France And Italy Do Not Want Austerity – But They lack A Credible Growth Strategy

WASHINGTON – France and Italy want less Brussels-imposed austerity, (spending cuts, higher taxes, fewer benefits for retirees), and more freedom to spend money, (that needs to borrowed, because they do not have it), in order to relaunch their comatose economies. Germany objects, because this would entail breaking rules regarding ceilings to annual deficits, (no more than 3% of GDP), this way encouraging fiscal profligacy.

Austerity cuts demand

Germany has a point. However, it is also true that in frozen economies cutting public spending favors more contraction, making things worse, at least in the short and medium term. So how will France, Italy and other slow-moving economies get out of this swamp?

My guess is that they will not. There is a bad combination of an ideological attachment to bad public policies and lack of basic competitiveness that conspire to keep these countries in constant stagnation, or worse.

Labor market reforms

Much has been said about labor market reforms that would create flexibility, allowing employers the freedom to hire workers when there is growth, and fire them when demand for their products drop.

Italy is slowly getting there. After years of endless debates and polemics, the left of center government led by Prime Minister Matteo Renzi seems to be close to achieving this goal. And this is good.

Italy’s unemployment is at 12.6%

However, an overdue labor market reform, arriving at least 20 years late, will not magically transform what is now a tragic employment picture. Italy has a 12.6% unempoyment rate. Yes, this is double what we have in the US –and do remember that most American economists argue that US unemployment close to 6% is still way too high. Well, in Italy you must also add 40% youth unemployment with peaks up to 60% in the perennially dysfunctional South.

There is no doubt that a more flexible labor market will encourage some Italian firms to hire. And this will translate into more jobs. But this reform, while necessary and welcome, by itself cannot be Italy’s miracle cure. The Italian economy stopped growing years ago. Even with more market-friendly labor laws, in order to hire more people you need to have growth in promising sectors.

Competitiveness

Italy badly needs new competitive sectors. And these are premised on a relentless pursuit of innovation, itself predicated on high quality human capital and significant R&D investments. None of these factors exist in Italy in significant amounts. (In France the picture is better, but not at all inspiring).

Add to the Italian mix a perennially dysfunctional and excessively large public sector, endemic corruption, the cancer of organized crime and a stupendous public debt, now at 136% of GDP, and you get the picture. There are just too many impediments to growth.

As Bill Gross of Janus, (formerly the creator and boss of Pacific Investment Management, PIMCO, the giant bond trader), put it recently, global economic growth is held back and will be held back by too much debt. Debt depresses growth. If it is true that any further expansion of the comparatively more vigorous US economy will be hindered by lack of demand in sluggish, high debt countries, imagine the situation inside a high debt country.

A way out?

Is there a way out for Italy, France, Greece and other weak economies? Of course there is. But any serious growth strategy would require gigantic cultural and psychological changes and a great deal of patience. Real, sustainable growth is predicated on real competitiveness, itself founded on high quality human capital, the natural outcome of good to excellent education.

Therefore, whatever can be done in the short-term, it is imperative to invest in quality public education now, keeping in mind that with luck you will see some results in at least 15 to 20 years. In the meantime, you have to create enough social cohesion to withstand lean times.

Politicians want to mitigate pain

But this is almost impossible, because most politicians are tempted to keep the public spending spigots open as short-term remedies against weak economic conditions. And this means that scarce public funds are spent to finance welfare measures, or unproductive new public employment. They are not invested in education or R&D.

To put it simply, despite a bad economy and high debt, the political pressures favor more and not less public spending to subsidize an unaffordable standard of living. As a result, the deficit keeps growing and the national debt gets bigger, adding long-term pressure on already exhausted economies.

Change is possible

As I said, change is possible. It always is. But meaningful change  would entail ditching bad public policy models and deeply entrenched bad habits.

I somehow doubt that, even when clearly faced with terminal decline, the ruling elites of so many Western countries will have the courage to change course.

 

 




China’s Leaders Want More Growth – But Innovation Requires Political Freedom

By Paolo von Schirach

October 9, 2013

WASHINGTON – Imagine this. Imagine that not so long ago the US was an over populated emerging market with a state controlled economy. A new crop of technocratic leaders decided to use cheap labor willing to come to Detroit, Atlanta and Houston to work in factories as the main national economic advantage. United Technologies, Procter & Gamble, Hanes and other state controlled firms would make a strong push into foreign markets with the considerable  advantage of rock bottom prices for US exports made possible by ultra cheap labor provided by migrant farm laborers coming into cities from Idaho, New Mexico and Oklahoma. Imagine that this economic growth strategy had been successfully carried out for 20 or 30 years.

