Economic Policy – Page 32 – The Wrongologist

October 30, 2014

What’s Wrong Today:

This year, Republicans did not put up a challenger in 37 House races, while Democrats did not field candidates in 32 districts, according to the Cook Political Report. Another 8 House districts will see no contest between the main parties, because of the “top two” primary system used in California and Washington state. These 77 single-party House races are a high number by recent standards. In 2012, there were 45 of them.

In today’s Democratic Party, challengers seldom see a primary attack from their left, while Republican incumbents often fear attacks from the right. The Economist quotes Rep. Mike Capuano (D-MA) who is running unopposed: (brackets by the Wrongologist)

In politics, Republicans are like dogs, working as a pack [while] Democrats are the cats.

Few races for the House are closely fought. Roughly 80% of the 435 members have little or fear on election day. Given the very high costs of getting elected, there are fewer opposition candidates in historically safe House districts.

Turning to the Senate, in July 2014, 42 Senators (41 GOP and 1 Dem) succeeded in killing Bill S2569, which would have repealed the corporate tax break for shipping American jobs overseas (you need 60 votes to overturn a Filibuster). And on Nov 4th, Kentucky Sen. Mitch McConnell (R) and all the other Senators (running in this cycle) who voted against the Bill will be re-elected.

DC insiders think that this is a feature, not a bug. Would voters tolerate a Congress with hundreds of uncontested seats?

Thursday linkage:

If they show you a chart, apparently, you will believe whatever they are saying.

Independents favor Republicans by 20 points: Republicans have discovered that a sufficiently united party can obstruct everything and anything, but largely escape blame for the resulting gridlock.

The most politically engaged states: This study shows the most engaged states had a more highly educated population, higher per capita economic output and fairer tax systems. Massachusetts and Colorado were #1 & #2. West Virginia was #50.

The US is developing better relations with Iran: If permanent, the shift could drastically alter the balance of power in the region. If the nuclear issue is resolved, this could be Obama’s greatest legacy. But, it risks alienating key US allies, like Israel, Saudi Arabia and United Arab Emirates.

Dubai police to use Google Glass with facial recognition to ID bad guys: Well, last year Dubai announced it would supply its police with $400,000 Lamborghini’s for use at major tourist sites. Cool cars and stupid glasses.

Some of Bach’s masterpieces were composed by his wife: A documentary film, “Written by Mrs. Bach” makes a case that Anna Magdalena Bach actually composed some of works attributed to her husband, Johann Sebastian Bach. And she had to cook and clean.

Home ownership rate in the US fell to the lowest rate in more than 19 years: Entry-level buyers have been held back by stringent mortgage standards and slow wage growth. The share of first-time buyers was 29% in September for the third straight month, compared with about 40% historically.

Who is watching the World Series? Apparently, fewer of us than ever: The last time the World Series averaged more than 20 million viewers was in 2004 when the Boston Red Sox defeated the St. Louis Cardinals to take their first title since 1918.

Your Thursday Music Break:

The Big Picture – An Editorial

“To conquer fear is the beginning of wisdom” – Bertrand Russell

Today, we are going to take a short course in The Big Picture. For starters, here is a quote from Digby:

…we are a primitive country. We’ve got idiots on TV screaming about a religion of 1.6 billion people being the toxic cause of violence even as our All American, non-religious school-kids are taking the deadly weapons their parents give them as presents to shoot their schoolmates and themselves. And we have the most sophisticated city on earth acting like a bunch of authoritarian creeps toward people who are doing serious work to stop the spread of an outbreak of a deadly disease — for PR purposes.

Since the Great Recession in 2008-9, we have seen the Federal Reserve move the economy slowly forward while leaving most people behind. Yet, few complain about growing income inequality. People know it and feel it, but don’t vote, or try to do anything else to change things.

• Why doesn’t income inequality upset the average American?
• Why are we more aware of how plastic surgery has changed the looks of an actress than we are about Gen. John Allen’s crazy ideas about winning the war against ISIS?
• How can more Americans be afraid of contracting Ebola than being killed in a car wreck?

What are we afraid will happen if we really dig deeply into an idea or a strategy that is proposed as a “solution” for some problem or other? Why can’t we resist re-tweeting some piece of snark that is the short version of something we believe, or thought we believed?

