A Different View of US Health Care Expenditures

John R. Graham is the director of health care analysis for the Pacific Research Institute in California. In a November 2010 article, “American Health Care and American Productivity: An International Comparison,” he makes a very interesting case that US health care expenditures as a share of GDP are not out of line with our productivity and wealth levels compared with other countries.

This does not mean that we should not be hoping the new Congress will take steps to rein in the growth in health care costs. Still, it is a very interesting perspective that I thought you would enjoy reading.

More on Dr. Hoenig’s Remarks About QE2

Here’s a good article from the Bureau of National Affairs quoting my comments on Dr. Hoenig’s excellent speech to NABE in Denver on October 12. You should find it useful, especially with the FOMC Meetings coming up Nov. 2-3.

The Fed Should Hold Off on a New Round of Quantitative Easing (QE2)

At the recent annual meeting of the National Association for Business Economics (NABE), Dr. Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, delivered an excellent talk on what the Fed should do over the long run to meet its twin mandates of stable prices and maximum employment. You may recognize his name from his dissents from the consensus at every FOMC meeting this year.

Financial market participants have been all atwitter (pun intended) lately about the very strong possibility that the Fed will soon begin another round of quantitative easing. They have nicknamed the expected effort “QE2.” [Note from Linda: I was wondering why the Queen Elizabeth II was in the news so much!]

Quantitative easing is what a central bank does when it wants to speed up the growth of the money supply after it has exhausted its primary tool, the target for the short-term interest rate that banks charge each other for overnight loans to meet reserve requirements (the Federal Funds rate in the US). The Fed purchased about $1.5 trillion of Treasury and mortgage-backed securities in the wake of the Lehman Brothers bankruptcy of September 15, 2008. That program ended in March 2010. Click here to read the full post and comment (Insights subscribers) »

Good News from Consumers

Today the Census Bureau announced that total retail and food services sales hit $363.7 billion in August on a seasonally and trading-day adjusted basis. That was 3.5 percent higher than a year earlier and up 0.4 percent from July.

It was the highest level since September 2008 and the third best August ever. It was 2.5 percent below the August 2008 record of $373.2 billion and only 1.8 percent below the second place $370.2 billion of August 2007. Click here to read the full post and comment (Insights subscribers) »

S&P/Case-Shiller “Crystal Ball Award” Honorable Mention

From Linda: Hey, sometimes Jim gets it practically perfect! Thought I’d let you know.

Remember, “he who lives by the crystal ball has to like the taste of broken glass.” No broken glass on this one, anyway.

Subject: S&P/Case-Shiller “Crystal Ball Award”

Q2/Q1 %change in the S&P/Case-Shiller U.S. National Home Price Index

Actual:
+4.4% (announced by S&P this morning)
——————————————————————————-
Michael Englund (Action Economics):
+4.4% (predicted on August 9th)
——————————————————————————-
Honorable mention: James Smith (Parsec Financial Mangement)
+4.5% (predicted on August 17th)
——————————————————————————-

OK, So How Would I Fix It?

Alan Zibel, of Associated Press, sent this request out to the AP panel of economic forecasters: “Now we’re just wondering what you would suggest be DONE about this ‘slow patch’ or ‘growing recession’ we’re in? What’s your solution for an economy where short-term interest rates are already near zero and the economy is barely growing? Do we need to consider a whole new suite of prescriptions for this sort of anemic economy?” Here’s my response.

If a majority of the members of the U.S. Congress wanted to get the economy moving along at a sprightly pace they would do the following ASAP:

1. Enact the ” Fair Tax” ( HR 25 and S. 296) and make it effective January 1, 2011. No more corporate taxes, no more income taxes and (eventually) no more IRS! This would cause businesses and consumers to spend much more freely and investment would rise as well because national savings would increase. The advance payments to households earning less than $50,000 a year would encourage consumption and eliminate the regressive nature of a flat tax without rebates. A poor (but much more likely) second choice would be to extend all the provisions of the 2001 and 2003 tax cuts for two more years while they work up the courage to pass the “Fair Tax”.

