How Can Western Countries Get Out of Debt? Only By Paring Down Unsustainable Entitlement Programs – A New Social Contract

By Paolo von Schirach

May 1, 2010

WASHINGTON – In the case of Greece’s nasty fiscal debacle,  everybody’s focus has been mostly on assessing the unfolding drama. Will this Eurozone-IMF rescue package work? Or will it be the next one, until finally something that would stick is cobbled together? Will Greece precipitate into the bankruptcy abyss; and, if it will precipitate, will this ruinous fall bring about further havoc within the already strained fabric of European monetary cohesion?

A growing debt, not this year’s deficit, is the issue

But, while not unreasonable, this focus on crisis management and related countermeasures takes all observers away from the real systemic problem which is not: “How to stem the hemorrhaging and thus bring down next year’s deficit”; but instead is: “How to reverse the systemic, creeping growth of public debt”. And the creeping debt crisis is by no means confined to Greece. It affects many advanced countries, in fact most of Europe and Japan, among others.

The real issue here is not about how to avoid another Greece; but about recognizing the urgency to reverse established –yet deeply  toxic– public spending trends, so that huge and growing amounts of debt will no longer weigh so heavily on so many countries, eventually crippling their ability to invest and grow, since most resources are devoted to spending or to finance borrowing to be channelled into the same spending. But nobody will act to stop this spending and borrowing until there will be a new, truly shared societal consensus that indeed, however well intentioned they may be, large and growing welfare systems, now a common feature in most advanced societies, force a progressive resources diversion from investments to entitlement spending and debt service; thus crowding out and ultimately smothering new productive investments, new research, innovation and new growth.

British elections: candidates avoid details about spending cuts

However, as things stand now, while everybody wants to avoid Greece’s fate, not many are prepared to take today the steps necessary to get out of a very similar course. Staying on this course does not guarantee becoming a basket case like Greece; but it does guarantee under performance, low growth and ultimately societal stagnation and possibly decline. And yet, as bad as all this is, getting out of this spending trap is politically dangerous, if not outright impossible. 

Indeed, days before critical national elections in Britain, none of the leaders of the three main parties dared to articulate what they would do to cut the monstrous UK debt, in case the voters may not like what they hear and punish at the polls who may tell them the truth about losses of benefits. And so Britain, as The Financial Times recently commented, goes into a critical national election without any idea of what any debt reduction plan may be; with the negative political consequences that whoever will end up governing will have no clear electoral mandate to take the harsh measures that, one way or the other, will have to be taken. (Unless Britain decides to do nothing, thus setting the stage to become the next Greece).

Greece will be fixed, somehow

Greece’s crisis eventually will get under control. Greece is, after all, a small country. Its problems, however dramatic and unprecedented for the Eurozone, are not unmanageable. But the issue of systemic growth of public debt in so many countries: Italy, Spain, Belgium, Britain, Portugal, Japan, and the US, among others, is a different story. The fact that higher and higher debt is eventually unsustainable is now blatantly obvious in Greece’s case. But we do not seem ready to acknowledge that the same disease, albeit in a less acute phase, is everywhere.

Between Greece and the other countries the difference is only about the speed of debt accumulation. All these countries are ailing. But many, for the moment, (and this includes the US), manage to mask the severity of the problem, thanks to the availability of sufficient credit that allows them to finance their chronic fiscal shortfalls.

The real lesson from the Greek crisis

Indeed, the real lesson from Greece is not about how to avoid Athens’ extravagant level of recklessness –this is not that difficult. The real problem is how to get out of the far less obvious trap of creeping higher and higher debt levels that may or may not degenerate into a Greece-like crisis; but that are nonetheless very damaging, in as much as too much debt saps precious energy from the economy. Just like a parasite, without being necessarily lethal, severely weakens the body, debt damages society’s fabric, even though it may not deal a mortal blow. The society somehow survives, just like the human body afflicted by the parasite; but it loses vitality, energy and dynamism.

This is the real problem.

But since it is a problem that grows subtly and incrementally; it is relatively easy to ignore it or to explain it away, in the meantime readjusting goals and expectations down. The Minister of Finance of a leading European power just recently said in Washington that a 1.5% projected growth rate for his country is acceptable. Coming out of a severe recession, 1.5% is fine? Not for people who believe in the need to do all you can to nurture the economy. But if 1.5% is alright now, then may be next year 1% growth will also be acceptable. Lowering goals and thus expectations is not too difficult, apparently.

Debt is like “termites in the basement”

Everybody understands a crisis when we are already in it. But before getting to where Athens is today, there is a long journey featuring, among other things, increased levels of public spending unmatched by corresponding revenue and thus higher borrowing requirements as its key milestones. But the problem with an increased debt level is that its damage is slow and incremental; and so this damage  does not manifest itself all of a sudden, as an immediate crisis.

The crisis comes later, some time much later, once debt has piled up beyond some threshold that convinces some key players that it is too much. With that judgment, warranted or not, comes the creditors’ mad rush to unload the bonds, now deemed to be junk, panic and thus the whole thing just falls apart, just as in the current case of Greece. But until debt can be financed with reasonable rates of interest, the process is fairly painless and thus it is easy to ignore its highly damaging and truly corrosive consequences, not just for public finances, but for the netire economic fabric.

As it has been observed: “Debt is not the wolf at the door; it is more like termites in the basement”. So, growing debt levels are not an imminent, visible threat; but rather a subtle, invisible enemy that literally “eats its way into your home”. If you do not catch it and eliminate it, it will destroy your property.

You can fix the immediate crisis without seriously addressing the debt problem

But if we look at Greece purely as a unique crisis, then we shall evaluate everything purely in terms of the success of a rescue package. If the EU-IMF 60 billion or 100 billion dollars rescue package over so many years comes along, Greece will not go belly up. Somehow, it will manage to cut spending, increase revenue collection, streamline public administration, at least to some degree. And so, everybody, (except the Greeks who will have to live through all this), will be happy. Crisis resolved, let’s all go out and celebrate over dinner.

And yet the larger issue is not Greece’s almost fantastic levels of both private and public irresponsibility. Historic evidence shows that crises brought about by extravagantly bad behavior can be dealt with and managed. However, the real systemic problem is not this year’s or next year’s deficit; but the long term fiscal trajectory created by excessive spending and insufficient revenue growth resulting in high debt. The Wall Street Journal of 1-2 May 2010, (“Athens Confronts Sisyphean Task in Austerity Program”), cites a revealing consideration from a report released by the Brussels based Centre for European Policy Studies: “The goal of the large fiscal adjustments is to make public finances sustainable. However….this goal was rarely achieved”. In plain language, you may avert disaster; but this does not imply successful inoculation against the debt malady. So, in the end you may not die, but you will be chronically ill.

Ad why is that? 

The roots of the debt problem are in the promises of the welfare state

In most western nations a key pillar of public policy is the firm belief that the state is supposed to take care of people. And so, to this end, we have created entitlement programs, ever more complex and ever more onerous, largely based on the fantasy that somehow any level of spending is affordable, that there is enough revenue to finance education, health, pensions and assorted subsidies to more and more constituencies. Policy makers who know that this is not possible, for fear of alienating voters, instead of telling the truth, borrow the difference between what they promised and the actual revenue in hand. Hence growing debt.

But, since borrowing has some limits, policy-makers, as they focus on financing what is politically more important to them, that is social welfare programs, short change discretionary spending, cutting spending in all the sectors that do not have huge, clamoring constituencies. And so they cut defense spending, (now, on average it is about 1% of GDP in Europe and Japan); thus creating the foreign policy of the weak, grounded on crisis avoidance, rather than on meeting threats. And they cut capital investments in infrastructure and in research and development. In so doing, they keep their voters happy, thus gaining confidence that they can face the next election. In all this, there is no concern for the aggregate, long term consequences of a trend that, by privileging social spending while shortchanging investments, objectively weakens the economic foundations and the chances of future growth.

No more babies: welfare spending levels become unsustainable

But other parallel trends will make it harder and harder to sustain this act in the future. Until now, growing debt notwithstanding, it was possible to keep financing this onerous welfare system. Looking ahead, this is going to be more difficult. Indeed, most advanced societies are facing negative fertility rates: well below population replacement levels.

In simple language, this means fewer young tax payers and growing numbers of old people who depend on the state for various costly benefits. A growing number of elderly citizens –and they are those who receive the most in terms of welfare—will have to be supported by the shrinking revenue produced by a dwindling number of younger, active citizens. At some point the mismatch between too many old people receiving benefits and too few active young ones paying into the system will become unsustainable. Recurring to debt will no longer be enough to fix the gap between what has been promised and what is financially possible.

Too late to change course?

What will happen then? Who knows. But we can bet that at that point it will be way too late to reverse the cumulative effects of policies that for decades have privileged social spending over productive investments. Sure enough, some benefits will be curtailed, some may be eliminated altogether, in order to diminish the fiscal imbalance. But I very much doubt that it will be possible to bring before the public and then successfully implement a new public policy philosophy strongly grounded on the basic notion that by far the best way to ensure public welfare is to maintain and safeguard above all else the full functionality of a vibrant economic system; in as much as this is the only engine for wealth generation. If you want to distribute wealth, you have to produce it first.

Until people will be prisoners of the idea that welfare is a basic right and that we can think about how to pay for it later, we shall privilege distribution of benefits and shortchange policies aimed at keeping the economic engine going full force. It should be clear to all that in the end you have to produce some added value in order to be able to distribute it. But the established distortions that make welfare policies untouchable allow most people to overlook this rather basic consideration. And so, we keep on distributing benefits financing the expenditures via borrowed funds.

Strong focus on welfare means less attention for growth

The end game of insisting with these entitlement policies in societies that are becoming less productive, (because the money goes to finance these very entitlements), is that over time there will be less and less to distribute. These societies will be progressively more impoverished, while their standing in the world will be diminished. My hunch is that Europe as a whole is well on its way to economic and societal decline, while I do not see any significant new tendencies that would reverse course. Japan is not too far behind.

What will happen in the US?

In the US it is still a toss up. Certainly there are large, powerful, mostly urban, constituencies located in the large states on the two coasts that aspire to something close to the European model. There are others, witness the spontaneous, if boisterous, anti-government, anti-tax “Tea Party Movement” phenomenon, who instinctively abhor statism and the attendant welfare state public policy approach. Can America find a reasonable balance between maintaining some sort of public safety net and a focus on doing whatever is necessary to keep investments and innovation at the highest possible rate? As of now, because of the impact of the 2008-2009 recession, our debt is  approaching European levels. We can retreat from this bad course and once again emphasize growth, while doing what it takes to keep this economy nimble and competitive. But this benign outcome is not a sure thing. The Obama administration repeatedly stated that high spending is a temporary counter cyclical remedy because of the horrible recession and that it will soon announce a convincing long term decifit and debt reduction strategy. And when will this be? Well…soon. Somehow, I think that we shall have to wait until at least after the November congressional elections. And, after the November elections, we shall be gearing up for the 2012 presidential elections. If, just like other governments, the Obama administration does not want to upset voters by announcing serious spending cuts, there are good chances that we shall not see any bold deficit and debt cutting strategy.

Will we learn anything from the wider debt story highlighted by the Greek crisis?

In the end, the Greek crisis is not an especially useful example of what to avoid, as Greece is clearly an extreme case, whose specific circumstances are not going to be easily replicated. Few other modern countries will accumulate so many distortions and so many inefficiencies.

But the Greek crisis did illuminate in some fashion the debt issue and the cumulative damage brought about by growing and growing public debt. Not as clear, by reading the copious commentary, is whether we are in agreement on the primary cause of structural debt: growing social spending out of sync with revenue. Will anybody, be it in London, Lisbon or Washington DC look at the nasty consequences embedded in spiraling debt and realize that it would be good to change course as fast as possible?

 




India’s Bharti Airtel Conquering Africa

WASHINGTON – What is the connection between India’s telecom giant Bharti Airtel acquisition of the African mobile operations of Kuwait based Zain and President Obama’s huge investments in health care reform, in terms of time, energy and political capital?

