Cheap Energy Makes America More Competitive

By Paolo von Schirach

September 30, 2013

WASHINGTON – Does cheap energy make a difference when it comes to economic competitiveness? You bet it does. The Financial Times, (Eon chief warns Europe on energy gap with US, September 30, 2013), quotes Johannes Teyssen, CEO of  EON, a German energy company, saying that: “there is a  competitive advantage for America that we cannot prevent, at least for some time…It is a dream for politicians to suggest otherwise“. America’s energy edge is in part the fruit of geology (plenty of shale gas); and of Yankee ingenuity, (nobody thought it was possible to extract gas from shale and make money).

Germany’s electricity is too expensive

The funny thing here is that policy makers in Germany, using subsidies and other incentives, pushed hard to get more energy from solar, this way trying to be both modern and “green”. Well, this policy has driven up the cost of electricity, and so Germany’s energy intensive industries are looking for opportunities to relocate to the US because the shale gas boom has made American electricity very inexpensive. Meanwhile, “green” Europe does not have enough of its expensive renewable energy; and so it has to rely more on old-fashioned, dirty, high emission coal, this way increasing green house gases emissions.

Being “green” is not so good for the economy

The paradox here is that supposedly immoral America, the country where business people would do the worst things in pursuit of immediate gain, is actually reducing carbon emissions. Yes, abundant US shale gas has displaced coal, and this means more cleaner burning gas-fired power plants. “Green” Europe, the Continent where concerned citizens really think a lot about global warming, is actually increasing CO2 emissions because of misguided energy policies that subsidized expensive renewable energy, this way displacing natural gas.


Energy Conservation Helps Us Fight Global Warming

By Paolo von Schirach

September 29, 2013

WASHINGTON – A recent (and rare) TIME magazine piece on energy, (Power Surge, October 7, 2013),  provides a good overview of America’s vastly improved energy outlook. What is most remarkable is that in just a few years we have moved from very negative predictions of energy scarcity and high prices to a brand new scenario of real abundance provided by multiple sources now economically viable thanks to technological advances. Hydraulic fracturing  and horizontal drilling now allow energy companies to extract shale oil and gas. Just a few years ago this was considered impossible. But there has also been considerable progress in solar and wind. In the meantime, as a nation we have learnt how to consume less energy. Therefore, even with a growing economy, the energy content of whatever we produce is shrinking. Furthermore, our gigantic fleets of cars and trucks have become more fuel efficient and they are projected to be even more so in the next years, on account of federal CAFE mandates.

Burn more carbon, cook the planet

However, as the TIME story points out, there is a huge fly in the ointment. Much of the US new energy supply comes from hydrocarbons: “non conventional” shale oil and most of all very inexpensive natural gas extracted from shale formations. And that is of course a problem if we subscribe to the prevailing consensus whereby global warming is the result of billions of people burning way too much fossil fuel, (with America in the lead regarding per capita use). Abundant and cheap carbon energy is great news. But if the resulting emissions will cook the planet, with catastrophic climate change consequences for humanity, then it is not such a good idea. From this perspective, the danger represented by cheap shale gas is that it is indeed so cheap that it will make it nearly impossible to move away from carbon based energy.

How do you give up cheap carbon energy?

Assuming that this is indeed the case, we have a huge public policy problem. It is very hard to give up an immediately available, inexpensive source of energy on account of the high probability that by using it today we shall cause irreparable environmental damage that will become visible in a few years. Are we willing to give up an immediate economic benefit (cheap and readily available oil and natural gas) for fear of consequences that are not yet apparent?  Very, very hard to do.

Of course, if dramatic technological progress in renewable energy would make wind or solar much cheaper than coal, oil or natural gas, then there would be no issue. We would switch over to zero emission renewables as fast as we could. Super abundant shale oil or gas would mean nothing if we could get cheaper energy from clean sources. But, while there has been tremendous progress in renewables, we are not there yet.

And this means burning more fossil fuels for a long time. Short of a forced switch, (via heavy carbon taxes, combined with even bigger subsidies for solar and wind that are likely to be extremely costly and unpopular), a middle ground can be found in conservation.