One visible trend is our increasing distrust of public institutions. We have seen how government, corporations, “charitable” organizations, media, and law-enforcement and the Justice system, all seem to exist for the benefit of those who manage them and not for the public.

This capturing of our institutions is a scary thing, but it is true everywhere in America. You might think that realizing this would spur interest in reform, but in fact, it has just increased our denial. People say in spite of it all, we’ll just soldier on as best as we can, making sure that we and our kids learn to navigate this rigged system.

This is why there is very little interest in politics by young voters.

Another trend is that America’s young know there is no possibility for real growth in personal income. They know that there are policies to promote and stimulate the economy, policies that might work. But, they have no faith in the ability of public officials to implement such policies, so they hang back, hoping somebody comes forward with a better answer. This, from the most connected, most media-savvy, most sophisticated generation in our history.

Voters show no interest in the 2014 mid-term elections. The media asks the same questions of the same Sabbath pundits each week: “Who will win the Senate?” But people don’t care. They watch the media whip up class warfare, cultural warfare and real warfare together into a big stew of propaganda that becomes mind-numbing. So they Facebook, and Tweet.

Most people are both stuck and scared–wanting things to change, but not knowing how. People might get upset, but big change requires commitment and action, and it is hard to get Millennials to change their minds, or to do much.

Political activism succeeds with a clear vision and a solid game plan. Neither Democrats nor Republicans have a list of good ideas about what will work to move us forward. It is possible to attribute political apathy to this lack of ideas, but the destruction of public trust in government is also a big problem.

Changing the future requires getting hold of the levers of government and then using them to do good. That is much more difficult when people don’t vote, and have no faith in their government. Trust in an institution takes a long time to build, but not to destroy. The first step is to take back our captured government.

A basic principle of martial arts is that you use your opponent’s strengths against them. In typical political contests, both sides work to out-raise and out-spend the other. And third parties try to get in the game using the same strategies as the legacy parties.

Today, each candidate is challenging the other’s strength using their own similar strength: It becomes a Sumo-style shoving match.

Conventional wisdom says that it’s expensive to run a campaign (even for local elections, much less national) and so everyone starts their campaign with a fundraising strategy and continues it incessantly even after Election Day. Conventional wisdom says you win with a charismatic candidate, so each party tries to find the best actor they can come up with. Conventional wisdom says candidates should “triangulate” their political views so that they are neither left nor right, just as Democrats are trying to do without success, in Red States this fall.

Instead, insurgent campaigns could be run on social media and the Internet, on as little money as possible—crowdsourcing both dollars and ideas from supporters. They should build constituencies for ideas and for a common future. They should select candidates who can tell the story of a united, desirable future, not some Ken or Barbie cypher for the moneyed interests who run our politics today.

The Big Picture is that we react more strongly to fear than to rationality. We used to fear Hitler. We feared the Communists. We feared al-Qaeda. We fear ISIS. We fear Ebola. We fear for our kids walking to school. We fear that America will let too many brown people across our borders. But we don’t fear climate change, or obesity, or a Congress that can’t enact an agenda to move the country forward.

There should be no mystery about how much corporate power and money drives the culture of fear. Think of it as a 4-step program:

1. Mass media hammers on events that builds general concern and possibly, panic from a few isolated incidents
2. Anecdotal evidence takes the place of hard scientific proof
3. Experts that the media trots out to make comments really don’t have the credentials to be considered experts
4. Entire categories of people (Muslims, West Africans) are labeled as “innately dangerous”

Can a cohesive group with a better way of dealing with the rest of us, gain traction in today’s connected world? Can they help America conquer the long laundry list of fears that constrict and in some cases, stop us from acting on much of anything?

It would take brains, ideas, commitment and energy.

Where are the leaders who have those qualities? How can we support them?

Sunday Cartoon Blogging – October 26, 2014

It’s that time of year, scary monsters in your email and on your TV. That means it’s the mad combo of the election season and Halloween. Be very afraid.

Some celebrate Halloween all year:

Fear is in the air around Halloween:

Really, Fox? Ben Bradlee must be turning over in his grave:

The reason Democrats will lose the Senate, Part I:

The reason Democrats will lose the Senate, Part II:

The House of Fear is open 24 hours a day:

Retail Store Closings Reflect Middle Class Income

Today, we take a business trip!