End of growth

But then massive growth would stop. The engine would start slowing down because the products made by the state-owned companies are no so great when it comes to quality, while the cost advantage slowly evaporated. Indeed, the supply of inexpensive migrant laborers dwindled. Fresh labor shortages now translate into higher wages.

The smart technocrats see all this; but they want to find ways to keep high levels of growth. They turn to a very senior economist for advice. He says that the only way to reignite self-sustaining growth is really to privatize state banks and major state controlled firms, this way injecting genuine competition into the system. This will inspire more investments, innovation and therefore quality improvements that will benefit consumers at home and abroad. 

Growth or political control?

The political leaders listen attentively; but then they shake their heads. “Nice ideas –they say– but this cannot be done. If we relinquish control over the economy –all the banks, the big state corporations– then, our main power base is gone. Soon enough, if we empower the private sector, we are gone too“. And so, the decision is made: no real economic reforms. This way political control is secure. America may stagnate; but the people in power will do fine, at least for many more years. 

This is about China

Alright, just put “China” in America’s place, and you have the distillation of China’s policy dilemmas. China is still doing very well, but it is losing altitude. Forget about dizzy double-digit growth. The IMF is forecasting may be 4% in just a few years. An economy built from the top, based on cheap labor to export massive amounts of manufactured products, coupled with huge infrastructure spending has worked very well; but now it has run its course. From now on, expect China to do OK, at best.

Can a smart economist solve this problem?

The WSJ just published a major front page story on this very topic. It  featured Liu He, a very senior economic policy advisor in Beijing, (A bureaucrat Tricky Task: Reignite Chinese Growth, October 7, 2013). Reportedly Liu has been tasked with producing a new blueprint for China’s growth. It would appear that Liu and his staff would favor reforms and in particular the privatization of the large state-owned banks that control the entire financial system and the flow of credit.

Most Chinese reformers know that, while China has a vibrant private sector, the gigantic system created by state banks and often inefficient state-owned corporations is a major drag on the economy. To any free market capitalist this is no surprise. Indeed, who would expect monopolistic corporations run by political appointees to be hubs of creativity and innovation? These companies may do well in a controlled, protected environment. But they are not nimble and flexible. They are slow and bureaucratic. And top-down real innovation does not really exist.

Economic control equals political control

However, state and ultimately party control over huge chunks of the economy is almost a prerequisite for the self-perpetuation of China’s leadership. 

I am not sure how this attempt to find a new formula for China’s growth will play out.

But I very much doubt that China’s technocrats, even those who would really like to see modernization, are going to take big chances when it comes to giving up control over the economy. A vibrant economy run by an eager private sector creates a middle class that will eventually demand accountability, and a voice in the political process. And this is not something that the political leadership in Beijing wants to encourage, let alone allow.




Underneath China’s Still Impressive 7.5% Growth There Is A Mountain Of Debt

By Paolo von Schirach

August 28, 2013

WASHINGTON – The official news about China is that the number two world economy, expertly managed by the careful Beijing technocrats, is adjusting to a slower but still very impressive rate of growth. After an amazing almost 30 year run with more than 10% growth, year after year, from now on China will be cruising at 7.5% a year. If you think that Europe is barely above zero, while the once mighty America is advancing at a pitiful 2% rate, 7.5% is fantastic.

Too much debt

Well, this is what appears. But it is not so. Not even close. The truth is that China’s growth is largely artificial and now mostly debt driven. And debt is growing at an alarming rate. If you read the hard-hitting pieces on China’s debt crisis published by The Financial Times on August 27 and 28, you get a truly scary picture. China’s construction boom, itself one of the major drivers of GDP growth is based mostly on speculation and enormous amounts of bad debt that now call into question the solvency of many local financial institutions. Likewise, Chinese corporations for years over estimated demand for almost everything. As a result there is enormous overcapacity in practically every sector, from coal to chemicals to steel. Corporate debt, much of it held by non official banking institutions, has skyrocketed. 

And this is has nothing to do with the predictable ups and downs of the business cycle. Here you have a major country whose growth is now sustained mostly by an enormous amount of debt. The good news is that China’s exports over time generated huge cash reserves. However, if a large portion of this capital will have to be used to cover all this red ink, there will be a lot less available for productive investment. Therefore, assuming that this scenario is correct, forget about 7.5% growth, year after year.

Local governments and corporations are in trouble

Just a few illustrative facts drawn from the excellent FT articles referred to above. China is now the most indebted among emerging markets. Aggregate debt (corporate, household, government) has soared from 40% in 2007 to 100% in 2012. Local government debt usually does not include debt carried by local non-bank financial institutions. Therefore, while official figures indicate local government debt level up to 16.8% of GDP, in truth this goes up to 57.8%.