Conservation would reduce emissions

As indicated above, there has already been progress in reducing consumption in a smart way. But much, much more could be done. Much of America’s energy is consumed at the individual household level. However, most people are unaware of the cost-effective investments they can make in order to make their homes far more energy-efficient. And the calculation here does not have to include any desire to “save the planet”. It is pure economics. You invest in a state of the art heating system plus insulation of your exterior walls, and in just few years you have net savings because much lower utility bills will allow you to quickly recover your initial investment and then save money because of reduced consumption. 

Not glamorous but effective

The conservation approach may not appear glamorous enough; but it works. For instance, major corporations, from Google to Walmart, are now engaged in efforts aimed at making their facilities more energy-efficient, not because they want to be “green”, but simply because they want to save money — up to hundreds of millions in the case of companies that run multiple large facilities.

Conservation is not a solution to global warming. However, if seriously adopted on a large scale, it could really make a huge difference by significantly reducing total emissions. Imagine the average US household reducing energy consumption by 10%. That translates into less coal or natural gas burnt to produce electricity. And this means  an immediate drop in green house gases. In the meantime, solar and wind will get more cost-effective and eventually we will be able to ramp up the switch over . 

Cheap shale gas is great. However, cheaper zero emission solar would be a lot better.

Contrary To What CNN Says, Iranian President Rouhani Has Not Admitted That The Holocaust Took Place – “A Group of Jewish People” Was Killed Is Not Much Of An Admission

By Paolo von Schirach

September 28, 2013

WASHINGTON – In New York for the UN General Assembly, freshly elected Iranian President Hassan Rouhani wanted to show to the West that he is not a crazy zealot like his predecessor Mahmoud Ahmadinejad. In order to prove that he is sensitive about “hot button issues” like the traditional official Iranian position that the Holocaust did not take place, he talked about it during a CNN interview. But what did he really say? According to a CNN translation from Farsi he basically admitted that the Holocaust did happen and that it was in fact about the extermination of the Jewish people. If this were really so, then we should call this first ever public “admission” a major new mile stone, possibly a prelude to the end of official Iranian “doctrine” whereby the Jewish state (established in large part because of the desire to give the Jewish  people a home after the Holocaust) should not exist. Hence Israel’s justifiable concerns as to what kind of plans Iran might have, once it managed to create nuclear weapons. Do they have any particular target in mind?

“Holocaust” not mentioned

Well, as it turned out, President Rouhani did not use the word “Holocaust” in his CNN interview. While he talked in general terms about Nazi war crimes, he did not indicate that the Nazis were determined to exterminate the Jews. 

Moreover, in a subsequent speech at the Council on Foreign Relation in New York Rouhani condemned Nazi war crimes, adding however that “regrettably those [Nazi] crimes were committed against many groups, many people were killed, including a group of Jewish people”.

So, this is the Iranian first official “admission” that a Holocaust took place: “A group of Jewish people were killed“.

Does this matter?

You may argue that none of this really matters, because what is important here is to see whether it may be possible to get a deal so that Iran will not develop nuclear weapons. “Let’s stick with the real issue and forget about the way in which the Iranian leaders talk about an event, however tragic, that is really in the past”.

Not so. We should not gloss over the fact that Rouhani was deliberately trying to be clever, giving a little bit away, (“some Jews were killed“), without even remotely conceding the larger point about Hitler’s deliberate and open attempt at extermination.

Yes, it does?

Again this no mere detail. As Holocaust denial is a pillar of the anti-Israel policy openly embraced and constantly repeated by the Iranian leaders, it does matter to determine whether this doctrine stands or has been repudiated. The unwillingness to clearly recognize an established historical fact and its implications is not just a harmless Iranian cultural peculiarity to be left alone. It is evidence of an ideology that is still openly hostile to a key US ally.

We are not negotiating with friends      

That does not mean that we should not negotiate with the Iranians. If there is such a possibility, we should engage the new Iranian President and see where this may lead. But one thing is to assume that we are negotiating with a counterpart that has finally come around and that is now sharing, at least in part, our worldview.

Quite another to realistically admit that Iran’s new President, while different from his predecessor, still subscribes to an ideology that is still fundamentally hostile to the West.