The retail sector of the US economy is not doing so well. The Census Bureau tracks retail sales in the US, and sales decreased 0.30% in September, compared to the previous month. Retail Sales month over month in the US gained an average of 0.37% from 1992 until 2014, reaching an all-time high of 6.71% in October of 2001.

This week, NCR, the maker of point-of-sale devices for the retail industry who call themselves “the global leader in consumer transaction technologies”, announced disappointing third quarter results. NCR blamed particularly the “challenging retail market” for its debacle. CEO Bill Nuti explained it this way:

Market conditions within the retail industry worsened in the third quarter, as evidenced by weak same store sales comparisons and financial results. This resulted in our retail customers spending more cautiously than anticipated and further delaying solution roll-outs…Additionally, ongoing retail consolidation continues to be a factor impacting our performance.

NCR has noticed that brick-and-mortar retailers are cutting back. “Ongoing retail consolidation,” Nuti called it. And some, like Radio Shack, are likely to use bankruptcy courts to do it. The structural problems in the brick-and-mortar retail industry include Sears, which is closing 300 Sears stores and 80 Kmart stores.

Some of us wonder why anyone still buys there. Retail chains, large and small, have announced an epidemic of store closings in 2014. Here are the “Top 20? announcements of store closings. For these 20 chains, the total number of stores to be closed exceeds 4,200. The number of closed stores is the first column:

Store closings add up: Jobs are lost, consumer spending weakens, and fewer tax revenues are paid to states and the federal government. This process has been going on for years. As a side note: when all this washes out, who is going to fill the vacant retail space in our malls? That’s one of the many secondary effects of the troubles in the American retail industry.

Hopefully, you haven’t invested in those Shopping Center Trusts.

Source: Wolf Richter

Yet, some box store retail continues to grow. Starbucks is opening another 1400 stores in the US by 2017, a 13% growth rate. They prove there is a market for things that can’t be ordered and delivered hot over the Internet. But, the openings of new retail locations for 2014 will not offset the closures. Much of domestic retail expansion in 2014 is about discount stores. Between Dollar General, Family Dollar and Dollar Tree, more than 1400 new discount stores will be opening, using the original Walmart expansion strategy. At the same time, Walmart is abandoning its own strategy. The New York Times reports that: (brackets by the Wrongologist)

Walmart’s woes [are causing] a change in corporate strategy. Walmart will slow store openings in the United States next year, opening 60 to 70 supercenters, compared with 120 this year…The Company is shifting its focus toward smaller Neighborhood Market grocery stores, and it said it would open 180 to 200 of them next year. It is also accelerating its online offerings…

Auto sales (mostly at retail box stores) have been booming, Reuters reports that: (brackets by the Wrongologist)

The annualized sales rate slowed to 16.4 million [units]…above last year’s 15.4 million, but well below the 17.5 million [annualized] pace in August.

This performance was partly due to cheap money, long financing terms, and a focus on subprime customers. Jim Lentz, US chief executive at Toyota Motor Corp:

We are seeing more ‘subprime,’ which is good.

In one report, a 71 year old Queens NY woman on food stamps got a $16,000 loan on a used car:

After two test drives and about two hours, the dealership found her a loan: $16,000 financing for a used 2014 Ford Fiesta. There would be a bank fee of about $4,000, and she would have an interest rate of 20.23%

Subprime, indeed. As for the role of consumer spending in our economy, American consumers are stressed. Many have had to curtail their spending, or make up the difference with borrowed money. Closing retail stores may be the canary in a coal mine for our consumer economy. For some business owners, considering some retail store analytics might provide insight into how to keep their stores open.

The best measure of economic security is ownership of wealth. Yet, using Median Wealth as a yardstick, the middle class in the US ranks only 27th in the world. Here is how we rank against two of our allies:

#27 USA: $44,911 ? hardly enough to pay for an operation in a US hospital
#1 Australia: $219205
#6 United Kingdom: $111,524

Global wealth has reached a new all-time high of $241 trillion, up 4.9% since last year and 68% since 2003, with the USA accounting for 72% of the latest increase.

Perhaps the solution in the US is to not to tax based only on income, but to tax based on income and assets. If you own or control 80 to 90% of the assets of this country, and the country’s resources are securing, maintaining, and protecting your assets, it stands to reason that you should also be bearing the majority of the tax burden of the country.

Ebola: Oh My God, We’re All Gonna Die!