At the local level, local governments used to make money by expropriating farm land that was then sold to developers. Land holdings were used as collateral to obtain cash that would finance infrastructure. Well, now the construction boom has halted because developers have over built. Many of them are in big trouble as they have unsold inventory that cannot be liquidated. In the meantime all the sectors, such as steel and cement, that used to be driven by the construction boom are suffering because of demand contraction. Back to the local government, with the end of the construction boom, now they own far less valuable land that is no longer accepted as collateral. Hence a mounting debt crisis at the local level.

Back to industry, many state-owned corporations now are kept artificially alive via easy government credit funneled to them via state-owned banks. Smaller companies that do not have easy access to credit are struggling. Some now pay their bills through promissory notes. Others disguise their troubles through increased unpaid leaves for their workers, so that official employment numbers appear unchanged.

No problem?

As all this is unfolding, we are told that there is no problem. And this is indeed the real problem. Denial and obfuscation is not a good way to deal with an emerging crisis. Remember Greece? Until the day (back in 2009) in which the Greek Government announced that it had cooked the books regarding the actual level of its debt, it all seemed perfectly normal.

In the US we have had our spectacular 2008 crash. While we can debate how the main actors and the regulators did not see this coming, after the collapse policy-makers and the public knew what had happened. And, sure enough, we have had our own gigantic bail outs. Still, when the Federal Government essentially took over General Motors, it did so publicly, at the same time demanding a credible restructuring plan that included closing down facilities, destruction of jobs, plus salary and benefits cuts for those lucky enough to keep a job.

No transparency

There is no such publicity and transaparency in China. Ttherefore there is far less pressure to restructure in order to obtain leaner and more competitive state owned corporations. As to the local governments and their troubled finances, most likely their debts will become government debts. Still, debt is debt –and it slows you down.

In the end, for sure China must have many healthy companies that are doing and will be doing well. Still, digging a bit deeper, as the FT has done, we discover a country with huge and as yet undeclared systemic problems. It is going to take time and a lot of money to fix all this. China’s economy will stay large. But it will be far less impressive than you would have thought.

 




Obamacare Will Not Improve America’s Deeply Flawed Health Care System

By Paolo von Schirach

August 25, 2013

WASHINGTON – The real problem with soon to be implemented Obamacare is that, contrary to what many believe, it is not “health care reform”. It is just “health insurance reform”. President Obama’s noble goal  was and is to extend coverage to the many millions of Americans who have no insurance and to many others who (on account of pre-existing conditions) are denied coverage. Indeed, given the exorbitant costs of even routine procedures, getting sick in America, without benefiting from the shield provided by health insurance, means financial ruin.

Improve a bad system?

That said, the fundamental flaw of Obamacare is that it intends to “improve” a really bad system by making it even bigger and more cumbersome. The law is not yet in force. But all we read about its possible impact on those who are currently insured, on employers who will be forced to pay for insurance, and on young people uninsured is that it may make everything more expensive, while causing other distortions. For instance, as the mandate to provide medical insurance would apply to companies with 50 or more full time workers, we see many employers who are now cutting their labor force down to 49 workers and who hire part time laborers in order to get out of the mandate. So, business decisions are influenced by Obamacare, and not in a good way.

By and large, as the law is not yet in force, much of what is said now about its long term impact is based on assumptions that may or may not be correct. However, common sense would dictate that it is difficult to improve upon a bad system by making it bigger. 

“Fee for services” is the problem

And why is the system on top of which Obamacare will be built so bad ? It is bad because it provides the worst incentives to those who theoretically should be the guardians of high quality care at affordable prices.  In America, you have doctors who are in the private sector. And they operate on a “fee for service” basis. The only way in which they make money is to have sick patients in need of care. Of course, doctors want to make money while providing an essential service.

The question is: how much money? Well, there is no built-in restraint. And for a very simple reason. You, the patients, need their services. However, most of you do not pay for those services, because you have medical insurance, usually provided for by your employer.

Over prescription of “everything”

Well, then how does this work? What happens is that, even though there are some price ceilings and certain restrictions on reimbursable procedures negotiated with insurance companies, by and large providers manage to overdo almost everything: diagnostics, therapies, surgeries, procedures, prescription medications.

And why do they do this? Because they have a financial incentive to do so, and because they know they can get away with it, in as much as the patient does not pay out of his/her pocket for most of this “care”. The insurance pays.

Therefore the care recipient will not protest. He/she is not going to ask probing questions like: “Is this really necessary? Are there alternatives to this surgery? How much will this cost? Can I get this cheaper somewhere else? 

