contributions for the year. I included both my contributions and my employer’s contributions, but only the Social Security part, not the Medicare contribution.

The stock market provided more excitement than Treasury Bills. The $216K in contributions grew steadily to be worth $613K at the start of 2009. The stock investments lost a heart-stopping plunge from $1,740K last year, but nonetheless still had $1,093 at year end. So despite the worst market year in the 45 year period, the stock investment was still 78% ahead of Treasuries.

Theoretical Social Security investments

In the past the market declined in eight of the 45 years, but never more than two years in a row. As investment firms are fond of saying, that is no guarantee of future performance. Nonetheless, from the viewpoint of pure statistics it’s likely to recover considerably more than T-bills over the next few years.

One implication is that if a portion of my Social Security contributions were invested in the stock market, say 25%, all of the welfare payments could have been made and my retirement benefits might have nearly doubled. And that’s true despite the biggest market sell-off in 45 years.

President Obama Selects a Pocket Calculator

May 27, 2009

President Obama: “I need a calculator, and I’d like to get a good one. Do you have the models that talk and have artificial intelligence?

Clerk: Yes, Mr. President. We feature the Autoconglomerator Ultra Turbo 971B. It’s one of the best. We call it the Aut9 for short.

PO: Very good. I’d like to interview it to see if it meets my needs.

[Clerk turns on the Aut9 and presents it.]

Aut9: Good morning. How may I help you?

PO: Good morning. First I need to know if you can handle large numbers. Not just billions, but trillions. Many trillions.

Aut9: Yes sir. I have a patented “government mode” that handles quadrillions, without rounding off a penny.

PO: Very good. That will handle two terms … I think. How about empathy?

Aut9: Empathy?

PO: 95% of the time I want straight calculator answers. But sometimes we will be facing very difficult problems where it is important to understand my needs and the needs of every American to arrive at answers that are both satisfying and fulfilling.

Aut9: I feel your pain. That feature is included. Press the “Government” mode key. Then select “3” to get the “Liberal Politician” option.

PO: That sounds good, but does it limit the empathy level to only 5%?

Aut9: Don’t worry. In that mode, I always care. 5% is just the default answer I am programmed to give when asked.

Clerk: There is also a network interface so all the Aut9’s on your team will produce the same empathetic results.

PO: Well, that wraps it up! Consistent empathy is critical. My staff will contact you about price and delivery. We will need many units.

Clerk: Sir, you understand that I cannot use empathy in computing the price.

PO: That’s unfortunate, but we run into that all the time. It’s okay.

Aut9: Thank you, sir. I won’t disappoint. I really care — at least when that mode is selected.

PO: Good. I must go now. I need to select a Supreme Court judge.