Why is it that so many pundits feel the need to tweet/talk/bloviate in a way that sounds like they’re proven right when there is a new case of Ebola? Why did Bill O’Reilly feel the need to say that he knows better than the head of the Centers for Disease Control and Prevention about how to keep Americans safe from the Ebola virus? The greatest cost of our rampant corporatism may be the continued chipping away at our trust in public institutions.

Even though spreading panic is great politics, if we need to reevaluate our protocols for healthcare workers caring for patients with Ebola, fine, but if you live in another state from the person infected in Dallas, you’re gonna be ok.

Let’s remember that Thomas Duncan, the sole Ebola fatality in the US, spent 3 days at home with a fever of 103. He was infectious for the 3 days he was at home with the illness, and he could have infected someone else in the household, but he did not. Apparently, his family took great care not to be exposed, and they seem to be on the verge of succeeding, since the incubation period is up to 21 days. Duncan showed symptoms on Sept. 24th. If we count from then, the family still have a day or two before they are out of the woods. If we count from Sept. 28th, when he was vomiting and went to the hospital for the 2nd time, they would be safe on Saturday.

Most of the Americans flown to the US with Ebola were healthcare workers. The person who died from the disease in Spain was a healthcare worker. Many who get it in Africa are caregivers or healthcare workers. So, again, this indicates an ongoing risk for those who care for patients with Ebola, but the average American’s risk for catching the disease is still near zero.

That said, this report in Scientific American by Judy Stone, MD and infectious disease specialist, speaks to the problems with both process and culture in hospitals:

One hospital I am familiar with has Powered Air Purifying respirators (PAPRs), purchased with bioterrorism preparedness grants, but neither stethoscopes nor other dedicated equipment for isolation rooms. So nurses and docs gown up to go in the room of a patient with a “superbug” but take their stethoscopes into the room and then on to other patients, perhaps remembering to wipe it down first.

This New York Times blog post & graphic on the procedures for healthcare workers caring for people with Ebola echoes Dr. Stone’s discussion and shows how hard it is to be careful.

Here is a chart by Dr. Stone on of our expense for Public Health Preparedness spending since 2001:

This shows that funding for preparedness efforts have fallen by a cumulative total of $2.4 billion since the high point in 2006. The chart shows that the deepest cuts came in GW Bush’s second term. Since then, substantially more has been cut from the programs. Starve a program designed to educate and isolate a deadly outbreak among public health professionals and then blame the government when something goes wrong. Thanks Mr. O’Reilly.

Politics, as usual, is the fly in our soup. Unfortunately, next month Americans again go to the polls and at least half of them will vote for the very people who are doing everything in their power to eliminate public health care.

Isn’t it strange that public health policy is being decided based on economic beliefs about free trade and travel rather than mathematics and science? We in the West offered no assistance to immediately help control the initial Ebola outbreak in Africa. We said, let it burn itself out, like it has done before.

But, the New York Times reports that the new head of the World Bank, Dr. Jim Yong Kim, was among the first to see the need to move quickly against the Ebola threat. He committed $400 million to fight Ebola, and $105 million has already been disbursed. In September, he said to Dr. Margaret Chan, the head of the World Health Organization:

You have the authority to act in this emergency…so why aren’t you doing it?

Now, in October, she seems to be finally on the case.

Here at home, Republicans are vying with each other to shame the Obama administration into implementing a travel ban against Ebola-affected countries. That wouldn’t be an unreasonable suggestion if it could stop the spread of the disease. But it won’t. Here’s why:
• There is a de facto private ban already in place, since US-based airlines stopped flying to Ebola-afflicted countries two months ago (to protect their crew and passengers from exposure — and themselves from lawsuits).
• Delta and United offer direct, nonstop service between the US and West Africa—Delta to Lagos, Accra, and Dakar, and United only to Lagos.
• No travel ban or quarantine will seal a country completely. Models predict that even if travel could be reduced by 80%, new transmissions would be delayed only by a few weeks.

And health-care workers who become ill would not be able to get out for treatment, and the international health personnel needed to quell the outbreak would no longer be able to get in.

Despite the fear-mongering, we know what needs to be done. We have organized the deployment of 3,000 troops and have begun marshaling a wider international response that is tragically slow. With the announcement of the Dallas case, hospitals across the country are now scrambling to get their procedures up to snuff.

