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Nov 26 12

A century after the Triangle Factory Fire in Manhattan, and we still cannot protect factory workers from burning to death

by Aaron McCormack

The parallels are horrible.  You will forgive me if I reprint this eyewitness account in full.  My apologies in advance if you feel it is too graphic.

“Horrified and helpless, the crowds — I among them — looked up at the burning building, saw girl after girl appear at the reddened windows, pause for a terrified moment, and then leap to the pavement below, to land as mangled, bloody pulp. This went on for what seemed a ghastly eternity. Occasionally a girl who had hesitated too long was licked by pursuing flames and, screaming with clothing and hair ablaze, plunged like a living torch to the street. Life nets held by the firemen were torn by the impact of the falling bodies”

That was the scene in Lower Manhattan in 1911.  It is still one of the three greatest losses of life through man-made disaster in the history of New York.

146 people were killed.  They were locked in their factory on a Saturday afternoon – poor, mainly immigrant, women and girls sewing blouses (known then as Shirtwaists).

This past weekend over 100 women were killed in a similar factory in  Dhaka, Bangladesh as a fire broke out and there were no fire escapes available.  Over 600 people have died in similar fires in the same area over the past couple of years.

The factory produced garments for Li&Fung – a Hong Kong based “sourcer” for the likes of Wal-Mart and Target. Recent fires also killed people working on supplying garments to Gap and JC Penney.

Here is the Wall Street Journal’s take on the impact of the tragedy

“… analysts said the incident won’t have a significant impact on Li & Fung’s sourcing businesses, though it would likely force retailers and agencies to be extra careful in factory audits, which will add to sourcing costs.”

There you go. That is how far we have progressed as a civilization in 100 years.

 

Nov 9 12

When is a cliff not a cliff? When it is a fiscal one of course!

by Aaron McCormack

A very interesting piece on NPR making the rounds today about the US Congressional Budget Office analysis on the “fiscal cliff” that everyone is suddenly terrified of.

The CBO are designed to be a non-partisan and independent evaluator of the US Federal Budget and the impact on the wider economy of choices made by Congress.

The most interesting part of their take on the fiscal cliff is the bit where they look at the return on investment of the dollars being spent by Congress and negative impact of the dollars being taken from people in the form of taxes.

If politicians make a new deal to avoid the “fiscal cliff” they will be committing to borrow money in the short term and thus increasing the debt ceiling.  In return for loosening the purse strings now, deficit hawks will want to see a longer term plan to reduce the size of government spending so that the deficit can fall.

So it is important to know if you are to borrow money to spend in government programs, does it have a benefit to the economy or not?  And can government spend money more wisely, at least in some cases, than the average citizen?

Here is a rough summary of what the CBO said….

1. In terms of public spending, only defense spending has a “multiplier effect” on the economy. Every $1 invested in defense produces $1.20 or so in economic output.

2. All other government spending is basically regressive – on average for every $1 the government takes from citizens or borrows, it produces 90cents in economic activity.

3. When the government takes a dollar from a citizen in taxes, it sucks something less than a whole dollar from the current economy because it is likely that the citizen would not have spent the whole dollar, but the government certainly will.  The richer that citizen, the less impact on the wider economy of taxing them. However, see point (2).

I have been saying a lot recently that the military/industrial world in the USA is really the perfect political balance of right-leaning “strong defense” and “left-leaning” redistribution of wealth.  Spending on the military takes money from taxpayers (and drives borrowing) just like any other government program.  It creates some very good jobs in technology and R&D and supports a very wide range of private companies.  They range from technology and hardware businesses (think Northrup Grumman, Lockheed Martin or Raytheon) to military services companies (KKR or Blackstone).  The armed services themselves provide a wide variety of jobs with good salaries and benefits to a whole swath of the US population and their dependents.

However, everyone would agree that defense spending is an entirely wasteful use of money.  And if defense spending is such a great “multiplier” shouldn’t the USA invest even more in it, not less? Faced with a 20% profit, a company would borrow as much as possible to invest in such an enterprise.  It makes me question the validity of these figures.

That aside, a short-term stimulus (military spending or otherwise) in return for tax code cleanup and longer-run fiscal restraint seems like the guts of a “Grand Bargain” that would both be good for the country and give both parties some of what they want. The only constituency who will not be pleased will be the Tea Party folks – the acid test will be to see if other Republicans are willing to push that group to one side for now.  Can it be done by December 31st? Let’s see….

Nov 8 12

One possible benefit from an “as you were” US Election

by Aaron McCormack

I wonder if all the businesses and high net worth individuals who spent so much on all the races in the recent election are evaluating their return-on-investment today?

Specifically, those who spent on a losing candidate.

Of course, those who spent money on a winning candidate will believe it was:

(a) worth it

(b) in part because of their spend

But wouldn’t it be nice if corporations and rich folk believed that investing in a real (job-creating) business would generate more return than investing in elections and politicians? And if they would do so with the same passion and commitment?