2. Set up a National Commission on Regulatory Reform with the authority to recommend changes to laws or regulations that would bring the benefits closer to the costs. At the moment, our best estimates are that the costs exceed the benefits by about $ 1.4 trillion a year or about 10.0 percent of GDP. The recommendations from the Commission should be presented to Congress for an “up or down” vote similar to the BRAC Commission votes they’ve used successfully several times.

3. Immediately approve the pending trade agreements with Colombia, Panama and South Korea. Also, pass a law instructing the president to herd his fellow world leaders into completing the Doha Round of the WTO. Estimates are that would add over $ 2.0 trillion a year to world economic output. They should also encourage efforts to get Russia into the WTO.

4. Set up another Commission to Reduce Government Spending. We have way too much government and not enough private-sector flexibility. The goal should be to reduce discretionary spending to what it was in 2001. We’d begin running budget surpluses and paying off debt within a year and the stock market would soar.

5. Repealing the recently passed Dodd-Frank bill and enacting real regulatory reform as advocated by the members of the Shadow Regulatory Committee would be a really good idea too.

Of course, none of these things will happen with this Congress as they are clueless about what it takes to get government out of the way of the private sector. The current ” Small Business” bill is an excellent example. Small business owners don’t want or need more activity from the SBA; hardly any of them use it and they’d love to see it abolished as a first or at least an early step toward reducing government spending.

That’s why all the nonpartisan political prognosticators are telling us there will be a huge number of new faces in the next Congress. We’re headed for our third ” watershed” election in four years. That’s amazing.

What’s Inhibiting Economic Growth In The US

Click here for a really terrific article about current conditions that are inhibiting economic growth in the US. It’s the text of a speech given by the President of the Federal Reserve Bank of Dallas on July 29. It is required reading for anyone who is trying to understand the current economy. Send it to your political representatives!

Enough with the Gloom and Doom Talk

This link will take you to a really terrible article entitled “Weak Economic Data Suggest Recovery Is Fizzling.” That’s not the worst and most misleading headline ever (the Chicago Daily Tribune probably wins with its immortal “Dewey Beats Truman” one on November 3, 1948), but it sure is a candidate for worst misleading economic report of 2010.

The article accurately cites several pieces of less-than-stellar economic news today (unemployment claims rose, Congress is cutting some people off after they’ve been receiving unemployment benefits for 99 weeks, the manufacturing index slipped, construction spending was weak, a survey in China was not so strong as expected and industrial production in the Euro Zone was weaker than expected). All these things are true, but not even remotely close to being important enough to derail the recovery. By the way, research shows extending unemployment benefits causes people to wait longer to seek a new job.

On July 30, the BEA will give us revised national income and product account (NIPA) data for the period from the first quarter of 2007 through the first quarter of 2010. The odds are these new data will change our perceptions of both the recession of 2007-2009 and the recovery that began in either May or June 2009.

Of course, the BEA will also give us the first “Advance” estimate of real GDP for the second quarter of 2010. The overwhelming consensus of economic forecasters is that we’ll see a number in excess of 3.0 percent. That’s not spectacular, but it’s not awful either.

Virtually every economic forecaster expects real GDP to set a new record this quarter. That would finally surpass the level of the second quarter of 2008, which was boosted into record territory by the $152 billion stimulus package (mostly composed of $600 payments to individuals and $1200 payments to married couples plus $300 per child with a phase out for couples with adjusted gross incomes above $150,000) signed into law by President Bush on February 13, 2008.

Once an economic expansion is under way, it tends to continue for a long time. It would take a successful terrorist attack in North America, a huge earthquake that destroyed major cities, oil prices hitting $100 a barrel and staying there four months or longer or the failure of Congress to enact legislation to keep the biggest tax increase in history from occurring on January 1, 2011, to cut this expansion short.