The connection is that while a relatively impoverished America, still shaken by the aftershocks of the banking crisis and the ensuing monumental recession, decided to focus on redressing domestic issues of social justice, (health), the emerging markets new players come of age and, deservedly so, start occupying new space. To put it differently, the choice of policy priorities and the ensuing expenditure of huge amounts of limited energies on one issue as opposed to another are not without consequences. As “we do” health care, the “Indians do” telecoms.

The emerging markets come of age

While here in Washington we debate who should get what part of a –shrinking– pie and what is fairness, the former Third World shows that now it has the size, staying power and ability to take a bigger and bigger share of the world’s new markets and of the opportunities that they present.

Nothing intrinsically wrong on the part of President Barak Obama in indicating that health care is important. But so important to make it the most significant national policy issue for more than a year? When the economy  deserves serious attention, to elevate health care to the status of “America’s priority one” was not wise. This was not the issue to concentrate upon, as the US economic foundations, shaken by the disaster of 2008-2009 and still very unsteady, needed immediate attention. But we did not focus on the economy, except for rescue operations. And so, as we have been engrossed in this time consuming, huge, highly partisan and eventually costly domestic debate on health, the world’s balance of power keeps shifting away from us and in favor of a more assertive Asia, finally coming of age.

The dynamics of a “South – South” major deal

What is significant about the Bharti Airtel-Zain deal is both the fact itself and its symbolic meaning. Consider this: this is a very sizable transaction valued at $ 10.7 billion. But, more than the dollar value, it is important to stress that this is an entirely “South-South” deal. Two multinational corporations based in emerging markets –India and Kuwait– agreed on the sale of assets that provide telecom services to the last huge emerging market: Africa. In all this, as the world economy is being progressively transformed, our American footprint is less and less visible. 

Africa’s telecom market is important

Old stereotypes might lead one to dismiss this African telecom acquisition as a mid size deal of marginal value, related to small, inconsequential markets. Well, not so. The deal is sizable and it is about mobile telephony operations in 15 African countries, (Mostly Central and Eastern Africa), with a total customer base of 42 million users to date –and a significant upside potential, considering that Africa, huge growth notwithstanding, is still way behind the rest of the world in terms of telecom services penetration.

Besides, with this acquisition, Bharti Airtel becomes the fifth largest telecom provider in the world; thus “fulfilling our vision of building a world class multinational” –in the words of Sunii Bharti Mittal, Bharti’s Chairman.

Not a watershed; but another sign of Asia’s growing relevance

Is this deal a watershed? Probably not. But it is yet another sign of the systemic transformation underway, indicating the growing relevance of Asia in global markets. And it is really important to stress that, while all this is taking place –Asia coming of age– we in the old developed west are not yet putting our economic house in order.

In its wisdom, the Obama administration did not place US competitiveness on top of its governing agenda. It chose instead health care, a deserving but costly issue. And, contrary to what has been said, this reform will do practically nothing to improve US international economic competitiveness.

Are we focusing on the right priorities?

Eventually the logic of globalization will assert itself, by determining  winners and losers. Those who are investing in new opportunities will be rewarded more. President Obama chose to prove his mettle on domestic social justice issues. Fine. And so, he did; and eventually he won his battle; even though the long term political ramifications and fiscal consequences of an extremely controversial reform that split the country in two are yet to be seen.

But the real point is that, while the White House expended a huge amount of time and energy on health, the likes of Bharti Airtel go around gobbling large pieces of new markets, progressively positioning themselves as global players.

America’s competitive base: is it still there?

Of course America still has its global players. Sure enough, we have HP and Dell and Apple and Cisco, Intel, United Technologies, Dupont and General Electric, and so on. But we have fewer world leaders then we used to; and now, after this horrendous recession, one should seriously reflect on what is and will be the credible foundation of America’s future competitiveness. The auto sector may eventually recover; but it is now in a sorry state, still on respirator, alive thanks to taxpayer subsidies in amounts unthinkable until very recently. (Remember that General Motors until a few years ago was the world’s largest auto producer!) The banking sector, stupendous bail outs notwithstanding, is still in precarious conditions.

Boeing lost its luster…and the list goes on

Boeing, once the unchallenged aerospace star performer and the symbol of America’s technological leadership, just announced yet another delay for the delivery of the first advanced jetliner 787 “Dreamliner” (may be nobody thought at the time that the nickname might become a joke, as this new aircraft is still basically “a dream”). This new delay, piling up on many other delays, not only costs Boeing money in terms of contractual penalties; but it tarnishes the image of American industry and puts in question Boeing’s once coveted reputation of technology and know-how leader. If Boeing cannot deliver on time, while it cannot even provide a realistic estimate of what it takes to fix (admittedly complex) production and assembly problems, is it fair to wonder whether America has still got what it takes to get big projects right? Or have we lost that skill?

Ancient air traffic control systems

On a separate note, we read that now, may be, we are going to take steps to start the modernization of our ancient (1960s vintage) air traffic control system. Note: we are about 20 years late on this, and who knows how long it will take for a total modernization to take place. And America has no high speed trains, while the rest of the world, from France to China, keeps rolling them out, thus creating alternatives to overcrowded skies.

Decrepit infrastructure 

And let’s not talk about our decrepit, chronically underfunded, infrastructure that routinely gets a “fail” grade from professional associations of civil and structural engineers. (While the federal stimulus money addressed some infrastructure projects, it was literally a drop in the ocean, compared to the monumental needs).

Very low broadband penetration

The US meanwhile chugs along being number 16, yes 16, in terms of broadband penetration in the world; while telecoms, internet providers and government regulators bicker on who should be doing what.

Energy policy: still missing

On energy, we have wasted a year with no real policies and no guidance. Now, it seems that the administration may take some steps to allow new Gulf Coast drilling. This may, just may, increase a bit our domestic oil production down the line, something that may provide a little help, some day, in term sof increased production; while we sorely need “now” a real, robust national energy strategy and a strong consensus on how to build a viable post carbon economy.

Education: still a problem

On a different yet equally sad note, new laudable efforts notwithstanding, our secondary public education system remains mediocre to bad, with minority students being the most underserved, thus recreating a de facto racial discrimination, due to limited or zero access to good jobs for millions of under educated kids.

Meanwhile, Nissan rolls out its all electric “Leaf” model

In the meantime, auto maker Nissan is busy advertising its new “Leaf” all electric car to be rolled out very soon. It will be built in Japan, the UK and in the Nissan plant in Smyrna, Tennessee. Being proactive, Nissan has created partnerships with a variety of US public institutions and utilities, so that they will work together in establishing the basis of an electric distribution system that will be able to support the new electric vehicles, once they will be on the road.

Time to adopt a strategy that will prioritize American competitiveness

The point of all this is that governing is about choosing the right priorities, building a broad consensus around them and then implementing them expertly. While America still has an enormous reservoir of talent and expertise, we do not have the right priorities in place and consequently we have not mobilized in a smart way the country’s still impressive potential.

Instead of making the economy issue one, our Government chose to get involved with social issues that, however important, are not vital and should not have been placed on top of the “to do list”. And, as we deal with our chosen priorities, the likes of Bharti Airtel take over huge chunks of emerging markets.

 

 

 




Singapore Wants to Stay Competitive

WASHINGTON – If there is one economy that is generally understood to be a net beneficiary of globalization this would be the small island state of Singapore. They started early on, back in the 1980s, to modernize everything, thus creating a well oiled, well organized, if somewhat autocratic, environment almost entirely geared towards the promotion of high value economic activities, well supported by a modernized infrastructure and a capable public administration apparatus. Singapore’s cleanliness, super efficiency and pro-business attitude attracted foreign investments. Its ethnic Chinese leadership created bridges with China and gave Singapore a unique opportunity to broker deals and to invest in the mainland. And the reward has been the attraction of high tech investments which in turn led to significant knowledge transfer, an above average growth and the creation of widespread prosperity.

Singapore: not as good as it should be

But today’s news is that the forward looking technocratic leadership is worried. They are worried that Singapore is losing or may be on the verge of losing its edge. If higher competitiveness was achieved through considerable investments in human capital and in the creation of efficiencies all around, in business as well as public administration, there are signs that the edge has been eroded.

The new budget sets priorities

Indeed, the new state budget for 2011, recently presented by Deputy Prime Minister Teo Chee Hean is almost entirely focused on the issue of refashioning and strengthening Singapore’s competitiveness via a series of measures aimed at increasing the level of skills of the Singaporean work force, so that the once famed edge may be reconstituted. “We are now a more developed economy, further up the productivity curve”, observed Deputy PM Chee Hean. “We have made progress, but those ahead of us have also progressed and moved up as well. And those behind have made rapid advances and are catching up with us”. Hence the need to focus on improved education standards and higher productivity.

Education and Productivity

To advance this goal, the Government is establishing a “National Productivity and Continuing Education Council”. And here, in the very name chosen for this new Council, the Singapore leadership reaffirmed what should be the obvious but perhaps not often enough reaffirmed crucial, strategic link between “education” and “productivity”.

Competitiveness needs to be enhanced

The headings of the budget are all focused on this major effort aimed at enhancing competitiveness. A)Investing in Continuing Education; B) Supporting Enterprise Investments in Innovation and Productivity; C) National Productivity Fund; D) Supporting Business Restructuring; E) Enhancing Land Productivity. Will all this succeed? Who knows. But what is important to note is that one of the most sophisticated, albeit small, Asian economies feels the heat of the global competition and is determined to move a few notches up the value chain in order to regain its competitive place.

But if tiny Singapore whose claim to fame is efficiency and productivity is on the move, what about the developed West?

In 2000 Europe announced the “Lisbon Goals” –a high tech revolution strategy

In the year 2000, with much fanfare, the European Union announced with a high degree of optimism the launching of the “Lisbon Goals” high tech agenda. Having noted the unfolding IT revolution dominated by the USA and to a lesser extent Asia, Europe declared its determination not only to catch up but to acquire a world leading position in the advanced technologies that will reshape the economies of the world.

The stated goal was nothing less than to make Europe “the most dynamic and competitive knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment by 2010”.

Very ambitious targets

Given a rather lackluster record on technology and innovation up to that point, itself due to a low level of spending in R & D, this was a very, very ambitious goal aimed at essentially transforming Europe from supporting character in the innovation scene into an IT and high tech powerhouse. According to the “Plan” adopted in Lisbon by the EU leaders, the “Goals” would be achieved by adopting whatever innovation solution would work in order to enhance productivity and leading technologies. If the strategy would succeed, the world would look at Europe, and not just at the US and emerging Asia, for state of the art this and that. A great and worthy idea, no doubt.

Part of the plan was also the project to create a “European Institute of Technology”, some sort of super university, or cluster of universities, to be modeled after MIT in the US that would be an integral component of this massive modernization effort.

Goals not met

So, what happened since 2000? Well, unfortunately not much. Former Dutch Prime Minister Wim Kok, entrusted with conducting a “mid-term review” of progress to date, in his report presented in November 2004 expressed serious doubt that Europe would achieve its “Lisbon Goals”. He noted “disappointing delivery”, due to an “overloaded agenda”, “poor coordination” and “conflicting priorities”. At the same time, The European Round Table of Industrialists, (ERT), a business group, expressed its “deep concern about the continued erosion of Europe’s competitiveness”.

Lisbon Goals: “Failure”?

In 2009, towards the end of the time line set by Europe for the achievement of its “Lisbon Goals”, Swedish Prime Minister Fredrik Reinfeldt admitted that: “Even if progress has been made, it must be said that the Lisbon Agenda, with only a year remaining before it is to be evaluated, has been a failure”

Odd enough: blame those who have tried to make positive changes

Not a complete and utter failure across the board, but mostly a failure. R & D spending has not advanced much. No new hubs of high value innovation established. No new striking centers of excellence created. The US, 2008-2009 massive financial crisis and astronomic rescue cost notwithstanding, continues to lead, (with a bit of shortness of breath, mind you), in labor productivity and IT innovation; while China and indeed Asia overall is investing massively in modernization. Europe, with due exceptions here and there, is not shining.