Nov 7 12

Three things President Obama should (and could) do immediately

by Aaron McCormack

After what amounted to nine full months of campaigning, and billions of dollars of spending, we are back were we started.  Don’t get me wrong. The process of reaffirming peoples’ choices is a key part of democracy.  But in terms of the challenges facing the US economy we have had nearly a year of stasis.  A tepid recovery continues.  External influences remain negative (European Debt, slowing Asian growth, political instability in the Middle-East).  The government of the United States remains divided.

However, there are three things that a newly-“mandated” President Obama should do, almost immediately.  Even with the continued divided government,  these things are attainable.

1. ACCELERATE WITHDRAWAL FROM AFGHANISTAN

It may not be fair on the average citizen of Afghanistan, but it is time for the military involvement in that country to end.  Not just the overt army presence. But the whole phalanx of contractors and pseudo-armies too.  The current withdrawal plan sees US forces leaving by the end of 2014.  That should be accelerated to “as soon as logistically possible”.  The Afghan invasion was the right thing to do when it started.  It was (stupidly) derailed by diverting attention to Iraq.  That egg cannot be unscrambled.  It is time to go, and as quickly as possible.  We will have to see where the pieces fall thereafter and react tactically.

2. DELIVER A COMPREHENSIVE AND ROBUST SERIES OF INVESTMENTS & INITIATIVES AROUND DOMESTIC ENERGY PRODUCTION

This may really piss off much of Obama’s base.  But he doesn’t need their votes now and he has already delivered the “you may not agree with everything I do, but in general I am headed the right way” speech.  As I described in my piece on manufacturing jobs, domestic energy represents a very real opportunity to create jobs, reduce dependence on foreign imports of hydrocarbons and help the balance of payments.  This was the headline initiative in Romney’s economic plan.  He was more likely to adopt a “deregulate and be damned” approach.  Obama can and should craft a more complete domestic energy policy which can include investments in green alternatives as well as more conventional initiatives such as increased permitting, use of federal lands and pipelines.  Yes, the benefits may be relatively shorter term (a couple of decades) and there will be some environmental impacts. But it has to be done and it can be done.

3. ADOPT SIMPSON-BOWLES AS THE BASIS FOR A COMPREHENSIVE GRAND BARGAIN ON DEBT, TAXES & ENTITLEMENT REFORM

One of the more mystifying aspects of the President’s first term in office was the fact that, having appointed a bipartisan debt commission, he completely ignored their output.  Whether this was a case of wrong-headedness, or some Machiavellian part of the plan to win re-election, is impossible to judge at this point.  One of the things we can look for from President Obama is a little humility, however “pretend” it is.  “One of things I wish I had done differently in my first term is to have made more progress on fiscal issues using Simpson/Bowles as a starting point.”  There. Easy said. A couple of news cycles of criticism. But the game is changed.  Fiscal reform should encompass comprehensive tax reform (loopholes closed, rates lowered in general, some “investment” rates raised), simple decisions on social security reform as well budget envelopes for other government programs.  Despite drawing down involvement in Afghanistan more quickly it is unlikely to see large defense cuts.  Republicans love the “strong military” except for their more libertarian wing.  Democrats secretly love the “hidden stimulus and redistributive” aspects of the military-industrial complex that they like to pretend to rage against.  That’s why the Army is getting a load of new tanks that it no longer needs nor wants.

 

There may be other bipartisan-esque things that President Obama can start on.  For example, the issue of comprehensive immigration reform.  Republicans are being forced to address the fact that they are seen as the Party of anti-immigrants – if for no other reason than they will never win another national election if they keep beating up on Latinos and women.  But the three listed above are surely the most important.

A note of caution.  The President’s reform of healthcare is the classic example of how a “camel is a horse designed by a committee”.  The corrupting influence of money on US politics is often mentioned in passing (both inside and outside the United States) but the depth of it has to be seen to be believed.  It’s not just the tanks mentioned above.  It is everywhere.  On healthcare, for example, the country still is not addressing the fact that the USA spends over twice as much (per capita, or as %age of GDP) on healthcare than other modern Western democracies.  Not 5% more. Not 35% more. Twice as much.  Outcomes for the average person are no better than they are in the UK or Germany.  Comprehensive healthcare reform was far from it.  It was tinkering with an already broken model. The healthcare industry is one stakeholder that is not complaining about Obamacare – it gave them customers who must buy what they are making, after all.  It discounted the Universal single-payer option and caved on the issue of driving down the prices of pharmaceuticals.  No wonder the insurance and drugs companies are not part of the effort fighting Obamacare in court or on state ballots.

Churchill said that the people of the  United States can be relied upon to the right thing, “as soon as they have exhausted all other possibilities”.  Let’s hope that President Obama can live up to that faint praise, now that he has been given a second chance.