Unethical practices

This set up of “I treat you; but someone else pays the bill” is a built-in incentive for unethical practices that essentially boil down to overdoing almost “everything”, from surgeries to physiotherapy sessions. Scores of studies indicate that up to 1/3 of all procedures ordered by doctors in America may be unnecessary. Think of that.  We are talking about billions of dollars, year after year, totally wasted on unneeded procedures.

Treating chronic diseases

And this is not all. This system that will always over prescribe has now the fantastic opportunity to treat tens of millions of chronic patients who actually do need care on account of diseases contracted because of a bad life style. America is now in the midst of an obesity epidemic. And obesity caused an explosion of chronic illnesses ranging from Type 2 diabetes to hypertension and all sorts of cardiovascular conditions. Treating all these patients costs now hundreds of billions, with no end in sight.

No prevention

These treatments are horrendously expensive. However, the good news is that in most cases, assuming proper diet and plenty of exercise, these chronic conditions can be reversed. The bad news is that a system with built-in incentives to treat and over treat people provides no financial incentives to physicians to teach patients anything about preventing or reversing diseases. 

The money is in care, and not in prevention.

No way to improve this system by making it bigger

Well, this is US health care. It takes truly heroic optimism to believe that by broadening this perverse system that blends profit oriented doctors with insurance companies that will always jack up premiums you are going to make it more efficient.

In the end, Obamacare may not be the disaster that its opponents claim it is; but it is impossible that it will amount to a serious reform of a truly bad system.




Mexico Will Amend Its Constitution, Allowing Foreign Companies To Invest In Its Energy Sector

By Paolo von Schirach

August 13, 2013

WASHINGTON – If I were Vladimir Putin or Ali al-Naimi, Saudi Minister of Petroleum, I would be really worried about the latest news from Mexico. President Enrique Pena Nieto is pushing forward an amendment to the Mexican Constitution that would eliminate or at least curtail existing barriers to foreign investments in the country’s oil and gas sectors. 75 years ago President Lazaro Cardenas nationalized the Mexican oil industry. The sector became  a monopoly managed by Pemex, a state-owned corporation.

Amending the Mexican Constitution

But now the Mexican leaders realize that Pemex is very inefficient. Its technologies are not up to date. However, given the constitutional barriers that prevent outside investments, it is almost impossible to find good ways to involve foreign firms in the energy sector. The push to amend the Constitution comes from the knowledge that Mexico has huge untapped resources, both conventional oil and gas as well as unconventional (mostly shale) gas. Mexico’s official reserves are 115 bln barrels of oil equivalent, comparable to Kuwait. But the figure could be a lot higher.

US energy independence

It is obvious that with the active participation of major American, European and other energy companies, Mexico could start developing all these reserves. Beyond the economic benefits for Mexico, from a geo-political stand point The United States of America would have the opportunity to get a larger share of its oil imports from Mexico. Combined with increased domestic production and greater reliance on Canadian oil, the US would reach “Hemispheric Energy Independence” even sooner than expected.

And this means no more OPEC oil for America.

More gas

Furthermore, Mexico has the fourth largest shale gas deposits in the world. As soon as this gas becomes available, this would further increase world supply. As America has plenty of its own shale gas, most the Mexican gas will be turned into LNG and exported to energy starved Europe, China and Japan.

Russia and OPEC will suffer

This is why Russia and Saudi Arabia should be worried. Their only valuable resource is likely to become less valuable on account of increased global supply. Look, even in a best case scenario it will take a while for Mexico to amend the Constitution and then enact the legislation and all the necessary regulations that will eventually enable foreign energy companies to participate in the exploitation of its vast energy resources. But this is going to happen, for sure.

A new energy map

As a result, in just a few years the world energy map will look entirely different. North America will become a net exporter of shale gas. Thanks to increased domestic output and more supplies from Canada and Mexico the US will get all the oil it needs from North America. As a result, Washington will no longer be obsessed with the danger of oil supplies disruptions originating in the Middle East. Consequently the responsibility for ensuring the unhindered flow of oil through the Strait of Hormuz will shift from America to China and Japan –the major oil importers that rely on those supplies.

But, more than anything else, Russia and Saudi Arabia, countries that today make money because of high oil prices, will see their revenue flow go down and their influence diminished.




Can China Fix Its Environmental Disaster?

By Paolo von Schirach

August 11, 2013

WASHINGTON – China is indeed “The World’s Worst Polluter“, as The Economist newsmagazine put it in its cover story (August 10th-16th, 2013). The implications are bone chilling for the Chinese people who are forced to breathe foul air and who cannot drink their water. But the rest of the world will also pay a huge price, given the enormous impact of China’s massive emissions on the planet. Indeed, the earth is getting close to a tipping point. Scientists indicate that we humans should do our best to keep carbon dioxide levels below 450 part per million. Well, we are now at 400 part per million. And most of the increase is due to China’s emissions. Put it differently, unless China reverses its course, even the combined efforts of the rest of the world may be not enough to avoid climate change Armageddon.  