Policy Makers Claim That Europe Is Finally Stable, Long Emergency Is Over – Not So

By Paolo von Schirach

September 27, 2013

WASHINGTON – It is a sign of the times that listless Europe, run by unimaginative politicians fearful of social reactions to anything that might even resemble serious pro-growth reforms, is deemed to be finally on the mend. Things are looking up, we are told by policy-makers. The long and grueling fiscal crisis emergency is over. We are back to normal. So much so that incumbent German Chancellor Angela Merkel did extremely well in the recent elections. Her steady hand and her pro-austerity (but still cautious) policies were apparently vindicated, and so she won the day.

Dismal numbers

Well, it may be so in Germany. But if you look at Europe, the picture is still very grim, unless you really believe that a Eurozone economy now 3% smaller than its pre 2008 crisis levels is a good sign of recovered health. And if you look closely at the sorry Club Med bunch, (Greece, Italy, Cyprus, Portugal and Spain), things are far worse. All of their economies are still way below pre crisis levels, (Greece is down 28%, Italy 8.8%). And no Southern European country is  about to begin a strong recovery. And what about a 12% Eurozone unemployment levels, (with peaks above 25% in Spain and Greece)? Is this yet another sign of health?

North South divide

Sure enough, Northern Europe, with Germany, Austria and the Scandinavian countries in the lead, is doing reasonably well. But France, the Eurozone number two economy, is not; and Eastern Europe is a mixed bag at best. Still, if the totally unjustified consensus is that this European Union has recovered and that it is now ready to resume business as usual, this means that there is no interest in facing reality and in re-examining the very foundations of a Union among far too disparate members that demonstrably are unable (because of resource levels, profoundly different cultures and psychologies), to function according to the same rules. 

While they all share the geography of this Western appendix to the Asian Continent, the Europeans are traveling at different speeds. Some –Greece being the most obvious example– are in such bad shape that they are clearly incapable of advancing without (permanent?) help from rich Northern partners. 

And, even more fundamentally, the financial crisis revealed profound cultural differences between North and South in Europe. The North believes in growth and responsible government. The South believes in debt, while tolerating graft and corruption as rather normal ways to conduct business.

Governance, Italian style 

Way before the crisis, Silvio Berlusconi long premiership showed the world that the Italian voters could not care less about glaring conflicts of interest (Berlusconi retained de facto control over a vast media empire as he served as Prime Minister) and self-serving legislation. Not to mention that he was the Prime Minister who hosted many “bunga-bunga parties” featuring sexy young women, saucy events described by Berlusconi’s friends as “elegant dinners“. Even now, with Berlusconi finally convicted of tax fraud at the end of one of so many trials, it is not clear that he will be expelled from the Senate, as the law would mandate. In fact, should he be expelled, his party may cause the collapse of an ultra fragile government coalition as a protest against what it believes to be a political punishment. And this is happening in Italy, the Eurozone third largest economy, and one of the original founders back in 1957 of the European Common Market, not in Sudan or Mali.

A slimmed down EU, with only the more modern countries in it, can do rather well. But this patchwork Europe, with the rich having to carry the negligent and indolent poor for the indefinite future, is doomed to eventual irrelevance.



The Near Collapse Of A Bridge In Wisconsin Is a Reminder Of The Horrible State Of America’s Basic Infrastructure

 By Paolo von Schirach

September 26, 2013

WASHINGTON – A major bridge in Green Bay, Wisconsin has been closed to traffic because it almost collapsed. The bridge carries about 40,000 trucks and cars per day. The closure is due to a sagging of the structure due to the settling of a bridge pier. There were no accidents. The causes of the collapse will be investigated.

Too many deficient bridges 

Taken in isolation, this is an unfortunate development; but hardly a tragedy. Taken in the context of systemic under investment in US basic infrastructure, this one relatively minor incident should raise plenty of red flags. This particular structure was built in 1980 and so it is not that old. In fact, it is not among the 60 Wisconsin bridges that a 2012 inspection defined as deficient. Still, now it is severely damaged. Poor design? Faulty construction? Who knows. But what about the other 60 bridges in need of serious repairs just in Wisconsin? When will that work be done?