Germany powers ahead

And even where there is progress, such as in German labor productivity, this is oddly pictured as harmful by other (envious?)Eurozone members who are less competitive vis-à-vis Germany. With truly twisted logic, it has been recently observed that, as Germany has done very well in containing labor costs and enhancing labor productivity, this has widened the competitiveness gap with the Eurozone laggards who have now comparatively greater difficulties in retaining their markets, because the Germans are “too good’.

German Economics Minister Rainer Bruederle retorted that it is peculiar to accuse Germany when those who are not doing well “lived beyond their means and neglected their competitiveness”. So there. Here you have the picture of the actual Europe, as opposed to what was imagined in 2000. Rather than trying to emulate them, some blame those who are doing better.

What about anemic America?

But, just to show that most of the “old” industrialized countries share similar problems, the Washington, DC based Center for the Study of the Presidency, led by establishment veteran David Abshire, just recently (March 19), released a paper titled “Prosperity or Decline” prepared by some recognized US bright minds. The Report is not too sanguine on the current US competitiveness posture and America’s chances to retain its innovation lead, the only recipe that would guarantee America’s leadership in world affairs and a reasonably high standard of living at home.

“Prosperity or Decline”?

Norman Augustine, former CEO of defense and technology giant Lockheed Martin and almost universally praised as one of America’s sharpest thinkers, presenting one section of the report, noted that America’s edge has been eroded or is fast eroding. He pointed out that at present, as a society, we are the lucky beneficiaries of huge investments made long ago. These benefits, without replenishment, are beginning to wear out. In the global economy the US is confronted with millions of progressively more skilled people who are willing to work for a fraction of what their US counterparts get paid. The primary and secondary education system is of dubious quality and quite bad in many areas.

And even the vaunted American university education system, still ranked very high in the world, is suffering because the increasing cost of maintaining state of the art “super universities” is not matched by commensurate revenue/grants growth, absolutely necessary to attract and retain the best minds and state of the art research facilities. Finally, Augustine noted the disproportionate cost of litigation for corporations, something that detracts precious resources from needed new investments. Other presenters noted the unsustainable levels of both Government debt and balance of payment deficit, as well as the erosion of the old free trade consensus. 

Do decision-makers understand?

Well, yet another report, issued by a another blue ribbon panel on behalf of a Washington think tank, whatever the patina and the fame of the contributors, by itself is not going to transform the policy landscape. But, while somewhat pessimistic, this gloomy outlook replete with warnings matches concerns repeatedly expressed by respected The New York Times columnist Tom Friedman and many others who believe that there is some kind of tone deafness in Washington, whereby key policy makers seem unable to recognize and address in a timely manner the salient strategic issues, creating thus a mismatch between what the country really needs and what is on their policy agenda. To put it simply: Washington has got its priorities all wrong.

Structural debt: can we deal with it?

To add further gloom, there is the other unpleasant issue of structural long term debt, not just in the US, but across most OECD members. Of course, much of the recent debt increase is due to extraordinary measures needed to counter the ill effects of the unprecedented real estate and banking crisis.

Fine.

But this crisis occurred in an environment in which most industrial democracies were already in debt and on a course leading to higher public spending and comparatively lower investments. This trend is mostly due to the promises made by the welfare state, coupled with major demographic shifts: lower fertility rates and increasing numbers of older people, in absolute terms and as a percentage of the total population. A lot has been promised to retirees and now there are more and more of them, while, due to significant birth rate drops, there are far fewer active workers paying into the system. So, on balance, most modern societies are spending more than they are investing. And as spending has overtaken revenue, the rest is paid for with borrowed funds.

Decline is not a heart attack. More akin to coping with chronic ailments

And so, where are we? This is not a disaster. We are not about to fall into the abyss. This is not like being victims of a fatal, massive heart attack. But we are like someone who used to be healthy and now is afflicted by a variety of annoying, chronic diseases that require constant care and attention –and that cost more and more money. Money that cannot be spent on other things. The opportunity cost is that while you pay more and more for your care, you do not have much to spare to buy new equipment for your small business. This is the long and the short of this.

Little investment, little growth

Low rates of investment, slow down of the innovation process, insufficient investments in education, high levels of debt and societies with increasing numbers of retirees –retirees who are fiercely protective of each and every entitlement program designed to keep them happy and comfortable. And unfortunately all those promises were made at a time in which nobody could clearly foresee the future, gigantic financial obligations, (nowadays we call them “unfunded liabilities”), created by this socially minded public largesse. This is the picture across the developed world. More pronounced in Europe and Japan, less so in America; but prevalent across the board.

Singapore gets it

The technocrats running small Singapore have gotten the message and they manifested the intention to redouble their efforts in order to retain or regain their competitiveness. A small city state run by capable people is like a modern maneuverable vessel. It can change course rather fast. The old OECD supertankers will take a long longer, assuming that is, that those in charge will decide that a course correction is not just prudent; but absolutely essential and urgent. Alas, while we may hear noises about course corrections, we do not hear much talk about its urgency, so far.

Washington: social issues first. Wise choice?

Barak Obama campaigned on a promise of dramatic transformation and a drastic reformulation of policies so that America would be the best that it could be. Well, in the last year, here in Washington, beyond coping with the banking crisis, we have focused most of our energies on social justice issues, (the complex health care package just passed). By all means this is a worthy concern. But in the meantime we have done almost nothing to improve our competitivensss and our productive potential. In the end “social justice” is just an aspiration, unless you have some added value to spread around.

Successful social policies are predicated on an ongoing wealth generation capacity

It is worth remembering that even old Karl Marx postulated that successful socialism could be established only because a socialist economy would be more efficient than wasteful, inefficient capitalism. “Socialism –as he put it—is not about the socialization of poverty”.

Which is to say that a even a successful socialist society, according to its major theoretician, was predicated on sustainable high levels of growth. So, it would be good that all of us would understand that competitiveness –itself the foundation of new growth– is the necessary premise for any kind of social policy, including the most egalitarian. Without growth, we cannot even fight over the spoils; because, once the sources of wealth we did produce will have been eroded, there will be less and less to fight over.




Greek Profligacy and the Myth of Cost Free Welfare

WASHINGTON – the Greek public sector deficit crisis has attracted inordinate media coverage largely because it broke out all of a sudden. The Greek Government, led by recently elected Socialist Prime Minister George Papandreou, “discovered” that its predecessor conservative Government had cooked the books and lied about estimated public sector deficits. So, as it turned out, the fiscal imbalance in reality is double the initial projection. And this carries the Greek deficit not only beyond the theoretical European strict limit of 3% of GDP; (already broken by others, for that matter), but it brings it to around 12.7% of GDP; that is beyond any sustainable level. This is big news, even though it affects directly only a small country, at the periphery of Europe, with a relatively marginal economy. Of course, the attempt was made to gauge the likelihood of any kind of “domino effect”, whereby a potential Greek bankruptcy might drag the whole Euro zone edifice down.

Greek “contagion”?

Could we have “contagion”, given the considerable lending by many European banks to Greece? But, outstanding European loans to Greece notwithstanding, the idea that tiny Greece would bring down the whole of Europe was really farfetched. Unless, of course, other Greek-style surprises of heretofore hidden losses might spring up elsewhere. To date at least, this seems unlikely. While we know that there are other problem countries affected by huge fiscal imbalances, there is no forecast of an impending Europe wide unraveling.

Europe holding on

Greece is not that important an economic player to cause the downfall of Germany and France. The Greek budget crisis is a big problem, indeed, but not a European catastrophe. The Greeks have been told, (or better, “ordered”) by their EU partners that there will be no bailout. They must take the necessary, if politically bitter, countermeasures in terms of drastic spending cuts and this should be enough to avert bankruptcy. The Euro as the common currency shared by Greece and 15 other EU member states is not in any imminent danger.

So, case closed?

More than just debt

Well, not entirely. Greece represents an extreme example of total fiscal irresponsibility, cleverly disguised for a while and certainly driven by the politics of the welfare state. And in Greece this free spending style was nicely blended with endemic corruption, extravagant levels of tax evasion and an otherwise mediocre economic performance. But Greece is a member of the European Union. And so this debacle becomes a problem for all the other members of the EU, as it blemishes the image of Europe as a Union of modern countries. No other member of the club wants to have, within Europe, this kind of Banana Republic governance model. And I am sure that this concern has been clearly conveyed to Prime Minister George Papandreou by his European counterparts.

A larger lesson about the consequences of public largesse

But, bad image aside, even if we limit ourselves to the issue of fiscal profligacy, the Greek example indicates that at least some Western Governments are prepared to take huge risks, behaving at times most irresponsibly, in order to placate constituencies who believe that the purpose of Government is “to give” more and more; constituencies who put pressure on elected leaders so that they will deliver more and more. Greece has become a sensational story because of the extreme overspending and the sudden revelations. And again, beyond the surprise, there has been the unplesant task of selling to the public this unprecedented austerity program.

The “free lunch” pipedream is still alive

This has not gone down well; and we have seen the vociferous and at times violent street demonstrations, and the emotional reactions of those who would like to cling to the dream that there really is a free lunch; that you can do both: overspend without limits and keep giving extra this and that to all kinds of constituencies, without ever paying the bill. And so now, along with the headlines about the drastic spending cuts, we have the photos of riot police battling demonstrators who would like to believe that somehow there must be a better, less painful alternative for them.

Did anybody learn anything?

In the end, in the case of Greece, it seems that the general public, beyond the current moment of hyperventilation, will have to surrender to the hard facts, unless they want to force the Papandreou Government to exit the Euro and may be the whole EU structure –and this seems highly unlikely. So, reluctantly and despondently the Greeks will fall back in line. If they follow the plan, they will cut spending and eventually rebalance their public accounts.

But I doubt that the larger lesson as to what provoked the crisis –the insane, yet widespread hope that in a modern western society you can indeed get something for nothing– will be properly understood. And, as this fallacy about magically obtainable unlimited entitlements, while someone else (who?) eventually will pay the bill, is not fully understood in Greece, it is probably lost in all the other countries in which, large deficits notwithstanding, (Belgium, Spain, Italy, Portugal, the United Kingdom), there is, for now at least, a semblance of normalcy.

A stable currency does not give you growth

And here is the real problem, a problem that goes way beyond the understandable desire to protect the Euro, potentially weakened by irresponsible fiscal policies, as a credible currency. A stable currency is a good thing. And it is good that the European Central Bank will continue to act as a good steward of the Euro’s reliability. But a stable currency, while essential, is no guarantee of underlying dynamic societies and economies. The Greeks will have to swallow the bitter pill. So, they will eventually rebalance the accounts, (we hope). But, at the same time, even staying within the Euro zone, they will have less money and their standard of living will be lowered. Unless the general public will learn the simple lesson that higher standards of living are not grounded on public largesse but on individual and corporate enterprise, the real lesson will stay hidden. The Greeks may become more sober; but the people, unless they are ready to embrace the basic tenets of private sector-led growth, will be both poorer and more disgruntled.

Welfare state yes, but who pays for it?

More broadly, Greek-style extremes aside, not many in the West are getting the message of what it takes to grow. In our ongoing love affair with the notion of a public sector that will provide more and more things: subsidized public sector jobs, free grants to this and that, tax shelters, lavish pensions, health care, free education and what not, we have forgotten that none of this things in the end grow the economy, while in the end someone has to pay the bill.

If it is politically unpleasant to make anyone pay the bill, then the cost of the unpaid fun will pile up and Government will need to finance its largesse through borrowing. And when more and more borrowing becomes not just a temporary expedient for extreme situations, but a routine way to finance ever increasing public spending, this entails a shift in basic Government functions: from focusing on public administration issues to spending more time and energy in the identification of ways to finance more spending. In the end, financing the debt –not governing– becomes a top Government priority. 

If you have larger deficits, you have less economic growth

Furhermore, even in situations in which there is a huge or growing debt but this debt can still be financed (Spain, Portugal, Belgium, Italy, and Japan, among others), this comes at a high cost. While the State may be able to continue to meet its obligations towards bond holders, interest due on the outstanding debt starts eating into a larger and larger share of existing revenue. And so the State can no longer perform basic functions such as investing in R&D, infrastructure development, defense or even education. Indeed, once interest on the debt is paid out, there is the regular operating budget just to keep day to day Government activities going; and so there is very little left for any discretionary spending. The Government can perform, at best, routine operations; but it has no resources and thus no flexibility to lead, in domestic as well as international policies.