We need to have the boots in Africa to help manage the probable local panic as well. It is a linear investment by the US that could have an exponential payback.

Friday Music Break – October 10, 2014

Today, we review the song “Sixteen Tons”. Here is the chorus:

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store

The song is about economic exploitation of coal miners. Depending on your view of history, the song was written by Merle Travis in 1946, or George Davis in the 1930’s as “9 to 10 Tons”. Of course, older readers know of the 1956 Tennessee Ernie Ford version of the song. It sold 20 million copies as a single!

Part of the exploitation was that miners were paid in scrip, not in cash. Scrip is non-transferable credit vouchers which could be exchanged only for goods sold at the company store. Workers also lived in company-owned dormitories or houses, the rent for which was automatically deducted from their pay. This had the feature of lowering the costs of labor for the mining companies, while making it impossible for workers to accumulate any cash savings. In the US, the associated debt bondage persisted until after the 1914 Ludlow Massacre.

The Massacre was the result of a strike against the Colorado Fuel & Iron Company, owned by John D. Rockefeller, Jr., the Rocky Mountain Fuel Company, and the Victor-American Fuel Company. The strike resulted in the violent deaths of at least 19 people.

Howard Zinn in The Politics of History described the Ludlow Massacre as:

The culminating act of perhaps the most violent struggle between corporate power and laboring men in American history

The Ludlow Massacre quickly evolved into a national rallying cry for labor unions and eventually helped lead to New Deal labor reforms. But over the years, the tragedy in Ludlow Colorado has been largely forgotten.

Here is the Wrongologist’s favorite version of the song by Jeff Beck and ZZ Top’s Billy Gibbons, who toured together this year. They are supported by Tai Wilkenfeld on bass:

Note that the performance ends at 3:49.

Now, please ask yourself how much you are worth. Then look around you and realize that you are also a part of the most underpaid workforce since the days of the company store.

If politics is about power, then the powerful will always have the advantage. There will be an endless loop of the more powerful crushing the less powerful, with any change in the balance of power simply a random fluke, like what happened after Ludlow catalyzed the United Mine Workers.

If politics can be about policy, then power will not have an insurmountable advantage, and progress can happen again.

Stock Buybacks: Who Benefits?

Bloomberg reported this week that companies in the S&P 500 are poised to spend $914 billion on share buybacks and dividends this year, or about 95% of their corporate earnings. Data compiled by Bloomberg and S&P Dow Jones Indices show that money returned to stock owners exceeded profits in the first quarter and may again in the third quarter of 2014.

The proportion of cash flow used for stock repurchases has almost doubled over the last decade while it’s slipped for capital investments. So, who is benefiting? From Bloomberg: (emphasis by the Wrongologist)

Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300% since March 2009. Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start plowing money into their businesses.

The S&P 500 Buyback Index (yes that is a thing) is up 7.5% percent this year through October, compared with the 6.5% advance in the S&P 500. It did better in the past, beating it by an average of 9.5% since 2009. Excluding the two years in which we had a recession (2001 and 2008), dividends and stock buybacks have represented 85% of corporate earnings since 1998. So, there has been little reinvestment in the business going on. Stock repurchases have helped buoy the bull market since 2009 by about $2 trillion.

Consider that corporate revenues have had an average growth rate of 2.6% per quarter in the past two years, while per-share earnings grew at 6.1%, more than twice as fast, says Bloomberg. Since earnings per share (EPS) is the ratio of the total earnings divided by the number of shares outstanding, you can either increase the numerator or decrease the denominator in order to grow EPS.

Corporate America has decided it is easier to reduce shares rather than to grow earnings.

This translates into bad long-term corporate strategy. During the same period, the portion of earnings used for capital spending has fallen to about 40% from more than 50%. This use of cash to fund buybacks has left US-based companies with the oldest plants and equipment in almost 60 years. Bloomberg says that the average age of fixed assets reached 22 years in 2013, the highest level since 1956, according to annual data compiled by the Commerce Department.