A bigger national problem

If  Wisconsin needs to allocate additional resources to fix its aging infrastructure, nationwide we have a crisis.  The 2013 Report Card for America’s Infrastructure, released by the American Society of Civil Engineers, gives an average grade of D+ to US roads, bridges, railways and more. “D” as we all know means “Poor”. “D+” is nothing to be proud of. The report estimates that, in order to fix crumbling infrastructure (forget about building anything new) America should invest $ 3.6 trillion by 2020. That’s a lot of money. As of now there is absolutely no political agreement in Washington on directing any significant federal funds to this effort that in many instances should be considered an emergency intervention.

The state of our bridges

Within the rather dismal national average, bridges do a little bit better. They get a C+. Still, while the picture in this category has improved somewhat in the last few years, there is still a huge gap between required spending and existing allocations. This is what the Report says:

“Over two hundred million trips are taken daily across deficient bridges in the nation’s 102 largest metropolitan regions. In total, one in nine of the nation’s bridges are rated as structurally deficient, while the average age of the nation’s 607,380 bridges is currently 42 years. The Federal Highway Administration (FHWA) estimates that to eliminate the nation’s bridge deficient backlog by 2028, we would need to invest $20.5 billion annually, while only $12.8 billion is being spent currently. The challenge for federal, state, and local governments is to increase bridge investments by $8 billion annually to address the identified $76 billion in needs for deficient bridges across the United States.”

So, every year there is an $ 8 billion deficit. And consider that bridges get an above average grade. Other sectors are even more severely under funded. It is obvious that old and crumbling infrastructure creates huge public safety risks. Beyond that, it is a drag on the economy. Moving people and goods around costs more, and these costs hold the US economy back.

Time to invest

Even in this cash strapped economy there should be a political consensus on this. Spending on America’s basic infrastructure is a good deal. It creates jobs while it safeguards our economic future. Besides, if we fail to make these absolutely necessary, (in some cases urgent), investments, expect more closings of damaged bridges, or worse. This time we got lucky because there was no collapse.

No Way For America To Compete Effectively Unless It Improves Its Dismal Public Education System

By Paolo von Schirach

September 25, 2013

WASHINGTON – There is really no dispute about the fact that in this hyper competitive global “knowledge economy” a super educated work force is not just an incredibly valuable asset, it is in fact an absolute precondition for success. In order to produce valuable new knowledge, societies need highly educated people whose combined talents will hopefully produce breakthrough innovation. If a country does not produce and sell valuable innovation, then it will have to be a user that  will have to pay for what has been produced by others. The innovators make money. The innovation users pay the innovators.

Invest in education

Given this unfolding scenario, it should be self-evident that all societies that wish to be competitive will invest vast resources in their public education systems. The better the effort to inform and train young minds, the better the chance that many well educated young people will be among tomorrow’s innovators.

All this is so obvious that it should be beyond debate. Well, in the US the principles are agreed upon, but there is a truly dismal record when it comes to implementation.

Simply stated, pro-education advocacy groups and policy-makers have yet to win decisive battles against the super conservative teachers unions that are de facto the main enemies of improved public education standards.

Bad schools in Philadelphia

Here is just one more depressing statistic extracted from a WSJ editorial. (Failure in Philadelphia, September 25, 2013). Last year only 40% of Philadelphia school children scored proficient or above in standardized readings tests, while 99.5% of teachers are doing a job. Note the contradiction. Less than 50% of the students are doing reasonably well, but their teachers are apparently doing great. 

This is clearly an impossibility. If the teachers were really that good, then the test scores would be much higher. And this data underscores a truly grim reality. In the US, the public education system main priority is not to educate the children. No, the main goal is to safeguard the career, job security, benefits and comfortable retirement needs of at best mediocre teachers.

Entrenched unions

As the teachers unions are quite powerful and capable in some instances of influencing local and state elections, politicians are unwilling to pick fights with them. The end result is the continuing status quo: tenured teachers who do little and students who do poorly. 

Education and income divide getting wider

Even worse, bad public schools tend to reinforce poverty and a growing opportunity and income divide. How so? Well, this is because the children of the well educated rich go to private schools or to the few well funded public schools located in very rich counties that have the means to enforce higher standards. It is plain obvious that well educated kids have a good shot at getting into prestigious universities that in turn will open good career paths.