Less capital for investments

In the meantime, a larger share of national savings will be directed to financing the debt. This means less and probably more expensive residual capital available for productive investments. In the end, the State and its profligacy, due to the desire of the political leadership to satisfy the desires of more and more constituencies, becomes an objective drag on new growth. Large, (or excessive, depending on your point of view), public expenditures –and the attendant need to finance the deficit– absorb more and more limited capital that cannot be used otherwise.

Europe has chosen welfare over growth

This state of affairs is endemic in Europe. Even though most European countries have not reached the insanity of Greece, on average, the public sector absorbs a very large percentage of GDP, 40% or more. In general, high spending entails higher taxes. But, even with high taxation, there is still a need to borrow heavily to finance the rest. While these societies seem to manage somehow, the real, if hidden, cost of this setup is in a myriad of missed opportunities for new growth, as funds that could otherwise be invested have to be employed to finance entitlements and other transfer payments.

Indeed, as the primary focus of Government is the provision of services to a variety of deserving constituencies, the pool of residual public sector capital available for productive investments shrinks. Besides, high levels of taxation, (necessary to finance increased spending), along with rigid labor laws, may also contribute to discouraging new enterprises. So, in the end, there is a lot more involved here than finding a way to balance the books, trying to reconcile a high level of spending with the need to find revenue and/or resort to more borrowing.

If we choose to devote resources to service delivery, we have to understand the implications

In the end the real issue on the table is a philosophy of Government and the shaping of a societal consensus whereby the essence of public policy is to provide services and to alleviate hardships, as opposed to the creation and the nurturing of an enabling environment conducive to the expansion of the economy.

Nothing wrong, in principle with espousing this approach focusing on making today’s life more comfortable, as opposed to devoting more resources to future growth.

More entitlements, less growth

But, if this is indeed the choice, it should be fisrt of all clearly articulated, (as opposed to being incrementally implemented), and fully understood by all citizens in all its immediate and long term implications. If our goal is to live today as comfortably as possible, almost like retirees, then we do indeed create public policies geared towards the delivery of services and the growth of entitlements at the expense of investment and growth. But it should be clear to all that, unless we become extravagantly rich due to fantastic levels of high value innovation and strong productivity growth, we cannot at the same time spend most of what we have today and have enough left for new investments. Maybe Norway can do it, as it has a very small, educated population and the extra bonus of significant revenue coming from oil and gas exports. But there are not many such examples.

What about the US?

And what about the US? Well, we are in an interesting, yet delicate, position right now. By European standards, we still have a miserly state that provides comparatively little in terms of services and entitlements. (Our combined total public outlays: Federal, State and Local amount to roughly 33% of GDP). But, quite apart from the recent extraordinary recession that caused an explosion of public spending to fund huge emergency countermeasures, we know that, unless we change our basic system rather drastically and soon, we are geared towards a dramatic increase of public spending. The cause is in  systemic demographic changes (more elderly Americans receiving public moneys) and the after inflation cost explosion of services such as medical care for the elderly.

Which way is America headed?

And here is our problem. Are we going in the direction chosen by Europe, or are we going to revert to a model of a Government that spends less on the provision of services, thus freeing up more resources that will be hopefully directed to the expansion of the pie and thus more prosperity? Long term, quite apart from how soon the current recession and related spending will end, this is the real strategic choice before us.

Former Massachusetts Governor Mitt Romney, warming up for a likely new bid for the Republican nomination for White House, argues in a new book, (“No Apology: The Case for American Greatness”), that we should be repairing our system so that it can be once more geared towards investing in new growth, while providing a modicum of a safety net, via the delivery of social services and some entitlements.

Fine.

Balancing growth and the expansion of opportunity

Yet, even if one agrees philosophically with the limited government model reproposed by Romney, the really complicated issue is to determine the proper balance between being pro-growth and the need to provide to the disadvantaged in a way that will really help them transform their lives, by granting them real solid options –such as good education–that will increase their opportunities. How much and what do you provide? And in what way do you provide effectively? A mountain of historic evidence shows that providing “more”, while nice, does not necessarily help to solve problems.

It is once again the old and worn story: “Give a fish to the hungry everyday, or invest resources teaching them how to fish, so that they will catch their own fish and become self-sufficient”? it is a shop worn, tired little example, and yet its wisdom still escapes us. Try as we may, we are still struggling with this. If we are at all reasonable, we should want to push for growth. But our sense of social cohesion and human decency also tells us that deep down we do not really believe in social Darwinism, whereby the fittest survive and for all the others, well… tough luck. They are lost along the trail because they could not make it.

Understanding the difference between social spending and social investments

The European story tells us about the penalties paid in terms of missed growth, plus huge debt overhang, via an excessive tilt towards equality and public interventions in the shape of hardship alleviation. Can we, as would be President Mitt Romney suggests, be decisively pro-growth, yet mindful of the need to have everybody on board, by providing to all the tools necessary to advance –first and foremost via a truly vibrant, modern, comprehensive education system? Can we invest in this kind of “fishing” education for those who will otherwise depend on future handouts? And are we willing, as a society, to recognize the qualitative distinction (and choose wisely) between investing in the future (education) and relief payments (welfare, unemployment checks, and so on)?

Our future is not going to be Greek-like. But it could be closer to Italy or Japan: low levels of investment, stagnation and slow decline. Less dramatic; but equally unappealing.




Health care? Rhode Island says: Wellness

WASHINGTON – Have you ever heard of Governor Don Carcieri, Republican of Rhode Island? Well, if you have not, read on, because there are very good reasons why you should become acquainted with his administration’s work on “wellness education”, as opposed to issues pertaining to containing the cost of services related to health care delivery.

Unfortunately, right now the focus is entirely on the fate of the Obama health care reform plan and the abundant speculation on the political ramifications of victory or defeat on this signature issue for the President himself, for the now wary Democrats and for the re-emerging Republicans. Because of this, a revealing segment dedicated to health care issues, within the recent meeting in Washington of the National Governors Association, got no attention.

The “Rhode Island Revolution”

And it is really too bad because at least one Governor brought up the real fundamental problem pertaining to health in this forum featuring all his colleagues from around the USA. It is all well and good, said Governor Don Carcieri of Rhode Island, to talk about best practices and innovative ways to improve quality, while reducing cost of the delivery of health care. But shouldn’t we be talking also about how to intelligently reduce demand for health care services?

In other words, shouldn’t we be focusing on ways, including prevention, broader health education, encouragement towards healthier life styles that would yield a healthier population thus preventing some illnesses, while delaying the onset of many others? Wouldn’t this be a good way to deal with the health care crisis, by having overall healthier people, thus reducing total demand for services and ultimately the size of the ensuing cost pressure?

Talking with the experts

Governor Carcieri’s questions, accompanied by examples of what his administration is doing in the general areas of the promotion of wellness in Rhode Island, including something called “Rewards for Wellness Program”, took place in the context of a Q & A following two very thoughtful presentations to the assembled Governors by Dr. Jack Cochran of Kaiser Permanente and by Dr. Atul Gawande, Professor at Harvard and now media celebrity for his insightful ideas about, among others, surgery protocols that can save lives.

The two Doctors talked eloquently to the assembled Governors about rationalization and streamlining of systems, about increasing transparency, so that everybody knows what is being done in the context of delivery of health care, about egregious problems that should be avoided and best practices. But, being physicians, both of them talked mostly about issues pertaining to what should be done when they and their peers as care givers are called upon to provide care. All very important no doubt. But the focus was entirely on how to improve on the “supply” of medical care.

What is the role of “wellness education”?

This is all fine, said Carcieri in the discussion phase. But why is it that we do not focus equally on the “demand” side for medical care? If people are healthier and stay healthier for a longer period of time, this is good for them personally, for their families and, as a significant added bonus, a healthier population is a welcome consequence with a positive impact on a the financial burden of the health care delivery system; a system that we are desperately trying to make more cost-effective, while expanding its reach, by providing insurance to millions currently without insurance coverage. To put it simply: healthier people need less health care. They cost less. Focusing on how to contain cost, without ways to address in a meaningful way how to reduce demand, is really dealing with the wrong end of the issue, the consequences, (illness), rather than the contributing factors, (life style, behavior, etc.).

Just like fighting drugs, we focus on the consequences, not the causes

It is a bit like the drug addiction epidemic, I would add. Our focus is entirely on the (mostly criminal) consequences of addiction, (jailing offenders), and on how to improve drug interdiction, (beefing up police actions, the Drug Enforcement Agency, etc). But are we really trying to understand why is it that so many people are attracted to drugs and become addicts, thus fueling this gigantic criminal trade that we are desperately trying to stop? If we could understand what its it that causes demand for drugs and if we could miraculously drastically reduce interest in drugs, (that is the demand side of the equation), we would have solved a huge public health, treatment cost, law enforcement and incarceration problem, all at once.

What causes our health care crisis?

Fine, may be the two issues are quite separate and the comparison does not make a lot of sense. But the prevailing attitude on both issues is the same: we focus on something only after it has become a huge problem with nasty financial and public policy consequences. Just the same as with drugs, we are focusing our attention on health care because of a cost explosion. As the problem seems to be cost, we are hoping that we can deal with cost as a self-contained issue. We are hoping that we can find ways to reduce it, therefore avoiding financial disaster. As with drug abuse, somehow we assume, implicitly at least, that the level of demand for health care services is fixed, (and in fact growing, given the larger and larger numbers of elederly citizens as a percentage of the total population).

Reduce demand for services: this is a good approach

But the Governor of tiny Rhode Island suggested that reduction of demand for services is at least equally important. Just as the First Lady defined the problem of children obesity as an issue that needs to be addressed by focusing on all the environmental and behavioral factors that influence attitudes and eventually lead to bad habits and obesity, following the same logic we should understand that, if people realized how important it is to learn and follow practices that allow them to stay healthy, this would be good for them and for this overstressed health care system.

The Doctors agree: wellness should be center stage

So, the Governor of a small state, certainly not a well known politician and chief executive on the national stage, made his observation to the assembled Governors. But this is not the end of the story. Much to my astonishment, as I was watching the proceedings thanks to C-SPAN, the two Doctors, replying to his comment, showed to be in perfect agreement.

Dr. Jack Cochran, in fact, added that, if we look at the whole continuum of what impinges upon health, the delivery of health care services counts for somewhere between 10 and 20%. And the remaining 80%? Oh well, some of it has to with your DNA, that is with heredity. But quite a bit, added the Doctor, has to do with the quality of the general environment in which the person lives, with habits and personal behavior. Dr. Atul Gawande indicated that he was in full agreement with this assessment of what is it that bears on wellness.

Health care is only about 20% of the problem!

So, two recognized, eminent medical authorities confirm that most of the issue is outside their immediate field of action. They, along with all the other practitioners and the whole system built to support them, (hospitals, nurses, administrator, pharmaceutical companies), cover only a small part of the problem.

Come again?

Only 20% of the problem rests with the delivery of health care services? OK, let’s add some more, just to be conservative. Let’s say it is 30% or even 40%. This would be still less than half. Is this not astonishing? Wouldn’t this invite a reconsideration of what is it that we are trying to fix? Are we trying to ensure that people stay healthy; or are we concerned only with containing the cost of services when people who have adopted unhealthy life styles get sick? And if the latter is true, isn’t this approach faulty?

Unfortunately, what is on the table now –good or bad as it may be— in terms of a health care reform plan, does not recognize the fact that the primary (not the only) issue is that we should focus on how to keep people away from doctors and hospitals, as opposed to laboring on solutions aimed at reducing the cost of your stay, once you are sick and have to be in the hospital. What is on the table right now focuses almost entirely on how to contain health care delivery cost.