Growth now, at any cost

Of course, we do know what happened. Over the last 30 years China pursued relentless industrialization, with total disregard as to how it was doing it. In other words: zero environmental protection standards. The goal was growth, fast growth, whatever the cost. Environmental protection measures costs money. This would slow us down. Therefore, no protection.

China’s apologists say that, in its noble pursuit of higher standards of living for hundreds of million of poor people, China was no different from Britain, the USA or Japan: “High growth now, stricter environmental standards later”. So, what’s the big deal about China’s behavior?

Lessons of experience were ignored

This exculpation is totally disingenuous. The truth is that when older manufacturing economies in the West were pursuing higher growth, the extent of the environmental damage their industries were causing was not well understood. But, beginning in the 1960s, policy makers in America, Europe and Japan began to understand it. And they started taking remedial action, while setting new standards that industries would have to abide by. 

Therefore, given  more than 40 years of Western environmental protection studies, enactment of new policies and consequent appreciation of the actual cost of cleaning polluted soil, air and water, China’s policy-makers cannot seriously claim that they had no idea that what they were doing in the 1980s and 1990s would cause serious, in fact horrible, damage.

Because of the well documented and analyzed Western experience, they knew about pollution, its consequences, the high cost of fixing it, and therefore the importance of preventing it. But they simply did not  care. And when it comes to the scale of the damage the Chinese caused, what they have done does not even remotely compare with what Europe or Japan did in the 1960s or 1970s, simply because of size. China is an enormous country of 1.3 billion. Just to cite one factor, most of its electricity comes from dirty, coal-fired plants. In order to provide electricity to all these people, not to mention hundreds of thousands of industrial plants that fueled the export-led economy, China became the largest user of high polluting coal in the world. As a result, beyond the Chinese people, now the entire world suffers the consequences of China’s emissions. 

Serious clean up efforts?

That said, what are China’s leaders going to do? Now that pollution has become a front burner public policy issue, the Government is trying to show that is really working on it. As the cited The Economist story explains, massive clean up investments have been announced, along with new regulations, strict enforcement standards, etc.

Obviously all this new activism is as much about politics as it is about caring for the environment. The Chinese people, especially the new and better educated middle class, understand that higher standards of living are of no value when the city dwellers are forced to breathe the most polluted air on earth. At some point, China’s scattered but vocal grass-roots environmental movements may morph into organized political resistance. And this is a huge worry for the Beijing leadership.     

Powerful resistance

But, while we have literally tens of million Chinese clamoring for clean air and clean water, while worrying about contaminated food, there are equally powerful interests that will resist meaningful change. The big manufacturers, the big utilities, all the super polluters have no intention to spend fabulous sums of money to clean up their mess. And, even assuming that will be forced to do this, the Communist Party leadership understands that making environmental clean up a top investment priority at least in the short and medium terms will result in slower growth. And this awareness clearly creates another political problem. The very legitimacy of China’s  leadership rests on its ability to deliver consistent high growth. If China’s economy slows down substantially, this is likely to create discontent and disillusionment.

Unpleasant political outcomes

So, there you have it. This is a classic “damned if you do, damned if you don’t” most unenviable situation.  Whichever way you look at it, China’s growth will be less potent, while its dreadfully damaged environment will improve only a little bit, and at a very high cost.

Frankly, my hunch is that the environmental damage already caused is so huge that it is probably irreversible. At best, provided sustained efforts and fabulous amounts of money, China may be able to stabilize  a very bad situation. But the price of any improvement will be lower economic growth. And that carries negative political consequences.

Indeed, as this massive clean up effort will unfold, millions of Chinese will have reasons to complain about persistent pollution and/or the impact of permanent damage, while at the same time complaining about slower economic growth and diminished opportunities.

I really have no idea how Beijing plans to manage all this.




Cost Competitive Solar Power? Coming Soon, But Not Here Yet

By Paolo von Schirach

August 9, 2013

WASHINGTON – The FT published a big spread on solar power, (A rising power, August 9, 2013), accompanied by this intriguing subtitle: “Plunging prices are finally making solar power competitive with conventional sources of energy…” Now, if it were really so, this would be the announcement of a major breakthrough, both technological and economic. This would mean that finally a key component of the renewable energy sector can actually make it on its own, without mandates, rebates or other subsidies, that is.

