|
|
Global Interdependence Center
|
The Global Interdependence Center meets at the Philadelphia Federal Reserve, organizing frequent seminars of outstanding quality about finance. This week, the speaker was Andrew Hodge, head of Profits Research, U.S. Department of Commerce, Bureau of Economic Analysis. Someone there once had the brilliant idea that aggregate national income was almost identical to Gross Domestic Product, so national income could be easily derived from tax information at the I.R.S. Originally probably seen as a way of verifying GDP statistics derived in other ways, aggregated income and profits look in some ways to be superior to the data coming from Wall Street earnings reports. As a leading indicator, it appears to be outstandingly effective in predicting an impending upswing in the business cycle, just about at the time everyone is getting discouraged about downswings. It's not so good at predicting market peaks.
The BEA profits report
Seems to be superior to Wall Street earnings reports in four ways. 1) Wall Street is not particularly useful in distinguishing domestic from foreign activity within multinational firms. 2) Wall Street reports generally attempt to avoid seasonality noise by comparing this month with this-month-last- year. If the market direction has changed during the past year, downswings may cancel upswings and such comparisons can be misleading. 3) at market inflection points, volatility gets exaggerated by firms going out of business at the bottom or businesses formed or expanded at the top. 4) Wall Street is only 40% of the economy. The other 60% has private ownership, particularly in S-corporations.
Out of studying the differences between the two types of statistics about the economy, it emerges that the tax-derived BEA statistics are quite good leading indicators, particularly when the economy is in a trough. They are sort of leading indicators of coming market peaks as well, but they lead by longer intervals. A lead of as long as a year isn't very useful as an indicator.
As the jargon goes, that's the take-home message. BEA data is pretty good at predicting market bottoms. But some interesting sidelights appear, as well.
Our economy is becoming less volatile, with milder cycles and less frequent ones. But national income is just as volatile as ever, particularly in stock prices. This would appear to be due to the steadily increasing proportion which is in the financial sector (or decreasing proportion in the manufacturing sector). The financial sector is characterized, worldwide and for a long time in the past, as having "sticky" wages and costs. With the cost side comparatively inert, profits become much more volatile. In the final analysis, the stock market becomes more volatile than the underlying economy.
A final conclusion is my own. If the best personal investment vehicle is a broad index fund representing the whole economy, then you had better be watching national statistics like the BEA, rather than sector statistics. At the moment, the problem is deciphering what's available on BEA.gov in tabular rather than graphics format.
SEVERAL years ago, I attended a public meeting at the Federal Reserve, surrounded by well-dressed strangers. At a contentious moment in the discussion, the man next to me rose and announced he was the Finance Minister of a large European nation and had a prediction to make. Within twenty years, he believed, there would only be three economically functioning nations in the world: America, India, and China. Since he was sitting next to me, I asked him the obvious question: what about Europe, what about Japan? He shrugged me off as if the question was too stupid to answer. As things have turned out, maybe it was.
Could Americans buy their way out of Medicare? Right now, no. In a few years, probably yes. A Medicare buy-out would have a few special complications. The transition to it might take thirty or more years, in view of the several ways it raises revenue and the varying ages of the patients involved. For example, from the time an individual starts his first job, until the age of 66, he is sustaining payroll deductions for future Medicare coverage. Also, from the age of 66 until he dies, he has Medicare premiums deducted from his Social Security payments. Each of these compartments aggregates about a quarter of the cost of the program, and the two methods keep more or less in balance over a lifetime, eventually paying half its cost.
The other half of the Medicare program cost is supplied through general tax sources, as a subsidy, and could continue to build up indefinitely. Eventually, an undeterminable portion of the subsidy is borrowed internationally, and that debt, like a credit-card balance, draws continuous interest. The Economist reports it would be more advantageous for the Chinese to buy American common stock. But using that approach, they would now own a fifth of the major corporations of America, which is politically unacceptable. Therefore, they bought American Treasury bonds. Depending on maturity, these bonds will eventually come due and must then be redeemed or refinanced. This arrangement can only continue with mutual consent of the two nations, and currently, the Chinese economy is shaky.
Moreover, it cannot be said the two funds will keep in balance. That's essentially true in bulk, but the actual revenue for each age cohort is largely based on its historical birth rate. Payroll deductions for the baby boom bulge have reached a peak and are about to decline to zero, whereas the Medicare premium bulge is just beginning, along with benefit payments. These repeated imbalances could prove troublesome to fund.