Only 20%? But then we are not focusing on the remaining 80%

So, without any controversy, a Governor and two eminent medical authorities, with all the other Governors listening in, affirmed that the crux of the problem is really in education on how to stay healthy; not in dealing with the problem (illness) after it has manifested itself. Now, in terms of the broader public policy implications, this is the equivalent of the discovery of electricity or any other epochal, truly transformative breakthrough, given the enormous cost (more than 15% of GDP) of health care services in the United States. This affirmation and recognition of what the real issue is, should be a game changer. You would expect  people either to vehemently disagree or to say: “Oh Lord, and all this time we were focusing on something else. Let’s go and change everything”.

Well, oddly enough, that did not happen.

New, revolutionary truth affirmed, but no reaction

Astonishingly, after this recognition as to where the real problem is, nothing further was added. Nobody else, no other Governor had anything to say on this. This affirmation is the equivalent of saying in the XVII Century that it is the Earth that rotates around the Sun and not vice versa, as we used to believe. But it was greeted with quiet indifference by the otherwise keen audience of Governors.

Is it because they did not really understand what was said? Or is it because they are so used to look at the problem in terms of bills,  Medicare and Medicaid budgets, numbers of practitioners and actuarial statistics, so that something like “wellness education” seems nice but hazy and thus probably not that important?

And yet, official science, via the two Doctors, endorsed the concept. Via the delivery of health care, we are dealing with 10 to 20% of the problem. The rest should be dealt with as well.

Intellectual inertia?

OK, let’s be clear. Obviously we need health care facilities. We need doctors and the best doctors at that. But we should not start dealing with health only when it is gone, because of the onset of disease. We should do all we can to educate people on the “value” of health and thus on how to keep it, preserve it and maintain it for the longest time.

We must change the objectives of medicine and its role in society

As Doctor Gawande said in a different context, until now we have paid doctors “more” if they do “more”, in terms of numbers of interventions (this is the prevailing “fee for service” approach for the payment of medical services). Now we should shift and understand that we should pay doctors “well” to do “well”, that is helping a person to stay well. Keeping a person healthy, so that he/she does not become “a patient” should be high on the list of what doctors do. Unfortunately as the system is currently conceived and organized it is not.

Notwithstanding the profound implications of what was said in the context of this meeting of the National Governors Association, Washington, (and everybody else, with the exception, apparently, of Rhode Island), is still focusing on the old stuff.

Will we ever learn?

 




Real Education for All is America’s Future

WASHINGTON – Just a few Republican electoral victories, significant but not overwhelming, aside from the strong symbolism of Ted Kennedy’s Senate seat abruptly changing hands, have engendered the perception that the Democrats are not just vulnerable; but truly rudderless and perhaps “finished”. President Barack Obama, until recently believed to be all knowing and serenely poised to fix any and all of America’s problems, one by one, with wise determination, now looks weak and almost powerless. And all this, mind you, in a political environment in which the Democrats still control “everything” in Washington.

New conservative confidence

Given this background, the annual gathering of the Conservatives in Washington, for CPAC, or Conservative Political Action Conference, was more boisterous and more self-confident than other such meetings. The smell of victory is in the air. Leaning a bit on over confidence, many leaders or would be leaders predicted that the Republicans will regain their lost majority in Congress after the November mid-term elections.

In all this, the real problem is that the Conservatives and the Republicans are attempting to ride a wave of an intense but still somewhat ill-defined national discontent, (witness the spontaneous combustion phenomenon of the “Tea Party Movement”), without having much to propose. Up to a point it is fine in politics to simply take advantage of the self-inflicted wounds of your own adversary: in this case the perceived statist over-reaching of the leftwing Democrats. But it would be nice to hear something new and different that would allow the opposition to rally public opinion around some new, forward looking and constructive ideas.

A new Republican agenda?

What is the “New Republican Agenda” for a weakened America, fully immersed in the global economy? What do they propose for a once leading nation now in need to reinvent itself in order to maintain an economic leadership that used to be based on a superior ability to innovate and to competently bring state of the art innovation to market?

Much of this ability rested on a uniquely well designed innovation friendly “eco-system” and on a uniquely flexible society willing to bend, change and transform itself at superior speed, in order to meet the new challenges and opportunities of the day.

At Issue: “Freedom” versus “Equality”

But if these were the superior cultural assets of American society that in turn gave America the edge, many of them are now in question. In a well crafted address to the CPAC crowd, conservative columnist George Will correctly outlined the broad terms of a political values debate that may lead the US towards self-confidence or towards a passive welfare mindset. It is all about the tension between “Freedom” and” Equality”, he said. The pursuit of Equality by the Liberals, especially of equality of outcome, inevitably breeds a culture of entitlement that leads to dependency, eventually stifling the risk taking spirit, innovation and wealth creation. Larger and larger segments of the lives of Americans will depend on what is done and provided for them in Washington. George Will warned his audience that entitlements and dependence are mainly a spiritual poison that enfeebles people’s souls. But the consequences of a passive mindset are practical. Passivity creates a dull spirit that will inevitably weaken the spark of enterprise thus impeding innovation and damaging the economy.

The dangers of dependency

And this, while debatable, is not a totally preposterous argument; especially if we compare the purported virtue of the old fashioned American self-reliance with the widespread collectivist mind set prevailing in Europe. The nanny state approach, with all its cushions and provisions, while shielding people from the consequences of misfortune, also blunts the appetite for risk taking. As a result, at best Europe is coasting. Do not look at Europe for courageous, risk taking enterprise. The rate of innovation is unremarkable; productivity is low.

America: the land of “Opportunity”?

This much is true. But, by embracing the opposite end of the spectrum, “Freedom”, we have to be careful about how we define it, as the meaning of Freedom changes quite a bit, depending on the larger context that truly determines how much Freedom can be enjoyed by how many. Indeed, at the center of the generally accepted American mythology and folklore about what makes this country “so great” is the heretofore semi-unchallenged creed that America is “the Country of Freedom and Opportunity“, as enshrined in the many uplifting Horatio Alger rags-to-riches stories. In fact, it is difficult to envisage what  can be done with Freedom without real Opportunity. So the two are to viewed together. Supporting Freedom without consideration as to how much Opportunity there is, is not very meaningful; because in the end it is material circumstances that make it possible for the average person to take advantage of the Freedom guaranteed by society.  

Opportunity: this is why immigrants come

Indeed the concept of “Access to Opportunity”, along with the fierce protection of Individual Liberties is what defines the uniqueness of the American experience. The accepted American belief has been and is that anybody, no matter how disadvantaged, no matter how lowly their station in life may be, if they are indeed armed with fortitude and persistence, they can achieve “anything”.

And indeed the iconography of so many self-made American millionaires and now billionaires, at least some of them first generation immigrants, would seem to underscore the truthfulness of this basic belief. And, no doubt, this notion of America as the country of Opportunity where all things are possible was part of the irresistible magnetism that attracted and still attracts so many millions from all over the world. They want to come to America armed with the firm belief that only in America they may be able to realize their otherwise unachievable dreams.

Is the old belief in Opportunity just a myth?

So far so good. The problem is that, even assuming that this mythology was at least to some reasonable degree based on fact, it is no longer so. In other words, the boundless Opportunity that in principle at least seemed to be made available to anybody lucky enough to reach America’s soil is now more than ever myth, at least for a sizable segment of this large society. And the consequences are huge. If indeed real Opportunity is no longer available to many if not most, than the promises of the rewards of Freedom ring hollow for the larger and larger numbers who, for all practical purposes, are excluded from the race.

Ending segregation was not the end of the story

In the past, as we know, we had an entire section of society, African-Americans, who were openly and deliberately excluded from real Opportunity through practices of racial discrimination enshrined in laws. After a long and hard struggle those patently unfair obstacles were removed. As of the late 1960s segregation was eliminated, at least as a matter of law; while discriminatory practices were made illegal. So, at least formally, if not entirely in the hearts of some people who may still harbor racist prejudice, that issue was resolved.

Today access to education is Opportunity

But far from being the happy ending, the elimination of legally sanctioned discrimination allowed the creation of a different kind of discrimination, less obvious –in as much as it is about allocation of scarce resources, rather than laws and statutes– but nonetheless pernicious, as it ends up reaffirming a de facto separation between those who are given a real chance and all the others.  “And the issue is education”. Whatever the causes and no matter who may be to blame, the fact of the matter is that the consistent shortchanging of public education as a policy priority and consequently of resources allocated to it in practice created a two tier society: those who have the means to buy good (mostly private) education and all the others who depend on education as a deficient –and in many cases disgraceful– public service.

Public education: at the bottom of the heap

The latter group is shortchanged by myopic public policies that have placed the funding of quality education and the upholding of high standards in the delivery of education at the bottom of policy priorities. As a result, today education or lack thereof is the main, real, concrete variable that defines the content of “Opportunity”; thus giving or denying meaning to the otherwise unimpeachable value of Freedom. It is now more than ever clear that Freedom without Opportunity means very little, as those who have no access to quality education lack the basic tools to participate and thus they cannot even begin to exploit the chances that Freedom would otherwise offer. Freedom without education, that is without the real opportunities offered by a good education, means that today for large numbers of Americans  “birth is destiny” —just like in a Third World country. It means that in XXI Century America the most significant variable that determines a person’s chances in life is the social environment in which they are born. If they are born poor, living in poor, underserved communities, with bad (and sometimes awful) schools, they are likely to stay poor. A good education might provide the ladder to get out of poverty and build a better life. A bad or inadequate education will not do the trick. The child will be stuck there, without many good chances of personal and social advancement.

No education, no enjoyment of the promises of Freedom

It is great to affirm that in principle any American can go as far as his/her potential may take them. But we know that, objectively, unless all young Americans have true access to a meaningful education, those who do not have access are excluded from the potential benefits of a truly Free Society that now, more than ever before, rewards the educated, while punishing the uneducated by mercilessly relegating them to the very bottom of society. Precisely because we are living now in the midst of an unprecedented knowledge revolution, now  education is the New Frontier. The ability to have it or not to have it for all practical purposes determines who may or may not have the material opportunity to enjoy the blessings of Freedom.

While in the past it was possible at least for some totally self-made people to overcome the odds and develop important, marketable skills on their own, nowadays, with the explosion of new, ever more complex knowledge, encompassing almost any field and sector, lack of real, substantive education really amounts to the de facto exclusion from all but the most menial employment opportunities.

Education creates options that define the content of Opportunity

As things are set up, it is clear that a poor family has very few options beyond accepting the kind of schools that are offered to their children by public institutions. And if the schools are lousy, the children will have an awful start that will create a huge disadvantage. A disadvantage so deep that it may end up, rare exceptions notwithstanding, haunting the person for life. If you have little schooling and whatever schooling you get is inadequate, if you get a meaningless high school diploma, despite being functionally illiterate, what are your chances in life? What do you do with your Freedom? Preciously little; because freedom without Opportunity is hollow.

Remedial actions do not provide real solutions

Now, this does not justify, in my mind, resorting to mere ex post facto remedial action via social engineering and redistributive public policies favoring the poor. Giving more “stuff” to the excluded and the disadvantaged is a relief operation, just like helping the victims of a natural disaster. But it cannot be the only or main policy. What the disadvantaged really need is not more subsidies; but intellectual empowerment. And this will come only through the expansion of their own intellect, so that they will have the tools to join –with confidence– the race, and do their best in a complicated and highly competitive environment that rewards superior skills, while it ignores the plight of those not sufficiently well equipped to participate.

Education was on the President’s agenda

In fairness, President Barack Obama had placed education in a rather prominent place on his policy agenda at the beginning of his administration. And the innovative initiatives undertaken by his thoughtful Secretary of Education, Arne Duncan, deserve full attention and consideration. But it would appear that in this environment now so deeply poisoned by partisan bickering and lack of conviction displayed by the party in power, the key relevance of the fundamental issue of recreating, via education reform, the true Opportunity that makes Freedom meaningful, is lost. In the ugly cacophony that now passes for political debate in Washington not much attention is paid to this critical problem that, probably more than any other, will shape America’s future, its cohesion and eventually its place in the world.

Can we build a consensus on making education a national priority?

And yet, the issue of how to recreate true Opportunity in America via access to quality education, should not be a partisan priority. Who could be “against” education? Or do we really want a two tier society in which the rewards of Freedom are enjoyed by some; while the Government subsidizes those who did not have a chance, so that the consequences of their systemic disadvantage will be somehow alleviated by relief measures?