Today, shareholders are the most mobile of corporate stakeholders. The days of “buy and hold” investing are over; it is now just for the smallest of investors. For example, high frequency trading (HFT) represents 70+% of trading by volume. The HFT “investors” often hold share ownership for fractions of a second. The HFT firms are in bed with professional fund managers who own large chunks of equity in public companies. Together, these shareholders ONLY want corporate strategies that maximize short-term profits and increasing dividends. Coupled with the growing trend of limited, or little, voting rights for stock ownership by the public, professional managers have a free hand to get wealthy without responsibility for longer term corporate performance. This plays into the hands of CEOs and other C-level managers who derive most of their compensation from increasing value of stock. Equilar, an Executive Compensation firm, reports that about 63% of S&P CEO compensation is in the form of stock.

This is not managing a business, it is liquidating a business. While it may be in the individual executive’s short-term interest (company stock appreciation and bonuses) ultimately, it will kill the US economy. Look for more complaints about the American workers when they are unable to compete, using worn out, or obsolete equipment.

We need different ideas to inform our effort to steer the ship of state to higher GDP growth and full employment. How about tying executive performance to adequate return targets for all STAKEHOLDERS rather than to a maximized return to shareholders who no longer buy and hold shares?

You can only go so far with financial engineering before you actually have to improve your business with real revenue and profit growth. Companies have done about all that they can in terms of maximizing the ability to do these buybacks.

What would be wrong with trying some new ideas?

Meds Are Too Damn High

On Sunday, 60 Minutes ran a segment about the high cost of drug therapies. They exposed the rip-off prices Big Pharma charges for certain Cancer drugs. Moreover, the clear message was that if you have a life-threatening disease, it is likely that some drug company has come up with a treatment that may extend your life, at a price. How much would you pay for another year of life? In 2012, of the 12 cancer drugs approved by the FDA, 11 cost over $100,000 per year.

Who wouldn’t pay that (if they could) in order to stay alive? 60 Minutes quoted Dr. Leonard Saltz, chief of gastrointestinal oncology at Memorial Sloan Kettering:

And remember that many of these drugs, most of them, don’t replace everything else. They get added to it. And if you figure one drug costs $120,000 and the next drug’s not going to cost less, you’re at a quarter-million dollars in drug costs just to get started.

The big lie told to the American people is that these high prices are necessary for innovation. 60 Minutes asked John Castellani, the CEO of the industry’s lobbying group, PhRMA, to explain why drug prices have to be so high:

The drug companies have to put a price on a medicine that reflects the cost of developing them, which is very expensive and takes a long period of time, and the value that it can provide.

This is, of course, BS. You never buy anything because it costs more to develop. You wouldn’t pay more for a car because GM wasted extra money in R&D without results. You buy the car because the car is safer in a collision.

The same with drugs: we should pay what they’re worth, not what it cost to develop them, particularly if you knew about your options, or were able to negotiate, like you can at the car dealership. The neoliberal meme at work is that profits motivate someone to invent. Perhaps Big Pharma just forgets about Dr. Jonas Salk, who gave his polio vaccine to the public free of charge, demonstrating the big lie spoken by the Big Pharma lobbyist.

Of course sociopathic entities, (that would be our beloved Corporations, who are people now) do not grasp altruism and empathy.

The Food and Drug Administration (FDA) approves drugs if they are shown to be “safe and effective”, but does not consider what the relative costs might be once the new medicine is marketed. From Bloomberg:

By law, Medicare must cover every cancer drug the FDA approves. (A 2003 law, moreover, mandates payment at the price the manufacturers charge, plus a 6% cushion) In most states private insurers are held to this same standard. Physician guideline-setting organizations likewise focus on whether or not a treatment is effective, and rarely factor in cost in their determinations.

The reality is that the drug companies are taking advantage of the current US law (that they lobbied for) to price their Cancer drugs.

Are these prices a rip-off? Prices for some of these drugs have increased the longer they are available, even though there is no increased research, no additional expenses in order to produce the drug. For example, Bloomberg notes that Gleevec, from Novartis, possibly the greatest cancer drug ever invented, cost $24,000 a year when it was introduced in 2001; now it costs $90,000 per year, nearly quadrupling in price. The typical new Cancer drug coming on the market a decade ago cost about $4,500 per month (in 2012 dollars); since 2010, the median price has been around $10,000. Two of the newest Cancer drugs cost more than $35,000 each per month of treatment.

A final quote from Bloomberg: (Emphasis by the Wrongologist)

While generic drugs… now make up 86% of all medicines used in the US, that hasn’t reduced total spending on prescription drugs. In 2012, Americans spent $263 billion, or 11% more than the $236 billion in 2007, according to government data.