I wish I believed these receipts had been put into a bank vault, but in fact, they were likely co-mingled for general government expenses and spent long ago. Whether or not they are represented by accountants as paying for part of future Medicare expenses, or for current bridges and battleships, they are going to make a problem when the boomer bulge catches up with them. The formula will remain unchanged, but the proportion of payroll deduction will fall because the Millennial generation is fewer than the boomer generation, who are in turn more numerous than their parents as consumers of Medicare funds. The Treasury would certainly be concerned about any proposal to accelerate the payout to help a Medicare buyout. And even if an exchange of health funding is agreed to, the accounting problem of determining millions of balances of differing size is sure to be a headache. The balance in question is the net of 6.5%, less the rate on Treasury bonds, which could be either a positive balance or a negative one if the bond market and the stock market do not move in parallel. The unpredictability of markets is amply illustrated at present, when trillions of freshly printed bonds do not cause inflation, even for the mundane purpose of maintaining a stable currency. Even inflation targeting does not work as desired, currently reaching 1.5% when the Federal Reserve is trying to reach 2%.
In the longer run, Medicare buy-outs by the grandchild approach would stretch available funds over a longer time span, and augment them somewhat. Longevity is increasing, but the period of working life is not. People are retiring earlier, and they are entering the workforce later in life. Progressive taxation further reduces what working people have left over to spend, and eventually will make them less willing to support the protracted vacations of their children and their parents. So extra investment income will be needed, and shifting other savings around will probably relieve some of the pressure. Even so, it appears certain some elderly people will outlive their savings and must find a way to generate income with their leisure time. Along the same lines, we must also change the mentality of those who regard employment as a punishment to be avoided, but that is not my present topic. One small advantage of the unemployed Millennials is they are less likely to resist working long after they do get a job.
Summary of One Scheme of Medicare Buyout. Childhood health insurance, funded through health insurance for senior citizens. Owned by two people linked by redefining a birthday or some other strategy, all sounds like a peculiar idea. But let me persuade you to do a little math. At 7%, there are 9 doublings in a 90-year life. 2,4,8,16,32, 64, 128, 256, 512. That's rounding up on 6.5% and 85 years, which are closer to realistic estimates of future longevity and interest rate return, but no one can predict. Every dollar at birth (now redefined financially as the 21st birthday) is multiplied 289 times (the approximation process suggested 512). The grandparent aged 40 would have to add $450 to a sinking fund, and a grandparent aged 65 would have to contribute $27,000 to pay it in advance. Eventually, when things settle down and we have added four doublings, the contribution would be $42+ a person, so considerable juggling would be useful for a few years to smooth it out fairly.
Let's aim for $200 a year for five or ten years for everybody over age 40 or something of that nature. To pay for Medicare coverage, that's amazingly cheap. That's a rough estimate, of course. The overall effect is for the child to wear down his gift from grandpa from birth to age 21, paying $42+ at age 40 to support his own grandchild. He pays for his own care from age 21 to 66. During the transition, a late starter would pay $200 a year for several years after age 40 to make up for his late start, and others would pay the same, but starting later. There are a hundred ways to do this, and the choice would be for the most palatable appearance. We have other, possibly more acceptable, approaches, but this one links well with other goals.
Proposal 22: Congress should enable one voluntary transfer between the Health Savings Accounts of members of the same family, especially grandparents and grandchildren, or one transfer to a general pool for atypical families. Members of the grandparent generation who have no grandchildren may choose one substitute from outside the family, or leave the decision to the fund.
Proposal 23: Congress should permit voluntary buy-outs from the Medicare program, which include consideration of returning payroll deductions, and fair accounting for premiums, copayments and benefits already paid for by age groups in transition; but make little effort to encourage buyouts, until prices start to fall.
All in all, the conclusion of this analysis is that targeted programs are probably better for the thirty million people with special needs, so universal one-size-fits-all is probably not a good goal. Privatizing Medicare is a good goal, but we may not be quite ready for it. What's left is to fund the healthcare of children, by mildly overfunding the healthcare of seniors. That ought to end the discussion of this topic, except for demonstrating how you would control the money machine, exposed by the lack of gold or other standards for the currency. It's done by bringing balances to zero once in a while, and it was uncovered by working around the grandparent-grandchild transfer. By studying what's left, we reach the conclusion that fixing the children problem would do the most good for the least cost, and just about everything else has major disadvantages.
Let us then do this much without waiting to see what Obamacare is going to do. If the Federal Reserve's inflation targeting serves the purpose, this may be held in reserve, but the failure of Keynesians to reach 2% inflation when they try to inflate on purpose, should make everyone uneasy about their approach in a currency system which depends on printing money until short-term interest rates rise to 2%. As the man in the audience called out, "Haven't you been to the grocery store, lately?"