Mostly subsidized

Well, reading the long article was rather disappointing. True enough, the cost of solar panels has gone down, in fact it has plummeted in the last decade –by 80% in the last five years alone. This is truly remarkable. And certainly, in specific markets where there is a lot of sun and high electricity prices, solar power is becoming a viable alternative. But while this may be the case here and there, it is not true worldwide. Most of the installed solar power in place today is there only thanks to subsidies or mandates.

In fact, the very same FT story tells us that only 0.1% of total solar installations are unsubsidized. So what happened to the headline of solar power having finally become competitive? Well, we are moving in that direction; but we are not quite there, yet.

Solar technology will improve

Look, solar technology has improved and I have confidence that it will keep getting better. Costs have come down rapidly. And soon enough we shall get to a point in which people will place inexpensive solar panels  on their roofs in order to generate their own low-cost electricity, because it is the smart thing to do. I am looking forward to this new era.

But we are not quite there yet. For the moment, amidst overcapacity, bankruptcies, industry consolidation, Chinese dumping, murky regulations, political pressures and what not, renewable energy is still not capable of making it on its own.




AARP Magazine Placed A Good Article On Bill Clinton’s Healthy Diet On Page 38 – Why Not The Cover Story?

By Paolo von Schirach

August 8, 2013

WASHINGTON – The 38 million strong AARP (formerly the American Association of Retired Persons) is often described as one of the most powerful lobbies in America. It is in fact the voice of the vast army of US pensioners. For this reason AARP is a staunch defender of the status quo when it comes to protecting existing Social Security and Medicare ( federal health insurance) programs and benefits for senior citizens.

AARP endorses services

It should also be noted that the AARP has built alliances with others who benefit from the status quo, such as companies that sell supplemental insurance that will pay for some of the medical expenses that the federally funded Medicare program will not cover. In other words, while the picture is not entirely clear, the AARP seems to have a bias in favor of keeping a system in which there is a high demand for medical services, some subsidized through federal entitlement programs, and some paid for by patients.

Preventable illnesses

That said, to place all this in context, we should also point out that the extremely high and rising cost of Medicare and of all the additional services offered to Medicare recipients, (some of them with the blessing of the AARP), is in large measure due to the extremely bad personal habits of most Americans –and that certainly includes senior citizens.

Yes, America has become an obese nation. Bad nutrition and lack of exercise are the root causes of many illnesses. And it is a fact that a huge portion of the national health care bill is due to the need to treat totally preventable chronic diseases. And that includes the cost of Medicare for seniors. Yes, it is well known and now properly documented that chronic diseases, such as type 2 diabetes, are totally preventable. Indeed, if most Americans, young and old, embraced a healthy life style in terms of diet and exercise, millions of people would not require medical attention, or at the very least they would require a lot less –and that includes the retirees that make up AARP’s membership. 

Nothing on wellness education

In this context of high but preventable health care costs, it should be noted that the AARP magazine, the main vehicle used by the association to communicate with its members, does not focus on issues of wellness education and/or advice to seniors on how to stay healthy. Knowing what we know today about the value of prevention and the importance of spreading information about “wellness” and a healthy life style this silence is rather stunning. Is this reticence due to the fact that AARP does not want to cause problems with all the service providers who benefit financially from a high demand for medical care? I do not know for sure.

An article on Bill Clinton’s vegetarian diet

Still, given this background, I found it interesting that the AARP magazine published a fairly extensive spread on former President Bill Clinton (My Lunch With Bill, August/September 2013) focusing on his post-heart surgery super healthy eating habits. The article clearly explains what motivated Bill Clinton to adopt a vegan diet. He avoids meat and fish, processed foods, cheese and dairy products because eating them caused him to develop a serious heart disease that almost killed him. Being a smart man, Clinton finally learned what any American nutritionist can tell you: a mostly vegetarian diet is a ticket to good health and a longer life. And he is a pretty good living advertisement of the benefits of healthy nutrition. Now a senior citizen, Bill Clinton looks positively great. He is lean, healthy and in almost perfect shape.

The value of a good life style

His secret? His secret is simple: lots of veggies and fruits. The article provides details on what Clinton eats every day and it includes Clinton’s advice to all Americans to follow a similar healthy eating regime. He clearly explains how healthy food equals a healthier, mostly disease free, life. Coming from a well respected, intellectually gifted former President involved in all sorts of worthy causes, I would say that Clinton’s message is both credible and pretty compelling: “America: Change your diet. Adopt good eating habits in order to stay healthy and live longer”.

And yet, while the AARP magazine editors published the piece with some relevance, they put singer Gloria Estefan on the cover of the August/September issue, and not Bill Clinton and his diet.