Sep 26 12

If China can’t hold on to manufacturing jobs, how can the USA grow them?

by Aaron McCormack

Top Manufacturing Countries – courtesy of Investing.curiouscatblog.net

I read a fascinating quote in a great opinion piece from from fellow WEF Young Global Leader Martyn Davies on investment flows to Africa. (see the full article here).  Perhaps the best thing to do is reprint the quote here, let it all sink in and then let’s think about the consequences.

According to Justin Lin, former chief economist of the World Bank and now at Peking University, China is forecast to lose up to 85-million labour-intensive manufacturing jobs in the next decade. Just as Japan lost 9.7-million in the 1960s and Korea almost 2.5-million in the 1980s due to rising wages and production costs, the Chinese economy will undergo a similar process. Wages for unskilled workers in China are set to increase fourfold in 10 years. According to China’s National Statistics Bureau, the average monthly worker’s wage now stands at $322, with an annual increase last year that topped 20%. Wage inflation and rising production costs are forcing China to become a higher-value and more efficient manufacturer. The Chinese economy has reached the “Lewis Turning Point”, which is the point at which manufacturing costs begin to outstrip manufacturing competitiveness. China’s has passed this point in the past two years.

I want to draw together a number of lines of thought here – this quote, or set of facts, is as good a hook as any to hang them on.  The collective theme is really a “global war for jobs” and the implications for discrete economies and societies.  In particular the United States as they are in an election cycle.

First things first. The global economy has been changed forever – certainly by the slow and steady advance of trade liberalization but, as we shall see, much more meaningfully by advances in technology.  Liberalization of trade means the elimination of all trade barriers and tariffs between nations and the creation of bilateral and multi-lateral free-trade zones (like the EU, or NAFTA).  It allows companies to do business where they chose (to buy, make and sell) without any artificial impediments to doing so.

This is supposed to make the world more prosperous – the theory is simple and is best understood by the old “Guns and Butter” story.  A nation must chose what it will produce, because it cannot make all of everything. So, it makes as much as it can of what it is best at, and lets other nations make what they are best at.  Everyone trades freely for what they need.  By focusing on what they are best at, everyone can maxmise output – i.e. the total amount of things made (goods, food, raw materials) is the highest it can possibly be.

In practice life is much more complicated of course. Just because you are good at making something doesn’t mean that people will want it. What happens if a society really isn’t any good at making anything useful at all?

But free-trade advocates will say that “a rising tide lifts all boats” – the same phrase is currently being applied by Mitt Romney to trickle-down economics where “enabling wealth creators” is designed to pull through prosperity for everyone else.  Free trade has certainly lifted hundreds of millions of people in China, India and other far-Eastern economies out of abject poverty.  If the rising tide is global, and the “boats” include the total population of the planet, then Mitt Romney is correct.  If one looks parochially at the benefits to the US as a whole, the jury is still very much out.

Now, if you are paying close attention to the US Presidential race, you will know that both main candidates have been promising that they will create jobs.  They have even said that they will create “good jobs” or “well-paying jobs” or “middle-class jobs”.

Let’s look at the challenge this presents.  The USA needs to create at least 200,000 jobs a month to satisfy growth in working-age population. With nearly 50million people (about 1/6th of the population) on food stamps and a significant number (perhaps 25%) of the population working, but still not earning enough to pay federal income tax, it is safe to say that a huge number of people who have jobs don’t find them to be “good”, “well-paying” or “middle-class”.

To put it another way, work opportunities in the USA seem to be bifurcating into those that are very well paid, and a lot of other jobs that can’t be thought to be “good” or “well-paying” or “middle-class” – even if you hold down two or three of them at the same time.  The whole country is slowly migrating to become like an episode of “Downton Abbey” – a dwindling set of better-off folks being serviced (or trickling down to) a large number of other people who are basically living sustainably, but not comfortably.  Interestingly if you have a “government” job including teaching, fire, police and civil servant you are most definitely in the “better-off” set.

This is often referred to as “the hollowing out of the middle-class” and one of the job groupings in the hollowed-out core is manufacturing.  Manufacturing jobs are thought to be “better” jobs because they tend to pay better than service jobs, they tend to drive much more investment in R&D (hence innovation and longevity), create more clusters of supply jobs and finally are considered “stickier” (meaning it is harder – though clearly not impossible –  to move a factory than it is to decide to get your software written in Bangalore instead of Boston)

At this point it is important to note that the US was until recently the largest manufacturer (by $ output) until China surpassed it in 2010.  The US and China still dominate manufacturing output, followed by Japan and Germany some ways back.

The $ value of manufacturing output is not the whole story at all.  In terms of jobs, the figures for the USA are much more stark.  Roughly speaking, 30% of working Americans in 1960 were in the manufacturing sector.  By 1990 that was 20%.  Now, it is estimated to be under 10%. In raw numbers, 11.7m Americans are today employed in manufacturing.

Interestingly, though, China has also seen manufacturing decline as a percentage of overall employment.  We hear a lot about the massive manufacturing plants that Foxconn and others have created to feed our need for consumer electronics – but the overall facts is that manufacturing is becoming a smaller proportion of employment even in China. If we believe the projections, even the aggregate number of manufacturing jobs in China will decline sharply over the coming decade.