The poor are trapped

The poor have no choices. They have to accept what is locally available. And the end result is more data like Philadelphia. If you are in school but you are not taught how to read the rest is almost meaningless. And yet it is common practice in US public schools to pass functionally illiterate children on to the next grade. While many will drop out, some of them will eventually graduate. However, in many instances their high school education is so bad that they will have trouble moving on to college or finding a decent job.

So, the children of the rich, with the huge advantage of a good education, have an excellent chance of getting into highly rewarding professions. The children of the poor have no opportunity ladder offered to them. They will stay uneducated and therefore poor.

We should do better

America as a whole will still move on, powered by the lucky ones who went to good schools. But we are becoming a two tier society, mostly because of a flawed public education system that policy-makers are still unable to fix. This is a horrible waste of human potential.

The country that sent a state of the art moving lab to Mars can and should do better.

Media Obsession With Terrorism Encourages Attention Seeking People To Engage In Terror Plots

WASHINGTON – The real problem with terrorists is that, whatever their “cause” and declared “goals”, deep down they are mostly attention seeking narcissists. When they plot and execute, they are not thinking about “winning”. They are really thinking about all the media attention that their showy violent acts will get. The more spectacular the deed, the more attention; and therefore the more glory to them, or to their image, assuming a suicide attack.

Obsessed with terrorism

Unfortunately, all media stupidly cooperate in this. Terrorism is scary. Therefore any act of violence, if linked with a terror group or with anybody, even a “lone wolf”, who claims to have a political motive for engaging in violence, gets an extraordinary amount of attention.

Given all this, it is intuitively obvious that the reward of endless media coverage may constitute a strong incentive for would be terrorists whose secret craving is really to be “famous” to actually engage in terror plots. 

 Aaron Alexis just a killer

Consider this. A few days ago Aaron Alexis, a deranged former serviceman, engaged in a deadly assault at the Navy Yard, in Washington , DC. He killed several people. The Navy Yard is a major US Defense Department facility, right in the heart of the Nation’s Capital.

Was this yet another terror attack? No, it was not.

Indeed, after the initial uncertainty, it was quickly concluded that Alexis was a mentally disturbed individual who did not have any political or terror agenda. And so the matter immediately fell into semi-obscurity.

But it would have been a totally different story had the same Aaron Alexis engaged in exactly the same massacre of innocent people shouting “Allahu Akbar“, (God Is Great), and if indeed it had turned out that he had converted to an extreme form of Islam, and that he had been “radicalized” on line by some fanatic Muslim cleric.

Terrorism gets attention

In this scenario, the whole thing would have been turned into a major national crisis. “How come?” “What mysterious route led Aaron Alexis to become a religious fanatic?” “Was he in contact with others who may be part of a sleeper cell  ready to spring into action?” And you would have seen parades after parades of terrorism experts on TV who would have opined on the significance of this act, and the likelihood of more such massacres inspired by radical Islam.

But, missing the spice of the “terror angle”, this horrible mass killing that occurred at a major military facility right in the middle of Washington, DC, almost immediately fell off the radar screens.

A terrorist killing a lot of people, even if acting alone, is a big story. A mentally disturbed individual killing the same number of people is a regrettable, tragic event soon to be forgotten.

Stop giving so much coverage 

Sadly and rather stupidly, we are obsessed with terrorism. And all terrorists and would be terrorists know this. While there are some among them who would plot and execute, no matter what, many others have a special incentive in portraying themselves as “fighters for the noble cause”, knowing that whatever they will do it will immediately get major media coverage.

If you are an attention seeking narcissist, in this climate, whatever the impact of your actions, for sure you’ll get all the coverage you wanted.

Pointless acts that change nothing

From this perspective, it would be wise to treat terrorism for what it is: totally pointless violence aimed at inflicting some wounds, making a lot of noise, and scaring people. The media should stop performing this echo chamber role. There is absolutely nothing to be gained in giving so much coverage to acts of terror.

On the contrary, if would-be terrorists would see that acts of terror get little or no media attention, while normal life goes on, at least some of them would come to the conclusion that, as these deeds are fruitless, they may as well desist.