And why is that? Clearly making the Clinton diet the cover story would have forced millions of readers to really focus on it. Whereas, by relegating it on page 38, this story can be viewed by many readers as a “color piece” on the somewhat bizarre eating habits of an ex President with a rather nerdish reputation. “Alright, this is interesting. Well, if eating carrots and broccoli works for him, let him do it. As for me, well, pass the ribs and corn bread, if you please”.

Why so little effort to educate seniors?

The AARP magazine has an enormous reach. I praise them for publishing this story on Bill Clinton’s healthy diet. However, if they were really serious about wellness education and its transformative effects, they could do a lot more. They talk mostly to millions of senior citizens, most of them with health issues. If they really wanted to help them, they should educate them on the life changing value of healthy eating. And do consider the compounded effects of a healthier America. This would translate into a lower demand for health care services and consequently a much reduced national health care bill. In case you wonder how big that bill is, it amounts to a stunning 17.5% of GDP, well over 1/3 higher than what other rich countries pay for health. And yet Americans are unhealthy and do not live long lives.

Prisoner of the status quo?

The only reason for not educating seniors about wellness is that the AARP may be prisoner of a really cynical calculation whereby there is nothing to be gained by upsetting the status quo, including the interests of all the medical insurance providers who benefit from AARP endorsements. As for the average AARP members, let them eat poorly so that they will have to go to the doctor who will prescribe cholesterol lowering medications.

Even though it is manifestly stupid to spend money to treat a condition that could be easily prevented, the fact is that doctors and pharmaceutical companies do not make any money when people are healthy. Under the present –horribly wasteful– system some people make lots of money. 

 




The State Is Not A Competent Entrepreneur – Huge Distinction Between Awarding Grants And Running Companies

By Paolo von Schirach

August 5, 2013

WASHINGTON – “The state is the real engine of innovation“. Under this strange FT headline (August 5, 2013) we read a review by economics commentator Martin Wolf extolling the brilliance of a book by Sussex University economist Marianna Mazzucato titled “The Entrepreneurial State“. Wolf tells us that, while it might sound preposterous, it is in fact true that public –as opposed to private–  investments are at the foundation of major technological revolutions that have transformed our world. Think of jet engines, teflon, the internet, and so on.

The critical role of the state in funding R&D

Indeed, contrary to what free market capitalism dogma would like you to believe, the state does good things. In fact, the state performs a role that the private sector would routinely shun: investing in open-ended basic science projects that do not have a compelling economic rationale.

Fine. This is all true. We know that most of the electronics and IT discoveries were made through the aid of government grants. And, yes, there was and there still is an irreplaceable role for open-ended basic R&D that is not tied to a marketable product that will bring in a cash return for the investors.

Entrepreneurial State?

But, while Martin Wolf  does not say so, some readers may inadvertently confuse the quite separate roles of grant making and running an enterprise. I have not  read the book. However, the title “The Entrepreneurial State” conveys the notion of enterprises run by public bodies. I believe that it is important to draw a sharp distinction between “funding” and “managing”. Funding research is one thing. Running an enterprise quite another.

Washington is not running GM

In the US experience, the Federal Government played and still plays a critical role in funding R&D. But Washington, with very few and limited exceptions, has no record in running anything. Even in the most extraordinary case of the recent, (and truly gigantic), General Motors bail out, while providing the massive liquidity injection that saved GM, Washington  did  not send Department of Commerce and Transportation bureaucrats to run the company. It left management in the hands of professionals.

The Soviet Union should have been a real leader

More broadly, think of this. If the state were a natural entrepreneur, then the Soviet Union should have been the most successful economy. During Communism the state run everything, from car factories to barber shops. And surely the Soviet Government ability to direct scarce resources into mostly military R&D was in some measure quite successful. Russia did build impressive tanks, jet fighters and ICBMs.

But, overall, despite its technological successes the state proved to be a lousy entrepreneur and a horrible manager. In the end, the whole country collapsed under the weight of colossal inefficiencies.

And even in mixed Western economies, like France or Italy, on balance the state proved to be a mediocre to bad entrepreneur. Otherwise, exploiting the advantages of abundant state funding for R&D, all state-run conglomerates should be world-class sector leaders. 

Awarding Grants and Enterprise: not the same

I fully agree with Wolf that it is important to debunk the ideologically biased and false notion whereby the state is by definition  incompetent, and therefore it should stay out of any and all economic activities. We know that the state did and still does perform an invaluable function by funding research in areas that the private sector would not touch.

But there is a huge distinction between awarding grants and being an entrepreneur.