Do we want a divided society in which only some truly participate with the confidence of possessing valuable intellectual tools? Or do we want to augment confidence by giving more Opportunity to the many who are out of the game? The reply seems obvious. Not to mention the positive economic consequences that an altogether better society would bring about.

Societal decline is the heavy price of inaction

So, I am for Freedom and I do recognize that too many entitlements breed dependency; while blunting the risk taking spirit of enterprise that is at the foundation of much of this country’s past and present successes. But I do believe that Freedom without reasonably widespread Opportunity for most if not all creates an inherently unfair society; while it plants the seeds of future cultural and social division. Division breeds envy and eventually social strife; not to mention the obvious fact that a society that does not take advantage of the possible contribution of most of its citizens is like a faulty engine. Other engines firing on all their cylinders will take the lead and America will fall behind.




Washington Cannot Invent Jobs

WASHINGTON – With John Maynard Keynes once again in the most favorite list, and in a prominent place, America started believing again not only in the virtuous, in fact infallible, power of public spending as a key tool to jump start an economy in a serious recession but also in the idea that Washington has the ability, indeed “the duty”, to create jobs and thus a good living for millions of unemployed. According to this view, Washington, not the (failed) market, “creates economic opportunity”, and all the good jobs that come along with it.

This mistaken belief whereby “jobs” are somehow an independent variable that can and should be politically willed, regardless of circumstances and market conditions, would be bad enough in ordinary times. But now it is tantamount to someone being on drugs and believing that they can actually do what they fantasized about during their trip. If there is a time in which the Government, try as it may, cannot possibly create the millions of jobs people demand, it is the present one.

Government cannot create jobs, especially in this environment

Look at our almost unprecedented disaster. As a consequence of a horrible recession, we have historically high unemployment, (close to 10%, not counting the millions who have given up and thus are no longer counted, and the millions forced to reluctantly accept part time work, because there is nothing else available). While the basic American economy, although greatly diminished, is still somehow alive, the job market literally fell off the precipice. This is because the epic employment downturn is due to a dramatic, fundamental retrenchment and downsizing of an economy (and the employment that it created) that for several years had grown in large measure thanks to the steroids of crazy levels of consumer spending with money borrowed from imaginary home equity, itself fueled by a housing bubble. This is why the picture now is so different from past cycles of growth and recession. This is a historic retrenchment. The jobs tied to the sectors that catered to overspending are gone –for good. This is the main difference between this massive jobs loss and others caused by the more “normal” business cycle. Here chucks of pseudo-economic activities justified only by overspending have melted, never to come back again. Period.

The end of the consumer binge and its consequences

Indeed, from one day to the next, Americans discovered that, not only they are not rich, (housing values having collapsed); but that they are also deeply in debt. Being deeply in debt, millions of Americans can no longer happily spend as they used to, counting on drawing cash from ever increasing home equity to pay the bills. In fact many cannot spend at all. Some of them stopped the party because they have no jobs; and millions more, while lucky to be employed, because they have huge debts and they will need years to repair their domestic balance sheets. As consumer spending constitutes about two thirds of the US economy, the collapse of spending with the consequent collapse of all the economic activities fueled by that level of spending means that this rate of joblessness cannot be temporary.

We still want jobs

But if we insist with the silly belief that Washington can and should fix problem caused by what is in truth an epochal transformation of the basic components of the US economy and that it should do it fast, this popular wisdom translates into a real political calamity for those in power, in this case the Democrats. Indeed, as it is assumed that it is entirely within Washington’s powers to create jobs in the wasteland caused by the total collapse of large swaths of an economy that existed only because it catered to excessive consumption, the inability to magically produce new employment appears to be governmental ineptitude. The perception of ineptitude in turn allows those who are left hanging to be upset with their leaders; in this case the Democrats who happen to be in charge during this rather horrible predicament.

The complicity of the experts

And the pundits fuel this misconception –that is the crazy idea that the government can and should create jobs— by advocating more aggressive jobs creation programs; and by prognosticating that, unless President Barack Obama can bring down the unemployment level, his party will take a beating this November at the mid-term elections; while his own chances of re-election in 2012 would be greatly diminished.

So, the pundits who are in general sympathetic to the administration proclaim with passion that the White House has to do “more”, indeed “whatever it takes” to allocate funds, invent programs and projects to create jobs. In other words, creating jobs is regarded as a “political imperative”. As to the quality and sustainability of the jobs…well…who cares about that. This is about getting as far as the next election, this is about saving one’s political skin. This has nothing to do with the real economy.

It is all a political game

By the same token, the political opponents, the Republicans, are salivating. They see an ongoing bad situation and gleefully proclaim that it is entirely the fault of the Democrats, the party in power, obviously incapable of fixing the problem. Their perspective is equally dimwitted and myopic. The worse the economy, the better their chances to regain political power. And the long term economic health of America? Oh well, that’s for the economists to figure out….Here we do politics. (And we wonder parenthetically why is it that opinion poll after opinion poll now indicate that a majority of Americans have lost confidence in their government’s competence and ability to take care of the people’s business?)

Given the way in which the “experts” have framed the debate, we are reinforcing the totally misconceived and wrong belief that the White House “runs” the US economy, that President Barack Obama is the CEO of America Inc. and that we are right to judge his economic performance on key issues, such as his ability to create jobs.

What Government can and should do

True, enough, it is a fact that the Government has significant influence on the economy. What is wrong is to believe that the Government “runs the economy” and that it is entirely within its powers and its mandate to create viable economic activities where none could otherwise exist. In truth, the Government can create a policy environment that can make economic activities easier or more difficult. Through taxation, strong or light regulation, labor laws, laws on liability and tort, speedy or slow processing of permits and licenses, government –central, state and local– can create a more or less business friendly environment. This much is true. But meaningful economic activities have to have a self-sustaining base. And the jobs that they create have to be based on the profitability and hopefully the future expansion of the activity itself.

Washington can create a better environment for investments

Simply put, it is a true mental distortion to say that “we need jobs” ands so Washington has to get busy creating them. Of course we need jobs. But first we need meaningful economic activities that, in turn, will generate jobs. First we must identify real opportunities; then we need the entrepreneurs who will exploit them, (hopefully within a public policy environment that will enable rather than impede business), and then we shall have, as a consequence, (assuming, and this a big assumption, the availability of the right mix of skills), more jobs. From this vantage point, job creation is a positive byproduct of a good economic environment in which viable and sustainable opportunities are exploited. So, we start with a money making proposition in mind. If this is successfully pursued and exploited, well, jobs will come along as a necessary consequence.

Make work does not work

But if we say that government has a sacred duty to create jobs, regardless of circumstances, because massive unemployment creates very negative social and political consequences, then jobs creation becomes a political imperative to be pursued irrespective of the underlying economic fundamentals. In so doing we divorce jobs from the creation of meaningful economic prospects. Mostly for political reasons, we want to push government to resort to gimmicks and magic in order to create jobs regardless as to their long term viability. While this is theoretically possible, the hard reality is that any “job” that is not tied to a productive activity eventually becomes a drain on scarce resources.

Make work

“Make work” schemes have been tried countless times. Sure enough there may be an immediate feel good effect. Idle people do something. They collect a pay check. They contribute to fuel consumption, thus helping other sectors of the economy by increasing demand for food, services and so on. But, in the end, if the jobs are not sustainable because the “make work” scheme is just that: “make work”, then the whole thing will eventually unravel with the only net effect of having added to public expenditures in order to set up the whole money losing, misguided machinery.

The old sectors are not coming back

While it has many causes, including of course the credit crunch resulting from the massive financial upheaval that we are still slowly digesting, the problem of the unusually high level of unemployment in the US, and the almost unanimous forecasts that it is going to take quite a long time to reabsorb the millions of idled people, is directly tied to an economy on steroids that inflated demand for service jobs. These were jobs filled by people who were catering to the absurd levels of consumption of millions of Americans who were happily piling up debt, spending all the money they thought they had and then some.

The party is over

Now we know that the party is over and that the consumer binge is gone.  Simply stated, most people no longer have discretionary money. Furthermore, millions for years to come will be engaged in the painful effort of trying to repair their horribly damaged balance sheets. This means they will be forced to save in order to pay back the bill of the party that ended so badly in 2007-2008. This process will go on for quite a while. So, it is inconceivable that the jobs that were supporting the consumers craze will come back. The overgrown financial industry and all the hangers on that were feeding from the housing bubble will not regain the old size any time soon. Those jobs are gone. Likewise, retailers will stay anemic. Closed restaurants will not reopen and those that did not go under will adjust to a diminished traffic, thus doing with a smaller staff.

What can Washington do?

So, the grim picture before us consists of decimated sectors, (hence the massive layoffs), and would be consumers with little or no cash. How do you fix this? Well, the only way is to look at what may be other sectors that hold the promise of future growth. And so we talk about “green jobs” and renewable energy and the like. All this is good. And this is an area where public policy can do much more to create the appropriate enabling environment that improves market conditions for fresh investments and innovation that can become commercially viable. And this is a key area where Washington can be rightfully blamed for not doing its work properly. Not because Washington is not creating the jobs; but because, so far at least, it has failed to create the public policy environment that would convincingly signal to business that there is indeed real money to be made in alternative energy because, as a nation, we have turned a page and we are now committed to a post-carbon economy.

Let’s get serious about a post carbon economy

In fairness, there is a lot of stirring and buzz about this and that opportunity in the energy sector. But not enough. We cannot even put on the table a meaningful tax on gasoline or other carbon byproducts. And yet a real tax on gasoline would send the signal that it does make sense now to seriously invest, as opposed to dabbling, in alternative sources for transportation fuel.

Even in the best case it will take a long time

Anyway, let’s make it clear that even a clever, well crafted green economy high tech plan –and we really need one– could not possibly produce fast, noticeable effects in terms of jobs creation so that all the Democrats will reap the political benefits come the mid term elections this November. These things do take time. But at least this would be a serious attempt to use public policy tools to signal to the markets that there is real opportunity in emerging sectors, so that real capital will be directed there.

Otherwise, the clamoring for “jobs” will be what it always is, an emotional, populist cry stemming from the belief that employment can be created by political fiat, regardless of economic fundamentals. For whatever it is worth, let us remember that in the old Soviet Union, technically speaking, there was full employment. The State took care of everybody. And we know how that story ended. 

 

 

 




Health Care: Wellness not Insurance Reform

WASHINGTON – Oddly enough, the initiative aimed at reversing children obesity in the US just presented by Mrs. Obama is the only health care related plan on the table that looks at the issue of “health” comprehensively, with the objective not just of “curing” a disease but of promoting good education that will have enhanced “wellness” as the outcome. Indeed, the objective is the well being of children across the board. Hence the need to look at everything that impinges on this goal: proper nutrition, ability to distinguish between healthy food and junk food, amount of sedentary time spent in front of the TV, amount of physical exercise, incentives or disincentives towards a healthy life coming from the family, schools and social interactions. The point made by the First Lady is quite simple. It takes long term, sustained action on all of these fronts, resulting in a serious course correction, in order to have healthier children as the end result. She also pointed out that healthy children growing to be healthy adults will need less medical care later on, as they will not be affected –at least not to a high degree— by diseases normally associated with unhealthy life styles.

Health Care at the beginning…

While the objective is huge and while the need to create and sustain a multi-pronged approach aimed at helping millions of children affected now by a veritable obesity epidemic, so that children will learn and maintain a healthy life is daunting, clearly this program contains the  substance of what had been dreamed about while presenting the brand new “wellness approach” that was discussed in the early days of the Obama administration. A “wellness” goal, not just health insurance reform, was supposed to be the real game changer, the necessary and indeed overdue reappraisal of the health care issue finally bringing to the light its real constituent parts. It was said then that we really wanted to change “the system”. No longer health care as the mere delivery of services to sick people; but a layered approach aimed at creating awareness of what it takes to be healthy and stay healthy in the different stages of life.