Fifty million people went without needed prescriptions in 2012 because they couldn’t afford them. It’s high time something is done about this.

A possible solution is to change the law so that Medicare negotiates volume discounts with the pharmaceutical companies, adding a fixed markup over costs, including R&D, plus the cost to produce and market the drug, and then adding a “fair profit” say, 20%.

By multiplying the number of probable drug users, the dose frequency, term of the prescription and the length of an exclusivity period, we could determine the cost/dose required to achieve that return. Parenthetically, the government should directly fund antibiotic research and also control the price of those drugs to give the company a fair fixed profit (at a lower return than if the R&D had been paid by the companies).

The drug industry needs to think about how it can limit Cancer and other drug costs, and how to price affordably — before someone decides to do the thinking for them.

Is Secession From the USA a Possibility?

According to a Reuters/Ipsos poll released on Sept. 19th, 23.9% of Americans polled from Aug. 23 through Sept. 16 said they strongly supported or tended to support the idea of their state breaking away from the country. The poll had 8,952 respondents. About 53% of them strongly opposed or tended to oppose secession, slightly less than the percentage that kept Scotland in the UK.

The exact wording of the question asked was: “Do you support or oppose the idea of your state peacefully withdrawing from the United States of America and the federal government?”

The LA Times reported the results by region:

You can see the interactive results here. They can be filtered by age, region, income, party affiliation, etc. Any way you slice it, the data are startlingly clear: Almost a quarter of those surveyed said they were strongly or provisionally inclined to leave the US, and take their states with them. Given the size of the polling sample, the online survey’s credibility interval (digital for “margin of error”) was only 1.2%, so the poll seems to be an accurate representation of where the country stands.

Politically, conservatives and Republicans seem to like the idea of leaving more than Democrats. Among people who said they identified with the Tea Party, supporters of secession were in the majority, with 53%.

Secession got more support from Republicans than Democrats, more from right-than left-leaning independents, more from younger than older people, more from lower- than higher-income brackets, more from high school than college grads. In general, men were slightly more predisposed to secession than women. Those making $25,000 a year were 11 points more favorably disposed to rebellion than those making more than $150,000 a year. But there was a marginally higher level of support in every group, especially the Rocky Mountain States, the Southwest and the old Confederacy.

Fifty years ago, most Americans would have laughed at the idea of any state or region seceding, calling it the talk of a radical or a crackpot out of touch with reality. But, with Americans becoming increasingly frustrated by the protracted economic recovery, and by big government, they seem to be expressing an interest in returning to smaller jurisdictions. In the last year or so, we’ve seen:
• Actual secession votes in California and Colorado
• More than 125,700 Texans signed a secession petition
• Secession petitions were circulated in Maryland, Arizona, and Michigan
• Wisconsin Republicans came close to voting on a secession plan this spring

Had the poll first presented lists of “This is what you will no longer have from the Feds, and have to get along without, or pay for them yourself”, the vote might have been different. Consider, for example: the FAA, all those little City, County, State “Grants”, Court Systems, Law/Medical, and various Copyright, Food inspections, education grants/research etc. Who will pay for these things?

As in Scotland, the vote might have been different if the estimated increase in taxes and other payments to fund secession were included in the discussion.

For example, earlier this year the personal finance website WalletHub.com conducted a study of the amounts individual states are paying in federal taxes compared to the amounts they are receiving. WalletHub analyzed data from the IRS, the US Census Bureau, the US Commerce Department and the Bureau of Labor Statistics.

As it turns out, it is red states that are overwhelmingly the Welfare Queen States, with Mississippi scoring the first (worst) position with 45.8% of its funding coming from the federal government. Yes, that’s right. Red States — the ones governed by folks who think government is too big and spending needs to be cut — take in more federal spending than they pay out in federal taxes.

They talk a good game, but are sticking the Blue States with the bill. WalletHub’s research demonstrates that, as a rule, the states that are the most likely to rail against “big government” are the most likely to be benefiting from it.

Secession is not illegal, unilateral secession is. A state can secede with the approval of the Federal Government by means of Constitutional amendment. A state that wants to secede legally and peacefully has to convince not only their own population but the rest of the country as well.