Newsmedia speak of medical "prices", the government speaks of medical "cost" -- what's the difference? Well, for fifteen years in my practice, and before that for thousands of years, prices and costs were nearly the same thing, or at least bore some relation to each other. The person who did the work set the price, and the person who paid the bill agreed to the price.
But out on the West coast they told us Henry J. Kaiser during World War II had expanded the idea of the Mayo Clinic into a pre-paid health system of clinics and pre-agreed patients, paying a set annual fee for all the care you could use in a year. By 1970 I was sent by my local medical society to see what this was all about. I learned a lot, including the main thing which made it so cheap rested on two government tax exemptions, one for the employer and a second one for the employee. They recruited doctors with the promise of relieving them of the business nuisances of medicine, plus instant practice-builders of employee groups of patients. Doctors in the neighborhood didn't like Kaiser at all, particularly after the Maricopa decision of the U.S. Supreme court made it an antitrust violation for doctors to do the same thing. For lawyers reading this, it is a particular irritant that this decision was 4-3 (not a majority), based without a trial of the facts, solely on upholding a motion of summary judgment.
Turning from historical legalities to practical economics, turning that is, from one doctor both doing the work and setting the price, into a third party with no doctors setting the price, the third party (the insurance company) paid its own reimbursement price. So not only did the physicians eventually lose control of pricing their own work, but that price rapidly drifted away from the audited cost in a capricious manner, responding to forces entirely unrelated to medical care. The accountants protested this lack of relationship between cost and price, and it was a legal requirement for hospitals to report (but not make public) the ratio of prices to cost. While the ratio was always high, it was also extremely variable. In effect, a fact demonstrated when the "diagnosis-related" system fixed inpatient costs by groups rather than individually, the disparity was only used to compete for out-patients with outside market prices. However, instead of forcing hospital prices down, it enticed drug companies to force prices up, often to absurd levels. Some hospitals negotiated discounts and applied them as invisible mark-ups to the uninsured patients. Cheap mortgages stimulated hospital building, and the situation spiraled out of control, as it does in any inflation. Nobody ever cured an inflation, except with brute force and lots of pain.
In our system, the money supply is governed by the Federal Reserve issuing and/or buying bonds. In so doing, it is issuing unheard-of amounts of debt for which there is no market, forcing interest rates down. Although the Japanese allow their central bank to buy common stock, Congress is adamant that buying ownership of corporations amounts to Communism with a demonstrated history of universal failure. Congress will probably never permit government take-over of corporation ownership, but Mr. Obama simply spent money beyond Congressional limitation and dared Congress not to pay the bill (and thus to ruin our national credit). Congress is not compelled to make a rational choice between inflation and government control of the private sector, but you can be certain it has been discussed.
I never took a course in economics but it seems to me, a couple of million individual citizens building up half-million dollar portfolios of indexed common stock might provide an adequate balance for three trillion dollars of excess debt. That is, holders of Health Savings Accounts would hold voting control of corporations, without the organization to abuse that power, and that power could never pass into foreign hands because it is contingent on American-based health care. Plenty of other regulations, good and bad, would have to be added for the system to become stable and tamper-proof, but it's a suggestion for debate and study of a possible solution to an entirely unrelated subject. One for which there has been an international shortage of fresh suggestions.
FEDERAL RESERVE, BOND MARKETS, AND THE ECONOMY--How to control them.
INFLATION BUST MARKETS and ECONOMIES
INFLATION BUST
=====================================================================================================
Ratio of Stocks to Bonds
Monetarism {Friedman}===========[periods of relative stability}================Keynseanism {Phillips Curve}==========================
===================================================================================================
Stocks drop
=====================================================================================================
Sell bonds stagflation
Discourage hiring.
Sell bonds, buy stocks
Buy stocks Make hiring expensive.
============================={Crash}=====================Sell stocks, bonds when you can===>
Buy and sell lots of them. =============
Originally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.
Start in Philadelphia, take two days to tour around Delaware Bay. Down the New Jersey side to Cape May, ferry over to Lewes, tour up to Dover and New Castle, visit Winterthur, Longwood Gardens, Brandywine Battlefield and art museum, then back to Philadelphia. Try it!
Millions of eye patients have been asked to read the passage from Franklin's autobiography, "I walked up Market Street, etc." which is commonly printed on eye-test cards. Here's your chance to do it.
In 1751, the Pennsylvania Hospital at 8th and Spruce was 'way out in the country. Now it is in the center of a city, but the area still remains dominated by medical institutions.
Grievances provoking the American Revolutionary War left many Philadelphians unprovoked. Loyalists often fled to Canada, especially Kingston, Ontario. Decades later the flow of dissidents reversed, Canadian anti-royalists taking refuge south of the border.