What is behind this? The first answer is simple – productivity gains.  We are able to make more things with less people through automation and a focus on better processes.  That is as true in China as it is in the USA.

The other important thing to note is that countries don’t make stuff – companies do.  China’s manufacturing is dominated by the needs of American and European corporations who have decided that certain tasks are better performed from a cost/quality perspective in lower-cost economies.  Right now you can figure on the hourly costs of a Chinese manufacturing worker to be about one tenth of those in the USA.  And so, if it was possible to redraw the graph above by domicile of the company making the goods, the USA and Germany would most likely come out on top.  It is a complicated picture that requires a fair amount of study and evidence to begin to see the full picture, right?

Back to the headline at the top of this post, though. China itself is now struggling to compete with other countries who present a better risk/reward balance for labor costs.  Those countries are other East Asian nations as well as emerging Latin American and African nations.  Driven in part by Chinese investments in upgrading infrastructure, some African countries will now do to Chinese manufacturing jobs what China did to American manufacturing jobs.

In terms of generic manufacturing jobs, the tides are flowing even further away from the USA – never mind any form of reversal of that tide.

But let’s remember that the largest driver for the loss of manufacturing jobs anywhere on the planet is increased productivity, meaning better technologies and processes.  Think about it – how many people used to stand on the line making cars in Lansing MI in the 1970s, compared to the number required on a similar line today? Maybe a ten-fold reduction in numbers.  It is no different from how the invention of mechanised farming radically reduced the number of people who work the land.  And by the way it is happening in service industries too – for example the rise of autonomic computing (computers fixing other computers) is greatly reducing the amount of IT support staff that a company needs.

So, what exactly can the Presidential candidates do to create “good”, “well-paying”, “middle-class” jobs if they are elected?

President Obama currently points to an increase in over 500,000 manufacturing jobs since taking office in January 2012 – reversing 10 straight prior years of decline.  He and his spokespeople are less specific about how this has taken place – i.e. where is the real specific cause-and-effect.  But likely much of the rise will be in the domestic energy sector (the job creation record that Gov Rick Perry loved to talk about) and perhaps from actions to rescue the auto industry.  As the Wall Street people love to say, even a dead cat bounces if you drop it from high enough.  So, whilst the results are encouraging, the President doesn’t seem to be able to conjure up a repeatable playbook that links specific government action to job creation.

His challenger has a three-pronged message for revitalizing the economy in general – one that does have implications for manufacturing specifically.  Those key themes are the rollback of regulations, opening more federal land to energy/resource companies and the lowering of taxes on companies and job creators.  Successful companies, big and small, will create a general increase in jobs  – removing regulations and lowering taxes will, according to Romney, encourage money currently waiting on the sidelines to invest in creating new businesses and growing existing ones.  However, there needs to be demand for the things that these new businesses will create – and it is not clear that such demand exists, except perhaps for oil and gas.

Like much of this election cycle, there is more specificity that would be required to really judge the plans that the candidates are offering.

In practice, it seems that only the domestic energy sector will offer a real opportunity for a high-impact set of decisions that can both improve energy security in an increasingly volatile world AND put Americans to work in a wide range of jobs that can pay well.  I think we can expect to see an aggressive move in this direction whoever wins – at the expense of environmental and health&safety concerns.  Like all resource extraction, it could be short-lived (a decade, maybe two) but will be too great a prize for congress and the White House to forgo.

The other long-shot for immediate impact would be a reversal of the direction on free trade.  It seems an amazing thing to say – that the USA, the country that drove the free trade agenda, may start to walk backwards from this.  But, with enough domestic pressure, and in particular if there are further major external shocks (Euro, Middle East war) it could provide an avenue to move more jobs back to the markets where their customers reside.  Mitt Romney has been playing TV adverts about how he will “deal firmly with trade cheats like China” and there is an isolationist strain in the Republican genetic makeup that has always been prevalent.  The left in the USA has always been resolutely against the expansion of free trade (at least for goods entering the USA) citing their “solidarity” with labor in other countries and concerns that both the safety of workers is not assured overseas, and the safety of American consumers is put at risk with lower-quality (or dangerous) goods.  But with both parties highly reliant on corporate money (yes, even Democrats) and with corporations being the largest beneficiary of free trade, it is hard to see such a volt-face occurring.

That simply leaves the “hard yards”.  Meaning, a long slow battle to invent, create, manufacture and service things in the USA that enough people around the planet want in sufficient quantities.  And it can’t be Iphones, right? It would have to be those “high end” and “complex” manufacturing and service tasks where the high costs of the US worker are justifiable – either because the quality cannot be found elsewhere, or because the expertise is clustered in some important way.  Think clean-tech, biotech, nanotech, life sciences and automation jobs, for example.