If Solar Power Became Affordable, Developing Countries Would Be Transformed

WASHINGTON – When it comes to electric power generation and distribution, in developed countries we are used to this basic model. Large power plants produce electricity. From these sites, relying on a complex network of power lines, electricity is delivered to customers, be it industrial plants, offices or individual homes. The fuel used for generation can be coal, gas, nuclear or hydro. More recently we have developed wind, solar and biomass.

A new model

Well, in the not so distant future, this complex architecture founded on several large sources of generation from which transmission lines deliver electricity to the end users may become obsolete. A The Wall Street Journal story opens a window on a possible and completely different future, a future that can soon become reality, assuming that technologies keep improving  and costs keep going down.

Simply stated, soon enough we shall be able to have our own miniature power plant at home, no longer relying on electricity coming to us through a grid, care of the local utility company. We are clearly not there yet. But we may get there soon, probably sooner than we think.

Miniature solar power plants in your own home

In America we have plenty of power generation. Going forward, the new shale gas boom guarantees that there will be plenty of gas-fired power plants. Still, at the same time, solar power generation, while still relying on subsidies and tax breaks, is becoming more efficient, its cost are going down.

According to industry and many experts, we will soon get to a point in which it will be cheaper for individual users to install their own domestic solar power plant (based on solar panels that generate electricity) rather than pay a monthly bill to the utility.

A revolution

When we get to that tipping point, this will signal the beginning of a revolution that will have a number of large and important consequences. The first one will be the growth of the solar panels industry and of all the services associated with it. The second one will be that individual households as well as industrial plants, office complexes and commercial centers will be energy independent. The third one will be that most of the complex national and regional regulations that have been created to manage power generation and distribution will essentially become obsolete. The fourth one will be the death of the large power plants, along with the death of all the industries that support them: think of coal mining, storage and transportation, for instance.

More broadly, locally produced affordable power will improve basic economic conditions. Households will no longer have to pay electricity bills that include the cost of maintaining an expensive grid. Overall, affordable energy will be a boost for many energy intensive industries.

Biggest impact in developing countries

But, while this technological innovation will radically change the economies of developed countries, the biggest transformation will occur in emerging markets. Indeed, tens of thousands of rural communities in Africa, India and elsewhere that currently have no electricity will no longer have to wait for governments to invest in power generation and transmission so that electricity will come to them. They will be able to  produce their own, on site, without any recurring fuel costs. This will be a real revolution. Sunlight is free.

No development without power

It is a painful reality that without power these villages are essentially cut off from any meaningful economic progress. If you think about it, there is no hope for real development without electricity. Not much is possible without it. At dark, almost everything has to stop. People cannot read at night. Besides, medical facilities cannot store medications. Shops cannot refrigerate food. You cannot have workshops or small factories. Power tools cannot be used. And forget about basic amenities like street lights, cinemas, bars and restaurants.

But if, indeed, on the basis of the experience in more developed countries, local communities in emerging economies will be able to install affordable solar power generation on site, electricity would create an incredibly important short cut to development.

Right now the key obstacle for any plan to bring power to emerging countries, especially to isolated, off grid communities within them, is the large capital cost of building power plants, plus the cost of fuel, and the  high cost of constructing transmission lines.

Well, if truly cost-effective solar power can be deployed at the village level, no need to focus on huge investments in large-scale power generation and distribution.

Hundreds of millions will step into modernity

Look, I am not even remotely suggesting that all this is happening right now. But it looks as if it is just beginning to happen. As technology keeps getting better and costs keep going down, it should become realistic to think of business models that will allow scaling up affordable renewable energy solutions for the hundreds of millions of Indians who have no power. Likewise, even city dwellers in Pakistan, Nigeria or Zambia who are used to frequent power cuts due to unreliable supplies will have a chance to break off from the grid and finally have their own uninterrupted power supply.

It is impossible to have basic development without the support of reliable and affordable electricity. Until now not much has been done to create adequate electricity generation in many poor countries because of the very high cost of this effort.

If new solar technologies will radically change the model, while bringing down cost for individual users, then a huge barrier to development will also come down.

And life will change for hundreds of millions around the planet.