Detroit’s Bankruptcy Is About Unaffordable Pension Obligations

By Paolo von Schirach

July 22, 2013

WASHINGTON – The convenient narrative about the Detroit bankruptcy is that the city is the main (and quite innocent) victim of the auto sector crisis. As GM and Chrysler went under, Detroit was sunk by the gigantic downdraft created by this epic collapse. Convenient story. Except that it is mostly untrue. In fact, the auto sector (however diminished) is back, while Detroit got worse. Of course Detroit was going to feel the negative impact of the auto sector crisis. But the real truth is that Detroit is the victim of the ill effects of racial and social conflicts coupled with decades of poor administration.

The 1967 Detroit riots

Detroit’s problems started after the gigantic 1967 riots, among the worst in US history. Sparked by police action that seemed unwarranted, Detroit’s Blacks went on a rampage that lasted five long days. There was so much violence that Governor George W. Romney (Mitt  Romney’s father) called the National Guard and President Johnson sent in the US Army. A curfew was ordered. At the end, there were 43 dead, 1189 injured, 7, 200 arrests and 2,000 building destroyed.

Seeing all that destruction, Whites felt unsafe and started leaving the city, this way causing a progressive shrinking of its tax base. How did the municipality cope? Poorly. Over many years, the city administration, caught between a shrinking revenue base and mounting pension obligations, quite foolishly decided not to renegotiate pensions, going instead for more tax hikes in order make ends meet.  

Making it worse

Well, not surprisingly, higher taxes going to pay for outstanding pension obligations, as opposed to funding new city projects, encouraged even more people to leave the city, therefore making the lack of revenue problem worse, year after year. Short of cash, Detroit did what other cities did and do: it issued bonds. Investors believed that those high interest bonds would be “safe”, because it seemed unthinkable to anybody that one of America’s largest cities, even though in bad shape, would be allowed to go belly up.

High pension costs, no money to pay for them

And this is Detroit’s story: Too many costly obligations towards large number of retirees, high taxes but not enough revenue, (after having lost most of the tax base due to tax hikes), and growing debt issued for the sole purpose of paying for pensions.

The only way to rebalance the fiscal outlook would have been a combination of renegotiated (meaning lower) pension benefits and measures aimed at encouraging economic growth and thus a larger and healthier revenue base. But the city did neither. The pension agreements stayed, while taxed remained too high to encourage new business. And so, year after year, things got a bit worse.

Bankruptcy

And now, here we are: bankruptcy. This is of course a tragedy for all those who trusted the word of city administrators. And this includes retirees who will see cuts in benefits and bond holders who will not see their money back.

That said, as painful as this is, it is welcome news that Detroit is not “too big to fail“. Detroit failed because it had unwisely created massive obligations, (due to the political deals between public services unions and public officials), that it could not meet. Its attempts to raise more revenue while city services were deteriorating made matters worse. It lost its tax base, while it created an army of (now) angry bondholders.

Other cities headed the same way

The cautionary tale in all this is that Detroit is only the tip of the iceberg. Many other large US municipalities, (like Chicago), are headed exactly in the same direction: too many unfunded liabilities to retirees. Trying to make up the difference through a combination of higher taxes and more borrowing is both suicidal and not enough, as Detroit’s story demonstrated. Tax payers will vote with their feet. They will simply move somewhere else in order ta avoid paying higher taxes.

Just like Greece

Ultimately, Detroit’s problems are not that different from Greece’s problems: too much spending on over generous social programs, without a growing economy that will generate the necessary revenue. While this bankruptcy is a mess, it is a good thing that Detroit is not “too big to fail”. Numbers should mean something, and when something is unsustainable it is wise to put an end to it. In the case of Greece, for the moment numbers do not count. Greece’s future is about political calculations on the part of its EU partners willing to keep the bail out going, despite all. Indeed, notwithstanding its stubborn inability to embrace serious reforms, Greece’s EU partners decided to support this virtually bankrupt country. This would be the equivalent of Detroit, whatever its financial outlook, seeking and getting more credit. 

US Federal Government has the same problem

Long term the US Federal Government faces a similar scenario. Even though the short term fiscal picture, thanks to the impact of the dreaded “sequester” has improved somewhat, long term America is faced with growing debt. And why? Yes, you guessed it, it is mostly about social spending obligations (mostly health care to seniors) completely out of line with Federal revenue. For the time being, the world is eager to lend money to Uncle Sam, trusting America’s creditworthiness. But what if global credit markets stop believing that America will pay back? As a minimum they will demand higher interest rates, this way making the fiscal outlook a lot worse.

Of course, Detroit is much, much smaller than the entire United States. And yet, until recently all creditors were comforted by the notion that such a large city would never go into bankruptcy.