It is quite a task to invent and produce enough things to provide even 1 million jobs in that space.  And there are other advanced nations, or emerging nations, with better education systems, great universities, well educated workforces, lucrative tax incentives, fantastic infrastructure and nimble governments with the same ideas.

The detail and the drive required to make progress in this way is far-removed from the election soundbites. It is tempting to say that in fact government shouldn’t be involved at all in this space – but the early signs point to public-private partnership being crucial to successful emerging clusters of growth.

I wonder if this bottom-up, organic approach will deliver results that will satisfy the US electorate in the next decade (the same question can be posed for many other countries too)?

There is no way to push back the great tectonic shift that is automation & productivity.  But there will be opportunities for societies that continue to struggle to roll back aspects of global free trade – even if it is done so under the guise of concerns for workers’ rights or through a (more legitimate) measure like a “cost of carbon” for imports.  It is going to get very interesting and not just for the USA it seems…

 

 

 

Aug 9 12

What if “whatever it takes” isn’t enough for the Euro?

by Aaron McCormack

(ORIGINALLY POSTED AT THE WORLD ECONOMIC FORUM SITE) It doesn’t really matter what Mario Draghi, head of the European Central Bank, announces this week.  The Eurozone has bound itself into a series of commitments and conditions that value the maintenance of the single currency over the competitiveness of the countries that are part of the Euro – yes, even Germany.

In fact, further moves towards a closer economic and banking union will only serve to do three things, all of which are negative for Europe.

First, the continued burden of an uncompetitive currency will make economic trading conditions intolerable for the weaker, debtor nations such as Greece, Portugal, Ireland and Spain.  They will be forced to continue down a path of austerity and brutal internal deflation.  The long-term effects on both the national competitiveness and on the people of those countries will be severe and take decades to reverse.  The story of the “survival of the Euro” will continue to dominate regional and global thinking – and produce its own self-fulfilling uncertainty.

Secondly, the political, moral and monetary ammunition of the continent will be squandered on this fight – one lost long ago.  That money, including Germany’s, could be much better spent on more useful things.  It could be returned to taxpayers to help them spend more. It could be invested in necessary infrastructure.  It could be deployed in R&D.  That is where Germany may lose out by letting this continue, even if the effects of returning to a proto-DMark would give them some heartburn of their own with respect to competitiveness.

Last, but by no means least, the political system takes a hit.  We elect our leaders to help administer our towns, regions and nations for us.  Part of the challenge of being in politics is that it is so very difficult to admit mistakes or to reverse course.  In this case the momentum of “saving the Euro” dominates the discourse.  In pursuing this aim, above all, our political elites do a disservice to the people they serve.  This is not just a moral hazard argument about politics and politicians, but one where the consequences of private (banks) and public (citizens and governments) behavior over the course of the credit boom has to have clear and proportionate consequences for the people who caused the problems.

In business terms the Eurozone is focused on the balance sheet, whilst the Profit & Loss of the region is going to hell.  Accounting rules eventually force companies to write off things on their balance sheet that are clearly failed investments.  The countries of the Eurozone need an alternate approach that “writes-off” much of the mess we got into over the past decade.

We correct our mistakes, we clean up the mess quickly, we move on with doing what is needed to make a competitive future for Europe.

After all, it would be a twin evil to leave subsequent generations a debt mountain AND no competitiveness to help them service it.

UPDATE 15th September 2012 – despite the announcement last week that the ECB will begin printing money and will use it to buy soveriegn debt, and despite the “positive market reaction” I still believe this analysis to be correct.  The debtor nations in Europe still face a decade of lost competitiveness.

Jul 24 12

Spain isn’t really any worse off than it was three, six or twelve months ago – why is the market reacting now?

by Aaron McCormack

You may remember my post on Mr Market and how is playing us all for chumps.  The market is always right, but only in the longest run.  In the short run, it will be as abberant in its behaviour as the people that make it work – bankers, brokers, investors, hedge fund managers and the like.

It is also subject to movement that is more dependant on the amount of money looking for things to invest in, rather than smart decisions on the individual things that can be bought and sold.  With central banks all over the world printing money and creating liquidity, this is a major force that somewhat “prevents” the market from acting more rationally.

Perhaps this explains why markets only sporadically wake up to the realities facing the European banking sector and the sovereign governments.  Last week the markets rallied substantially and debt yields fell.  This week, Spain has reached record highs in how much it has to pay to borrow money.

But Spain has not become appreciably worse in the course of a week or even the month since the last big EU debt deal for Spanish banks.  Nor has Greece really changed trajectory from its last bailout.

The fact is that only the most extreme solutions (debt federalisation, for example) have even a small chance of saving the euro from a technical perspective.  However, those solutions just cannot be implemented in the democratic structures that we have – which is just as well because it is not clear that saving the Euro is actually a good use of resources in the long run.

The Euro will be dragged kicking and screaming to its slow death, when a swift and ruthless execution was needed.  The resources poured into saving the Euro will accrue to the private rich and elite, further skewing income inequality.  Remember – all money goes somewhere.  But whilst the banks and hedge funds are gladly manouvering to take advantage of this, there is no conspiracy.  This is cock-up. At your expense.