Think about Arizona seceding. It would be surrounded by the country it had just left and the country it seemingly hates most (Mexico) with little hope of defending itself, educating itself or paying its own way. Plus, a large number of their citizens are on Social Security and Medicare from (gasp) the United States of America. Decidedly not smart.

The question is, what do these results mean for the country?

The US hardly seems on the verge of a successful secession movement. But the poll results scale up to represent 60 million unhappy people in America, who are willing to consider secession.

This should scream out to our leaders that we are susceptible to the sophistry of a demagogue, or to a serious political reform movement.

The Coming Maker Economy

Ever hear of the Maker Movement? It is a loosely affiliated group of several hundred thousand people around the world who are starting their own small businesses dedicated to creating and selling self-made products.

It has the potential to be formidable economic force that might change much about how we produce and consume goods.

The Wrongologist first learned of the Maker Movement while preparing for his trip to Shenzhen, China last spring. Shenzhen is where the iPhone and iPad, and half of the world’s mobile phones are manufactured. It is also a huge hub of people who build, design, modify, hack, invent, or simply make something newer, cheaper, better and/or smaller than it can be made in large corporate or university contexts.

Maker culture emphasizes learning-through-doing in a social environment, rather than formal education as the most important part of skills development. This is very true in Shenzhen today.

Joi Ito, head of the MIT Media Lab, also visited Shenzhen earlier this year. He reports: (emphasis and brackets by the Wrongologist)

What we experienced was an entire ecosystem. From the bespoke little shop making 50 blinking computer controlled burning man badges to the guy rebuilding a phone while eating a Big Mac, to the clean room with robots scurrying around delivering parts to rows and rows of SMTs [Surface Mount Technology machines] - the low cost of labor was the driving force to pull most of the world’s sophisticated manufacturing here, but it was the ecosystem that developed the network of factories and the tradecraft that allows this ecosystem to produce just about anything at any scale.

Notice he says “at any scale”. Ito goes further:

Just like it is impossible to make another Silicon Valley somewhere else, although everyone tries – after spending four days in Shenzhen, I’m convinced that it’s impossible to reproduce this ecosystem anywhere else.

Both Shenzhen and Silicon Valley have a “critical mass” that attracts more and more people, resources and knowledge, but they are also living ecosystems, with diversity and with a work ethic and experience base that another region will have difficulty bootstrapping. Ito thinks that most of America will do best by forging links with places like Shenzhen rather than to try and compete with it head-on

Modern technology has made it easier than ever for a single individual to create and distribute items that are customizable and unique, without depending on middlemen like manufacturers. The Internet facilitates direct marketing to end users. This shift is starting to affect the global economy, and will likely have big implications for new consumer and industrial products. The convergence of technology and Internet connectivity is making this a special time in history. It is beginning to look like it could have a transformative impact on our future.

Joi Ito has a TEDTalk that predates his Shenzhen trip. In the talk, he outlines a series of concepts that drive the Maker Movement. One takeaway is this point:

Education is what people do to you and learning is what you do to yourself.

Ito discusses a new approach: building quickly and improving constantly, without waiting for permission or for proof that you have the right idea. It is this bottom-up innovation that the Maker Movement is all about.

For Makers, community interaction and knowledge sharing is mediated through networked technologies, where websites and social media form the knowledge repositories. The exchange of ideas takes place in shared spaces called hackerspaces. Today, there are about 1,100 active hackerspaces all over the world.

One such hackerspace is Shenzhen’s HAXLR8R, started by expatriates, it is a start up accelerator program focused on providing hardware-based start-ups with the appropriate China-based knowledge and support to take their concept into a commercialized reality. You can see an explanation of their process here.

Earlier this year, the White House announced its own Maker initiative, where the Obama administration is partnering with companies, nonprofits, and communities to get the most out of the Maker Movement. China wants in on the game as well. In April, a Maker Faire in Shenzhen attracted an estimated 30,000 people.

Common sense suggests that if you want to maximize creativity, you find some bright people, give them the resources they need to pursue whatever idea comes into their heads, and then leave them alone.

Most will turn up nothing, but one or two may well discover something very, very useful.

The Maker Movement is democratizing product development, and a few successfully commercialized products may have a snowball effect. We may see products with more value and at cheaper price points than we ever thought possible.

And better paying jobs for Millennials.

The Wrongologist

Geopolitics, Power and Political Economy

Category: Economic Policy