Outrageous Health Care Costs In America

WASHINGTON – I have observed before that there is an incredible gap between the extraordinarily high level of US health care spending and the actual health outcomes. When one compares American health statistics with those of other rich, developed countries, America does barely OK. For example, in terms of life expectancy, the US, (number 51 out of 223) does worse than Portugal and is just a little bit ahead of Panama. Not a horrible score but hardly a shining example. Still, this ranking is really dismal if you consider that the US now spends about 17.5% of GDP on health care, an astonishing amount, while the average spending among developed countries that offer far better service with far better health outcomes is around 9 to 10%.

Gigantic over spending

So, we spend about 1/3 more than other countries comparable to us and we get mediocre results, at best. And do consider that in the US 5% of a $ 16 trillion GDP is a lot of money. The entire US defense spending, by far the highest in the world, (20% of overall Federal outlays), comes up to about 4% of GDP. So, every year we outspend the rest of the world on health by an amount that is larger than the entire Pentagon budget, with mediocre or poor results.

Value for money?

If you thought that here in America almost by definition people want and get “value for money”, think again. At least in health care, we do not. There are many reasons. In a crazy and most perverse way, we have created a system that tries to reconcile private medical practice, with doctors charging whatever the want, with a payment system in which most people are covered by insurance, that is to say they do not pay out of pocket.  Here is the set up. The care giver charges whatever, while the care recipient does not pay, but passes the bill to a third party. This almost guarantees higher and higher prices, because there is no real market mechanism that will keep prices in check.

Medieval inefficiency

Beyond that there is still, (albeit not everywhere), an almost medieval level of inefficiency. Let me illustrate with an example. I had to take a good friend of mine to the emergency room of a major (and well known) medical facility in the Washington, DC region. He was in great pain and the matter appeared really urgent.

Anyway, upon checking in at the ER, he was looked at by a nurse. Then he was sent to an office where another nurse asked questions. Then he was placed in one area of the emergency room on a gurney. After quite some time another nurse arrived, asked some questions about his condition and did routine stuff like checking his blood pressure.

Then a physician arrived and asked once again all the same questions, taking notes in long hand on a book, while the nurse had entered some data on a computer. This data was not even looked at by the physician. After that visit, a long while later another physician arrived asking once more exactly the same questions, and also taking notes in long hand. Later on a new nurse arrived because the previous one had finished her shift. The new nurse needed to be told what her colleague had done.

7 1/2 hours in the ER

As a result of all these ER staff coming and going and repeating the same stuff, three procedures were prescribed in order to come to a diagnosis: one X-ray, an EKG and one CAT scan. Time for each procedure: about 15 to 20 minutes. My friend’s time in the emergency room: 7 1/2 hours. Yes, that is 7 1/2 hours.

No electronic records

And this is only the half of it. This facility does not have seamless computerized records. Therefore the ER medical personnel has no access to existing medical  history of patients coming in. As a result, consider this absurdity: my friend is actually being treated by specialists in the very same medical facility. But the ER medical staff could not access any of his records, something that would have really saved time and resources because, by reviewing his medical history, they would have received precious help in determining the nature of the ailment (tied to an existing condition) that took him to the ER.

No, I am not making this up. He had to explain and provide details about his medical history, in his own words, to doctors who could not see any of it, notwithstanding the fact that all his records are located in the very same facility, literally in the same building.

Talking to one of the nurses we were told that this great hospital is in the process of introducing electronic records. Now this is great news. In fact, she said that she has been recruited to help with the transition from another medical facility  where they embraced electronic medical records 15 years ago.

Lack of information, waste of resources

I have no idea why it has taken so long for this (famous) hospital to finally get to the point of adopting what should be the standard. But I can only imagine the incredible cumulative cost of this epic level of inefficiency, in terms of waste of time and wrong diagnoses. Indeed, with access to my friend’s records, the physicians probably would have ordered the CAT scan immediately, and this would have allowed for a quick diagnosis, therapy and discharge. In an efficient ER facility, with access to medical records, my friend would have been there for may be two hours. Instead it was a long, drawn out process that lasted for 7 1/2 hours.

Needless to say, all that staff time and all these people doing this and that, much of it irrelevant, is going to be billed to his medical insurance. And then you wonder why US health care costs are so high, while quality of care is so poor?

And the irony here is that America is the leading country in the world when it comes to state of the art solutions in IT and innovation. Something does not add up.