 

Jun 29 12

The US healthcare debate misses the huge and glaring point….

by Aaron McCormack

The USA spends twice as much (both per capita and as a %age of GDP) on healthcare than the UK does.  Can you really tell me that health outcomes in the USA are twice as good as they are in the UK?

Whilst US conservatives and liberals give their partisan takes on the US Supreme court ruling on Obamacare, the debate continues to miss the wider point.

The US healthcare world seems like a bizarre place when you come here from a European country like the UK with a national health service.  We were always told that “in America the ambulanceman checks for a credit card in an injured person’s pocket before they will take you to the hospital.”

It’s not that bad, of course.  It turns out that the USA is probably one of the best places in the world to be sick if you have money.  But, relative to other developed economies, it is one of the worst places in the world to be sick if you are poor.  With nearly half of all Americans under the federal “poverty line”, access to quality, affordable healthcare dominates many people’s lives.  One note, virtually any person in large parts of Africa, Latin America and Asia would love to have our first-world problems, but let’s put that to one side for a minute.

Obamacare is better described by its legislative title – the Affordable Care Act.  That tells you all you need to know – this is an exercise in making healthcare available to around 50million people in the country who cannot afford it right now.

In essence, the legislation forces people like me, who would otherwise not buy insurance, to enter the market. I have first-hand experience of this, because I live in Massachusetts – where this whole principle was first tested. (Mitt Romney will try to run away from the fact that he signed it into law as Governor, but he will struggle….).

Most Europeans have access to a basic, reasonable quality healthcare system that is funded by their taxes.  In some countries it is common for businesses to offer a private (by implication higher standard) version of healthcare to their employees as a perk, often only to the more senior staff.  But, if you get sick, no matter who you are, there is a place to go where you won’t have a huge bill to deal with.

In America, you either pay the bill yourself, or the insurance you take out pays most of it for you (usually you still have to pay some of the bill).  For those who just can’t afford insurance, state and federal governments work to provide a safety net.

Medicaid is for the poor, who cannot otherwise afford healthcare.  Obamacare defines the limit for Medicaid as 133% of the poverty level.  The program is administered separately (and differently) by each state with supporting federal funding. It effectively bundles up all these folk in a pool where the state then buys services from the private sector to meet the healthcare needs of the group.  This most closely resembles a National Health Service and about 50million Americans rely on this program.

Closely related to Medicaid is the Children’s Health Insurance Program – designed to help pregnant women and folks with children who do not qualify for Medicaid, but still would otherwise struggle to pay for healthcare.

Medicare is for people over 65 and folks of any age with disabilities. It covers about 50% of the costs of healthcare for these groups  – another 50million Americans.

There is a third support network for veterans called the VA – around 1million veterans with service-related illnesses are covered.

You can see that around 100million (or just under a third) of all Americans are supported by some form of government-initiated healthcare program.

Of the rest, around 150million people receive their healthcare from insurance that is provided as a benefit by their employer (this can include the families or dependents of employees).  This strange system evolved when government wage restraints were introduced in the 1940s. Employers found that providing benefits and perks was an excellent way of competing for labour.  Following the private-sector lead, public employers followed suit.  This is a classic example of unintended consequences and has become the foundational vehicle for healthcare in the USA.   If the right-wing believe that it is wrong for government to be involved in the healthcare business, it is surely equally bizarre that employers are in the healthcare business.  I see my friends and former colleagues choosing employment on the basis of the healthcare offered – or taking sub-optimal jobs just to get medical cover.

And then there are the 50million uninsured.  Some by choice – most because it is unaffordable and they fall outside the social safety nets described above.  A common myth is that these 50million are mainly illegal immigrants.  That is not true.  80% of these people are American-born, and the remaining 20% are either legal or illegal immigrants of various classes.

Some of these people deliberately chose not to buy insurance because they are healthy and prepared to take their chances with any bills that might result.  This can be quite a risk if you are involved in a serious accident or develop a chronic condition.  A friend (thankfully covered by his employer’s insurance) ran up a $50,000 bill repairing a broken shoulder after a crash in a bike race.

Some of these people cannot get insurance because they are currently ill (let’s say you have cancer) and insurance companies refuse to cover them.

The principle of Obamacare is to get all the uninsured into the market by making it affordable (through subsidy) and by making it illegal for the insurance companies to pick and choose who they will cover.  It is supposed to have the benefit of bringing a lot of healthy people into the the insurance pool – effectively making it more affordable for the insurance companies to give insurance to those who have pre-existing conditions.  The Federal government has promised to pay for any further subsidies to give affordable insurance to the poor.  That is supposed to be paid for by “as yet undetermined” efficiencies to be found in the federal medical programs.