Nobody really said that this way we would abolish the need for medical treatments; but it was rightfully argued that people leading healthier lives, on balance, would need less medical remedies. Whereas a population of millions of Americans who eat poorly, who do not exercise and who are addicted to toxic substances are more likely to need more care, as their unhealthy life styles will make them more vulnerable to disease.

The revolutionary approach is gone

Simple stuff. Intuitively obvious. But what happened to this lofty, maybe ambitious but essentially correct approach? Who knows, really? It’s gone, essentially forgotten. Instead of talking about a revolution in the very concept of health care, we have narrowed the debate down to a discussion about medical care cost, and, even more narrowly to a debate on medical insurance availability, portability and cost. Not that these are unimportant points; but debating them without addressing the larger context of which they are essentially the byproduct, rather than the cause, is not that useful. Lacking  a wellness goal as the real strategic game changer, (initially promised and then silently dropped), the health care reform package pushed by the Democrats, whatever its chances of passing, due to the added problem represented by the recent loss of a key Senate vote, is still a bad idea.

This reform package will not work

It is a bad idea because, despite the good intentions regarding covering millions of uninsured and increased affordability for millions of others, this reform package does not really address the truly perverse systemic flaws of a health care system that is set in motion only when (often preventable) issues have become medical problems to be fixed. On top this, the system is fatally geared to “overdo” in terms of quantity –and therefore cost– of services ordered by doctors to their patients. These systemic shortcomings, added to a population that is on average increasingly unhealthy because of widespread bad habits regarding nutrition and exercise affecting millions of Americans, provides the ideal formula for runaway health care costs.

Keep repairing a poorly maintained car

It’s like having a car that is left out in the cold, that never undergoes scheduled maintenance, not even oil changes. This car is more likely to develop problems that will need to be fixed by an auto mechanic. Of course, the auto mechanic will be delighted to observe that the owner does not take care of the vehicle. The worse the every day care, the more likely the need for more visits to the workshop, more fixing and more repairs. Does the auto mechanic have any economic interest in advising the car owner on basic principles of preventative maintenance? Probably not; as lack of good vehicle maintenance aimed at avoiding major breakdowns, while preserving a state of “good vehicle health” is the source of additional income for him. In addition, as the auto mechanic knows that the bill for his services is not paid directly by the car owner but by a “breakdown and repairs insurance policy”, he feels that he does not need to say anything to the ignorant car owner, so that he will keep coming  back for more and more expensive repairs.

We fix only what is broken

In essence, this is the problem of US health care. It is mostly “care after the fact”, with little or no concern about how to help people stay healthy, thus preventing or mitigating the impact of at least some types of diseases. Beyond that, the insurance system, as currently configured for those who are covered, shields the majority of the population from bearing the direct impact of the cost of procedures ordered by busy doctors.

The individual and/or his employer pay for insurance and the insurance takes care of the medical bills. So the “customer”, (just like the imaginary car owner who goes to the auto mechanic with insurance coverage), does not feel directly the financial impact of whatever the doctor may order. But a cost is nonetheless incurred. Eventually, when cumulatively the cost of all procedures, including all the unnecessary ones, covered by an insurer gets to be too high, the insurance company will jack up the insurance premium, to the dismay of the individual customer or the employer who provides the insurance itself.

True, the health care reform package currently on the table in some fashion tries to address the issue of what should be proper care, best practices, cost effective procedures for common medical issues, other measures aimed at diminishing administrative costs and the like. But, as currently conceived and presented, it does not really aim at transforming the fundamentals that conspire to have a system that overprescribes, while doing nothing to promote wellness for the general population.

The providers’ interests

Cynically we could say that this is simply because the medical/pharmaceutical industries have an economic vested interested in having as many sick customers as possible. If we look at the issue in purely economic terms, right now the industry “wants” people to be sick; in as much as it is only sick people who need medications and procedures; while comparatively healthier people need much less. In a health care system in which my doctor makes money only if I am sick, what is his financial incentive in keeping me healthy so that I can avoid sickness and the consequent costs (his gains) related to fixing it?

If we do not address head on these systemic flaws, regarding the lack of incentives to provide wellness education and the “fee for service” approach to medical care billing an payments, the only way to contain the cost is to ration one way or the other the amount (and thus the cost) of available care.

Yes, it is all about “wellness”

It has been said before; but it is worth repeating that the US needs a comprehensive approach to “wellness” aimed at vigorously encouraging and promoting healthy life styles. It is odd, in fact, almost incomprehensible how the US, the biggest economy on earth, with a variety of first rate medical research facilities, with developed educational and mass communication tools, cannot correct the mess caused by a fundamental lack of care regarding education about the fundamentals of a healthy life style. We have the knowledge, we produce the research; and yet we cannot apply it to ourselves?

Present system: lousy outcomes

And what is the end result? Very poor. We have the highest medical costs in the world, both in absolute terms and per capita and in the end America’s broad health statistics are mediocre to poor. Indeed, with all our  incredible health care expenditures, if we look at life expectancy at birth, the US, the biggest economic power in the world, ranks at number 49 in the world; right between Portugal and Albania. So, this is what an aggregate spending of 16% of GDP, (and rising), on health care gets you: the life expectancy of Albania! And this happens in the US. All the talent produced by the best business schools and top notch schools of public administration somehow has not managed to notice that, at the very least, this system is not cost effective.

Yes, there will be sickness; but less

It is obvious that healthier life styles, while certainly not enough to “abolish” sickness, can reduce it significantly and consequently reduce the economic weight of health care delivery. Let’s think for a moment at the explosion of  cost related to the consequences of the obesity epidemic. Clearly this is only one part of a larger picture; but it is a significant part, worth hundreds of billions of dollars, year after year; because diseases like diabetes or hypertension are chronic and need continuous monitoring and treatment.

The tobacco experience

In the US we have spent years and considerable resources to fight tobacco head on, on the basis of the unquestionable knowledge that, on average, smoking is a significant health hazard. A hazard bad for the individual smoker, for the people subjected to the effects of smoke around them and bad for a health care system that is called upon to treat the consequences of the smoking habit. But, if this is so, it should also be obvious that, in a slightly different way, unhealthy food in the supermarkets, bad eating habits, lack of proper exercise, the widespread abuse of alcohol and/or other toxic substances contribute to the nurturing of a population more at risk of developing diseases.

Education can prevent disease

Given this dire picture, real reform would have to include a serious approach towards wellness education, while it would have to include a transformation of the financial remuneration for the medical profession, so that the perverse incentive of always doing “more”, because “more”, means more money for the physicians, is abolished –once and for all. In a truly reformed world doctors should be a lot more than just “mechanics” who fix your body for a fee once you walk through their door because you need repairs. Doctors and nurses should be an integral part of a multi-pronged educational apparatus aimed at teaching and spreading good habits, so that people develop healthy life styles and thus stay healthy.

Let’s be clear, wellness education, physical exercise, good nutrition are not going to abolish diseases. There will be issues due to heredity; there will be cancer; there will be accidents; broken legs and worn joints in need of replacement. But we can safely bet that the volume of demand for health care services in terms of treatments will be reduced. With diminished demand and a different way to reward financially the medical profession, the economic pressure on the system, whether based on private insurance or on anything else, will be lessened.

A tall agenda

I do realize that, as ambitious as the Obama plan was and is, what I propose is far more ambitious and thus more complicated, with no immediate gains. The difference is that my approach attacks the problem at its roots; whereas what is on the table right now does not. What we have on the table is an honorable attempt to provide services to millions of people who are left out. But the notion that it can provide care without adding to the overall cost, not just now but in the years to come, is a fantasy. When it comes to these types of services, given the underlying, perverse “inflationary” incentives that will remain essentially untouched, the tendency will be for aggregate costs to go up and not down.

The First Lady gets it right

As noted at the beginning, strangely enough, the just announced First Lady initiative on child obesity, conceptually at least, looks a lot more promising. True, we may agree that this is the “soft” side of health care. We may say that this is a worthwhile, noble cause fit for the First Lady. Something that can keep her busy and that can allow her to go around preaching a good Gospel of good habits, etc. People will listen, and will nod politely. The impact of all this in the end may be minimal; but there will be the satisfaction of being on the right side of the issue, with all the accrual of moral capital that this may bring along.

And yet, if we dream for a moment and we think that this initiative can have real traction, that it will be seriously endorsed by all the relevant stakeholders, thus rapidly changing habits and thus the basic conditions for millions of overweight and obese American children, well, this initiative would be the closest thing to a real and comprehensive approach to wellness.

This would be a real, meaningful contribution to making Americans healthy and thus, down the line, not so much in need for health care services necessary to fix the effects of a bad life style. If we could indeed imagine for a moment that, magically, in a short period of time, millions of overweight children could be “normal”, not just in terms of their weight, but also in terms of their fitness and all the habits that contribute to normal weight: such as healthy, nutritious food, plenty of fresh air and good exercise, we could safely assume that this would be a much healthier generation that will stay healthy for much longer and that overall would require comparatively less in terms of medical services.

Indeed.

Can we forge a new consensus on wellness?

But it would take a miracle to successfully sell this comprehensive approach to all the parties that have an interest in the health care reform debate. Right now, health care has become a poisonous topic, likely to ignite partisan, acrimonious fights that go way beyond the merit of individual issues contained or not contained in the package. Right now, it is raw politics. To have President Barack Obama fail on this, means humiliating the Democrats and showing that the opposition has real teeth. So there. The health of the American people does not come into this perspective; not even as an afterthought.

And it may very well end up like this. A huge mess laced with posturing, animosity and wild allegations. In the meantime, we shall continue to limp along with a horribly inefficient, damaged and stupendously expensive system; while the overall health conditions of the average American, (unless you are a millionaire who can afford the 5 star treatments at the best private clinics), will not improve a bit. And this is really sad. We Americans are supposed to be pragmatic problem solvers.

What happened to Yankee ingenuity?




Europe Becoming Truly “Old”

[Fertility] rates below two children indicate populations decreasing in size and growing older. Global fertility rates are in general decline and this trend is most pronounced in industrialized countries, especially Western Europe, where populations are projected to decline dramatically over the next 50 years.

–CIA World FactBook

WASHINGTON – Indeed, Europe is already experiencing a “dramatic” fertility decline. Most European countries are below “replacement level”. Unless this trend will be reversed, overtime this will translate into smaller and older populations, with all the attendant economic, political and indeed psychological consequences associated with the prevalence of the elderly at every level of society. Societies in which old people are more numerous or prevalent tend to be less future oriented, less entrepreneurial, more risk averse. They stop growing. They become anemic, rationalizing their lack of action through some mix of political ideologies claiming the superior wisdom of a “less is more” approach to almost anything.

United Europe a strong presence in the world?

Given these pronounced demographic trends, all those who look at the enlarged European Union as a new dynamic political and economic entity, now flexing its muscles and getting ready to play a wider role in the international political system should curb their enthusiasm to a more prudent level. Most likely fewer and comparatively older Europeans will translate into a stronger aspiration for a quiet, problem free life. In international politics this will mean doing less, not more; a tendency towards minimizing problems and accommodation –even with hostile forces.

The cost of old people

On the domestic economic front, the prevalence of older people within the general population in the context of developed welfare states in which the social contract stipulates that the elderly will be taken care of means a progressive, but ultimately gigantic shift of resources from production to consumption. And this systemic trend that subtracts capital from new ventures devoting it to increased welfare spending is bound to have negative consequences on the dynamism and flexibility of these societies.

Given these demographic trends, since the public treasury cannot drain from a diminished tax base all that ideally would be required to provide adequately for both the elderly and all the other governmental activities, including research and development and new investments, overtime this will lead to stagnation and ultimately decline.

Below population replacement level

Most of Europe is now characterized by birth rates below “replacement level”. Which is to say that, unless this trend is reversed and/or other factors, such as significant new, reasonably skilled and educated immigration, will intervene, in the long run these societies will be composed mostly of old people and eventually, whatever the time frame, they will become less and relevant and maybe they will disappear altogether, at least in the form in which we have known them.