No market incentive to become efficient

Here is my explanation. Decision makers are not pushed by real market incentives to strive for cost-effective systems. In other words, even if your procedures are old and spectacularly inefficient, you still charge and you still make money. If this does not change, 10 years from now we shall still have hospitals in which physicians take notes on a scrap-book that will be totally inaccessible to any other health care provider.

Just like in the Third World.


Martin Feldstein Has An Excellent Recipe For Stimulating US Growth While Fixing The Debt

By Paolo von Schirach

September 18, 2013

WASHINGTON – In a very clear and cogent essay published by the WSJ, (How to Create  a Real Economic Stimulus, September 17, 2013), Harvard Professor Martin Feldstein provides a road map that would allow the US to finally develop sustainable fiscal policies, while at the same time promoting economic growth. The trick –he writes– is to stimulate the economy now, through tax reform and targeted infrastructure projects, while at the same time reforming federal entitlements programs so that the perennially upward spending trend will be credibly bent down.

Growth and debt reduction

Professor Feldstein describes a fairly simple process guided by twin goals: get back on our historic 3% growth rate while at the same time reassuring all economic players and bond holders that America is serious about containing federal spending, cutting down annual deficits and eventually reducing the national debt.

Short term spending…

And how would he do this? Well, for starters he would reduce the corporate tax rate, (currently 35%, one of the highest in the world), in order to encourage more business activity. In parallel he would launch a credible plan to fix and upgrade America’s obsolete and in some cases dangerously decrepit infrastructure. There are obvious economic benefits in improving, roads, bridges and ports that are in essence the national “arteries of commerce”. The more modern our infrastructure, (much of it was built in the 1950s and 1960s), the lower the cost of moving goods and people around. This is good for business and good for our overall national competitiveness.

…Long term debt reduction via entitlement reform

Still, reducing tax revenue and higher spending on new project would have an immediate toll on our still high deficit and therefore on the growing national debt. But this serious fiscal consequence can be taken care of, assuming that we can credibly reform US Federal entitlement programs, mostly Social Security and Medicare, keeping in my mind that entitlements constitute about 60% of all Federal spending. Indeed, they are the long-term ticking bomb. As the population ages, and more people become eligible because of the baby boomers retiring, the financial weight of these programs (especially Medicare) keep going up and up.

A very simple remedy is to postpone the age of full eligibility. The age used to be 65 and then it was pushed to 67 because people live longer. Well, if we could gradually push it to 70 this move would guarantee savings around 2% of GDP. By the same token, just reducing the tax exemptions that litter our tax code to 2% of adjusted gross income would result in increased revenue amounting to an additional 1% of GDP.

Feldstein assumed that such a plan would be phased in gradually so that drastic spending reductions combined with higher taxes would not shock the economy. At the same time, while we carry out spending reform, America would start revving up, on account of the stimulative impact of lower corporate taxes and higher infrastructure spending. 

Markets would be reassured

If this were a real plan, embraced by the national leadership on a credible bipartisan base, markets would have the reassurance that America is serious about both: pro-growth economic and tax policies and gradual but serious spending reduction.

In essence, as Feldstein writes, a credible plan for long-term entitlement spending reduction creates the opportunity for short and medium term higher spending on a real stimulus based on lower corporate taxes and a robust program to upgrade our infrastructure.

We need this plan; but US politics work against it

Feldstein is basically right. We need both components in order to revive the economy, while at the same setting the stage for long-term deficit and debt reduction. The problem is that, even though this is sensible, there is and there will be fierce political opposition to most of it.  Most Americans favor reducing public spending. But they usually think that eliminating “waste, fraud and abuse” would take care of the problem. Well, it would not.

The problem is the benefits that people do not want to relinquish. Even if we are talking only about future reduction, while current beneficiaries enjoy the system as is, any idea of reducing anything is immediately misrepresented as a plan “to throw grandma in the snow”. We have seen this script nicely rolled out during the 2012 presidential campaign. Likewise, tax reform would requite a degree of political agreement that just does not exist. Ditto for any sizable infrastructure spending program.

Feldstein concludes his essay by saying that unless something like this plan is adopted, “the US economy will continue to limp along with slow growth, declining earnings and weak employment”. I am afraid he is right. 

Sadly, unless our politics change rather dramatically, this is our destiny.