But folks, here is the headline for me.  The USA spends twice as much (both per capita and as a %age of GDP) on healthcare than the UK does.  Can you really tell me that health outcomes in the USA are twice as good as they are in the UK?  Are they actually even better at all than in the UK?  I don’t know, but I know that if they are better, they are only slightly so.  What about South Korea, where healthcare spending is a quarter of the USA (in PPP dollars) and a third as a percentage of GDP?  I lived for a while in Korea – I can tell you they have a first rate healthcare system.  The outcomes in the USA are not three or four times better than those in Korea.

So, as US politicians argue over the relative minutiae of healthcare in the USA, the real big ticket items are being missed in the debate:

1. The US model is totally broken in terms of value-for-money and outcomes.  Even a fully socialized system is delivering radically better results.

2. All developed nations are seeing a huge growth in health spending in GDP% and real terms.  Healthcare is becoming a larger and more unsustainable part of our economies.

3. All the while we are becoming unhealthier.  So, as spending rises, outcomes are really getting worse in the most general terms.  We many be making incremental steps in curing some diseases, but in general we are becoming fatter, more miserable and diabetes-riddled.

It cannot last.  The chart at the top of this post illustrates, just for Medicare and Medicaid, how demographics, increased “unwellness” and (expensive) advances in medical capability are going to explode expenditure.  Most estimates see this programs doubling in absolute cost in the next decade.  This will be true for healthcare in general, and for most developed nations, not just the USA.  It’s just worse in the USA because they start from such a position of inefficiency and because it is such a looming part of the debt crisis here.

But, so much for cursing the darkness.  What can we do about this challenge?

Governments will need a radically new series of carrots and sticks to run any form of sustainable healthcare programs.  I have said it before, and I will say it again.  That will mean rationing – in terms of what the public purse will and will not pay for.  It will also mean payment to providers for health outcomes, not just treatments.

Every day millions of us are involved in health choices.  Every day millions of people work hard to help ease the suffering of others.  The humane thing to do now, however, is to start to be cruel to be kind.  We are going to have to start to draw the line on what government will pay for.  This will further make the best healthcare available only to those who can most afford it.  This will mean some really tough choices about approving expenditure on, for example, very expensive cancer drugs that may extend life a few months.  Believe me, when your mother is dying of cancer, you want nothing but the best for her.  But society is not going to be able to pay for it for much longer.   The current situation cannot last.  Every day where we allow our leaders to play political “small-ball” and every day that we lie to ourselves about the consequences of our health behaviours, we put off an inevitable rude-awakening.

To get it right will require the best blend of individual accountability and government help imaginable.  But what could be more important than our health? It is surely worth the effort.  Let’s at least start thinking clearly about the challenge ahead, and get on with the REAL healthcare debate.

 

 

Jun 27 12

The End of Wars to help End all Wars – why I am so proud of Northern Ireland

by Aaron McCormack

 

I have always found it a little strange that a small country like Northern Ireland  with its silly and relatively insignificant quarrel has managed to attract so much international attention.  Why do so many people around the world know about, and care about, our squabbles – known as the “Troubles”?

Winston Churchill put it best as far back as 1922, when Europe was still recovering from the Great War (World War One) and the recently-partitioned Ireland was gripped by a brutal civil war that killed more people in months than eight centuries of uprisings against the British.  He said “The whole map of Europe has been changed … but as the deluge subsides and the waters fall short we see the dreary steeples of Fermanagh and Tyrone emerging once again.”

I come from Omagh in County Tyrone – famous for it’s terrible IRA atrocity in 1998.  Our steeples are not-at-all dreary and  I was never offended by Churchill’s quote.  He had it spot on.  Certainly from Partition onwards, there was perhaps, at a stretch, a civil-rights cause worth dying for in Northern Ireland – but there was never, ever anything worth killing for.

However, kill we did.  In a bitter, nasty 30 year war that saw casualty rates that are staggering.  Proportionately, you can think of it as 10 Vietnam Wars.  We grew up in segregated communities, we went to different schools and we largely socialized separately – nominally based on what minor branch of Christianity we supposedly adhered to, but in reality based on a sense of national identity. Irish or British.  Catholic or Protestant. And yes, haves and have-nots.  Protestants tended to “have” and Catholics tended to “have-not”.

Never mind that Irish nationalism was largely a product of the same European enlightenment that had fueled the non-sectarian French and American equivalents.  Never mind that many of the great Irish nationalist leaders had been Protestant.  The battle-lines from the late 1960s onwards were drawn around a Civil Rights problem.  The Protestant Loyalist British-facing majority in Northern Ireland had treated the Catholic Nationalist Irish-facing minority terribly since partition.  A situation that reached boiling point in the mid-1960s not unlike the situation for African-Americans in the United States.

But let’s be clear – it wasn’t anywhere near as bad as the way African-American’s were treated.  The civil-rights movement, through mis-steps by the British government, and often with the nefarious support of misguided Irish-American money, was swept away by the rise of the IRA and opposing Loyalist paramilitaries.