Let’s look at the numbers. In Europe, France is on the edge. Its rate of 1.98 children per woman places it just a little below replacement level. But the rest of the Continent is mostly way below replacement level. Norway: 1.78; Finland: 1:73; United Kingdom: 1.66; Portugal: 1.49; Croatia: 1.43; Germany, 1.41; Greece: 1.37; Italy, 1.31; and so on.

In the US the picture is somewhat better

The US is not doing great in this regard, but it is above water with a fertility rate at 2.05 which places the country a little bit above replacement level. This fertility rate means that there is still a reasonable supply of young Americans capable and willing to start something new and to maintain a reasonably broad tax base that will be able to support the government.

Still, even here in the US we see the consequences of relatively fewer births and an increased percentage of seniors within the overall population. Based on our own experience, we do understand the political and policy pitfalls created by a large population progressively growing older.

Cost of old age in America

On balance, even in America, a country in which the welfare state is not particularly developed, (at least compared to Europe), the sheer mass of increasing numbers of older people already caused a significant resource shift from investment to consumption, given the promise to take care of seniors through the public purse, be it via Social Security payments or Medicare support when they get sick; keeping in mind that improved longevity means an increase in the demand for medical services, given the ailments and infirmities usually associated with old age. In the aggregate, more capital spent to satisfy the needs of the elderly directly translates into smaller funds available for education, infrastructure, investment in research and new economic activities. In the US we already know that, unless the entitlement programs will be significantly reduced, at the current level of growth they will bankrupt the Federal Government.

And this is happening in America, a country in which the fall in overall fertility is far less pronounced than in Europe and a country in which the state gives comparatively less to senior citizens. In Europe the trend of falling demographics is much more pronounced, while the welfare state promises more to its seniors.

The impact of a shrinking, aging population

Which is to say that, whatever we may be experiencing in the US concerning the increased financial burden of entitlement programs, in Europe the consequences of an aging population are much more pronounced in terms of size, speed, economic and eventually political impact. It is almost inevitable that, without counterbalancing forces, such as a significant influx of young and productive immigrants, societies characterized by low fertility rates will become progressively less dynamic, more risk averse and more concerned with satisfying the immediate demands of the elderly who have acquired the right to get a variety of services; while fewer and fewer active citizens produce the wealth necessary to provide them.

So, oddly enough, higher prosperity, at least in these countries, brought along the lack of desire to have children and thus the inevitable aging of the population. As a consequence, there is a shifting of resources from production to consumption and thus diminished economic vitality.

Children and confidence in the future

Now, I would dare say that there is a correlation between this phenomenon of falling fertility rates and the less empirically verifiable, yet still observable phenomenon of the rise of a risk averse culture of little entrepreneurial daring and more accommodation, including with enemies; all this rationalized and justified under pious ideas of social tolerance, justice, human rights, international dialogue, cooperation with all, and the like.

Is it possible to say that societies in which people decide to have few children or no children at all are more inward looking and less optimistic? Can we say that the desire to have children is a vote of confidence in the future? Who knows for sure. But it is a fact that we are witnessing the emergence of this new undeclared cultural consensus in Europe amounting to doing less for the future, while doing more for the every day necessities of an aging population that needs more.

Mitigating factors?

What about other factors that may mitigate or reverse this trend leading to a population that is on average getting older, while shrinking in overall size? Europe, as far as counter tendencies are concerned, there is not much comfort in what we can observe. Indeed, there is fresh new immigration into Europe –and this would alleviate the shrinking problem. However, the bulk of the new immigration comes from Africa and the Islamic world; that is from societies whose members have quite often difficulties or no will at all to be assimilated into the mainstream of European society and culture. On the contrary, the new immigrants tend to create their own separate communities, veritable ethnic and cultural islands within an environment that may be either hostile or at least not very accommodating towards the newcomers. Immigrants usually have higher fertility rates. So, to the extent that there may be any segments of European societies experiencing population growth, this growth takes place largely among not very well assimilated and/or not especially welcome immigrants. And so, while the “native” European stock shrinks, Europe is being transformed by the unassimilated newcomers, in some regions already beyond recognition.

Transformation may be good or bad, depending on one’s own opinions and on what is it that we are measuring. If we measure academic achievement, a key precursor of future economic productivity, of the rate of innovation and ultimately of future growth, we see that increasing numbers of less literate young immigrants are not improving the broader picture in terms of academic standards and skills. In the long run, for societies to stay prosperous they need to be competitive and this can only happen via the nurturing of human capital. If the indigenous working age Europeans are producing less because the active population pool is shrinking, while the younger immigrants are comparatively less skilled, we have strong indicators of progressive economic decline.

America and “Old Europe”

So, the “Old Continent’ is living up to the metaphor, with a twist: not just old countries and old societies. Europe is truly “becoming old” in every respect; and the foreseeable consequences of this pronounced trend are not that bright. In all this, let us bear in mind that this is going to be a long, incremental process. The impact of lower fertility, assuming that it will not be reversed, is not immediate. It will take a long time for Europe to be totally transformed. But, if current trends continue, the combination of an aging population and of the continuing influx of problematic immigrants who cannot be easily assimilated tells us that our European Allies will be more inward looking. Thus they will be less interested in broader international issues that may not have an immediate impact on their welfare.

After WWII, we forged a US foreign policy predicated on the concept of a strengthened Atlantic Community, based on the two “pillars”: North America and Western Europe. After the fall of communism and the reunification of Germany, it seemed as if this Atlantic Community, having “won” the Cold War, would be dominant in world affairs. The demographic trends in Europe indicate that the European “pillar” of this Community is becoming weaker and thus over time less relevant. Time for the US to seek productive partnerships with more dynamic societies.

 

 

 

 

 




Something Broken in America?

WASHINGTON – America may be in economic trouble right now; but one of the perceived core strengths of this country is that, compared to everybody else, we have made constant modernization, perpetual re-engineering and the striving for greater and greater efficiencies in all sectors into a science. We are world leaders in information technology and all its cascading applications. We have the best software companies. We have the business and management schools that teach aspiring leaders from all over the world the secrets of super efficiency. We are the leaders in computer manufacturing and the most popular internet search engines. We have Apple’s IPhone and unmanned Predator aircraft maneuvered by a few techies in Nevada that can target bad guys in the mountains of Pakistan. We have some of the best R&D in biotech, pharmaceuticals and space technologies.

Well, may be we do; even though the pace of investing in innovation has slackened somewhat and others are catching up. But the ability to keep and maintain high standards of efficiency, whether reliant on state of the art technology, competent pros or both is not so unquestionable these days.

Take a few illustrative examples, unrelated, but chosen here because they happened recently, within a relatively short span of time.

Systemic failures

A) We had a computer glitch within the Federal Aviation Administration, FAA, system that caused nationwide chaos in air traffic control, with flight delays piling up on delays for almost an entire day, disrupting air travel for more than half the nation.

B) Then there was the almost comical episode of the “lost” NorthWest flight. Well, the pilots, otherwise engaged, missed the airport where they were supposed to land and carried on chatting for more than one hour, flying the aircraft God knows where. Worse yet, the air traffic control people on the ground, aware that something was wrong, could not get in contact with the flight crew for more than one hour.

C) More recently there is the story of Army Major Nidal Hasan. Of course, this grabbed headlines, given the tragedy of all those servicemen killed by him. The story, as presented so far, is whether or not the Army security apparatus should have been able to spot Hasan’s dangerous dispositions on time and prevent him from killing soldiers. But, in my mind, the real story is that internal records indicate that Major Hasan, irrespective of his views on Islam or jihad, was a really bad doctor, according to the judgment of his superior officers, duly included in his file.

Bad doctor kept in the ranks

The story, as reported by National Public Radio, among others, is that Major Hasan had a truly bad professional record. He did not show up on time. In fact, sometimes he did not show up at all. One of his superiors wanted him removed. But the story shows that, bad reports notwithstanding, all in his file, the system’s inertia allowed a bad Army doctor who was performing poorly to be kept in the ranks –and in fact to be promoted to Major.

So, the system, and I am referring here to the “basic system”, the vaunted “armed forces meritocracy”, where you are supposed to perform according to a given standard, did not work. Hasan could not be axed and then, later on, he did what he did.

D) Last but not least, we have the recent episode of the uninvited couple who managed to sneak into the White House for the very first state dinner in honor of the visiting Indian Prime Minister. The story has been presented as some sort of prank engineered by a publicity hungry, clever couple. “Look at this: how far are people willing to go in order to get attention….They got into the White House…Now they’ll sell the story to the tabloids”…Etc. etc.

Except that this was not a United Way fund raiser. This is “The White House”, theoretically one of the most secure fortresses in the world, protected by a small army of ultra trained Secret Service professionals whose job is to establish and keep layers of security and to check on anything and anybody, 24/7. Whereas, super security apparatus notwithstanding, an enterprising couple could just sweet talk their way in? And nobody noticed? So that they could go through layers of security and end up shaking hands with the President of the United States?

In the age of terrorism, post 9/11 and all that, this is an astonishing security failure, revealing a shocking degree of amateurism on the part of the supposedly super professional Secret Service.

Accepting lower standards

Alright. So, what is the point of all this? The point is not that the “sky is falling”; but that something fundamental is not working well. We have systemic failure at various levels, revealing outmoded technologies and underperforming professionals who are not up to the demands of their jobs. What is worse, we do not see real public outcry.

Among policy makers it is old hat that we are saddled with FAA ancient equipment; and so it is not really a surprise that on occasion the system will crash, throwing half the country air traffic into chaos. But policy-makers look the other way and continue to under invest, allowing this dangerous situation to fester. Do we hear any protests? Likewise, we allow sloppy performance in the cases of supposedly skilled people who do not know their job or who cannot perform their job. And this includes the pilots who miss the airport, the air traffic control people who fail to make contact with them and the Secret Service who cannot spot those who belong and those who do not from a list of VIPs invited to a state dinner at the White House.

Inability to be selective

But the worst among these is the case of the inability of the “Army system” to get rid of an underperforming physician, because this instance reveals tolerance for “generic” under performance. By and large, unless something dramatic happens, as in the case of Major Hasan, many cases of tolerance for sloppy work are destined to remain hidden. This way mediocre or bad people stay on the job and get promoted; whereby silently lowering many standards –and nobody says anything.

How many more mediocre doctors?

If Major Hasan had not had this outburst of insanity (whether tied to his self-radicalization as a lonely Jihadist, or not), he would have continued to serve as a sub par Army psychiatrist paid by all of us and nobody would have known any better. The question is: how many other Major Hasan equivalent are there within our vast system of public (and private, for that matter) services? Now we know about Hasan because of the scrutiny caused by the horrible event that he engineered. But, had he killed no one, he would continue to be a bad Army doctor, providing bad service to unaware servicemen and no one would know; while the system, supposedly geared towards weeding out the sub par people, would continue to tolerate him. And this means that, in an untold number of cases, we are tolerating mediocrity, underperformance and substandard service.

Low standards are the new normal

Now, the point here is not to exaggerate and reach the gloomy conclusion that “nothing works in America”. Of course, many other things work and some work very well. But the point is that in a complex, knowledge based, service focused, modern society whose claim to fame is a very high standard of performance across the board, a high standard, demanding as it is, should be the only acceptable norm. Whereas, we have come to accept sloppiness and underperformance as “part of life”, due to “human error”, or due to “lack of funds” that do not allow, for example, the modernization of an ancient air traffic control system.

And so, subtly and implicitly we have redefined our standards down. “Stuff happens”. “It is too bad”.” But, look, don’t complain too much, most of the time things really work as intended”. Whereas, the truth is that now there is higher tolerance for failure. Indeed, these various instances of egregious bad performance do not seem to cause major public outcries.

We want to forget failures

Even in extreme cases, we would rather forget, as in the instance of the confused and late response to natural disasters like Hurricane Katrina in 2005, an event that reveled horrendous gaps in our national preparedness for such calamities. Well, after the outcry, we brush it aside, in the same manner as we would like to forget a bad dream. So, after a while, nobody talks about it anymore, just as if it did not happen.

And yet, If lower standards become the implicitly accepted “new normal”, then we cannot be surprised when failures become more frequent and when we shall see others, motivated by higher standards, passing us by.