The conflict that ensued (it wrongly enobles it in some respects to call it a “war”) had an impact far beyond our small country.  It evolved, through trial and error, the playbook for how countries should and should not deal with these forms of internal, ethnic-style conflicts in the modern-era.  Internment-without-trial of suspect bad guys.  Banning political wings of terrorist groups. Limits on the actions of government forces.   Undercover counter-terrorism (on that point, where do you think the British learned to place or turn undercover spies in al-Quaeda in Yemen?)  The British learned all this the hard way – and in the end a mix of undercover infiltration of the IRA coupled with “hearts and minds” initiatives to erode support for the IRA in their communities brought the IRA to the peace table.  What a shame a lot of that playbook has been lost in subsequent conflicts in places like Iraq….

A long and torturous peace process ensued, and fourteen years ago a peace deal was signed that saw paramilitaries give up their weapons, and a series of peace-building initiatives begin.

Yesterday, when the Queen of England shook the hand of the former Chief of Staff of the IRA Martin McGuinness, this was the latest in a long line of events that have helped Northern Ireland (in fact, the islands of Britain and Ireland) progress away from their bitter past and towards a more friendly future.

Whilst both Ireland the UK face significant economic challenges, it turns out that we are actually great at making something that lots of others around the world want – a peace process that seems to be working.

Every conflict in our world is different.  They have different origins, different past-sins, different protagonists, different balances of power.

The magic ingredients in the Northern Ireland process, however, can apply to all of them.  Domestic political courage, significant outside help from those who genuinely care, talks and more talks, a heartfelt desire from the ordinary person for the conflict to just stop so they can get on with trying to better their lot and their childrens’ lots.

Above all, hope – a belief that there can be light at the end of the tunnel.

A handshake may seem like such a small thing, no matter who the two people may be that are shaking hands. The handshake won’t bring back a single loved one killed in our conflict – and no-one will ever forget the terrible atrocities that befell our people, even as we try to forgive them.

But make no mistake, everyone who loves the North of Ireland is marveling today at the progress we have made and full of hope that it can be contagious.  That people elsewhere can learn not just from the futility of our conflict, but from how we eventually put it behind us.

 

Jun 21 12

The longer we sit on the Euro problem, the worse the situation will get

by Aaron McCormack

Business teaches some very valuable lessons about how to deal with problems, challenges and all-out crises.  One rule, that is certainly golden, is that things rarely get better by just waiting them out.  Another key skill that business teaches is “abstraction” – the ability to cut through the crap and the noise and get to the heart of what needs to be done to fix things.  Business also teaches us that even when we know what to do, many companies fail because they just can’t seem to get it done.  Knowing that execution is even harder in the public world versus the private world, it is possible to appreciate the challenges that our political leaders face.

That it is difficult is no excuse, however.  No-one forced these individuals to step up and lead – there was no gun to their heads.  We got the political leaders we deserve.

Re-establishing competitiveness in the Eurozone economies that are struggling is the key mission for those leaders.  It isn’t about saving the Euro, or the banks, or the financial system – those are symptoms and sideshows.  I can understand an argument (although I don’t agree with it) that keeping the Euro intact and protecting the integrity of the financial system is somehow important to maintain what fragile economies we have.  But they are not ends in and of themselves.  We are abstracting to the wrong layer of the problem.

Even government indebtedness is really a symptom of lack of competitiveness.  When an economy is really moving, all systems go, a country usually finds itself in good financial shape and any bumps in the road are temporary.

But then, as can easily happen in businesses, folks get complacent and lazy and take their eye off the ball.  The history of the western economies over the past thirty years is one where governments have replaced real progress and growth with phony progress and growth – burgeoning government payrolls, asset bubbles, housing bubbles and the printing of too much money.

Not everyone on the planet has had raw deal from this – hundreds of millions of people in countries like China, India, Brazil, Indonesia and the Philippines have been raised out of abject poverty into their own version of a working or middle-class existence.  We have seen a boom in technology that has transformed not only western lives, but those in the poorest of regions.  Think how cellphone technology is transforming communities around the world for example.

But let’s face it – a lot of the froth in our western lives has been generated by borrowing or printing money.  Our false sense of prosperity has further helped us cling to outdated models of social support structures.  We have gotten soft.  And now I am not sure we have the mettle to deal with the realities in front of us.

But, back to the Euro crisis.  One of the great lubricants of international competitiveness has always been exchange rates.  Countries who would succeed and prosper would find their currency strengthening, making their exports relatively less competitive, dampening their comparative advantage and thus exchange rates would therefore act as a natural balancing mechanism between countries.  When you remove that influence – one that acted on our economies every second of every day – you end up with one more contributing factor to our sense of “false prosperity” and a faux-crisis when it all needs to come to an end.

So, now I believe it is time to let the recession, the correction, finally do its work.  It is time to get on with the convulsions of breaking up the Euro and having the banks suffer the consequences of their poor investments. It is time to end the Euro-drama and get on with the real job of fixing competitiveness.  Simply saving the Euro will actually do nothing to save our economies.