None of those things belong in a baseline forecast. Disposable personal income hit an all-time record in May (the old record was set in May 2008) ) and that augers well for higher retail sales. Real personal consumption expenditures, which account for 70.0 percent of real GDP, began setting new records in March 2010.

Business fixed investment is quite strong. Given high levels of profits and aging equipment (especially computers and software), businesses have to keep investing to stay competitive and they can afford it.

Things aren’t perfect. What a shock. The expansion is not running out of steam either.

So sit back, take a deep breath, and think about all the good things happening in the US economy. They far outweigh the bad ones.

Small Business, Small Banks & Credit–Two Views

This article by Bill Dunkelberg was published on CNBC.com
Published: Thursday, 17 Jun 2010

If you listen to Washington and New Yorkers working for bailed out institutions or in offices 100 floors above Wall Street, the recovery is weak because banks, and now small banks in particular, won’t lend money to small businesses. There has been plenty of evidence to the contrary (demand is weak rather than banks are hoarding money), but facts don’t play well in Washington.

First of all, we should stop “benchmarking” to 2006 and 2007, a period of credit excesses enabled by an apparent “weakening” of credit standards in many parts of the economy. This is not a period we should aspire to return to. Of course credit is “harder” to get than it was prior to the recession. And of course the press can find someone who thinks they deserve credit but can’t get it.

These “Man Who” statistics (“I know a man who…………) quoted in the press and in hearings are not helpful and highly misleading. Nobody did the investigatory work to see if any of these alleged cases of unfair credit rationing were really bankable. In the best of times, 5% of small business owners say their credit needs weren’t met – it was 8% in May (NFIB). Banks aren’t venture capitalists; they have no ability to recognize the next “great idea” and don’t make loans to fund such projects.

Lending is about capacity to repay – tomorrow, not yesterday.

The “message” from Washington and some New York pundits is that the banks “owe it’ to the U.S. to make more loans (it’s “unpatriotic” not to!) because they were “bailed out”.

Well, most small banks were not bailed out, but they sure are paying through the nose to cover the “bad actors” with FDIC premiums 700% higher.

The implication is that banks are not making good loans when the opportunity arises, an unlikely situation. Large banks lost a ton of bucks, and did restrict their lending. But the “small banks” for the most part did not engage in risk-taking like the larger institutions and have money to lend. Surely the administration is not suggesting that banks go back to making bad loans to create jobs.

NFIB (which surveys a sample of its 300,000 or so members each month) finds that only 3% of its members report financing as their top business problem (as high as 37% pre-1983). A third cites “weak sales” as their top problem. 92% report all of their credit needs met (or having no desire to borrow). Thirteen percent of regular borrows report credit “harder to get” than their last attempt which now dates into the post crash period – of course it is harder!! (But not as high as pre-1983 survey readings).

Loans to small business are down primarily because huge amounts of private credit demand are on the sidelines:

A. Housing starts are 1,000,000 below normal needs, normally built by thousands of small construction firms financed by thousands of community banks. At, say, $200,000 per construction loan, that’s a huge gap in private credit demand. In the first year after the more modest 1991 recession, 100,000 new construction jobs were credit by a housing recovery. Missing today.

B. Auto purchases are 5 million units below normal

C. For 6 million employer firms, actual capital outlays are at 35-year low levels, purchases that are normally financed at banks.

D. For two years, firms have been liquidating inventory, not adding, an activity usually supported by bank loans.

E. Consumers have been actively paying down their indebtedness.

In short, there are far fewer firms looking for credit these days, there is money to be lent, but a shortage of eligible borrowers. A special NFIB study of D&B firms with fewer than 100 employees in December 2009 indicated that the purpose of most borrowers (over 70%) was to supplement cash flow, not expanding their businesses or hiring. In addition to too many houses, we also built too many strip malls, retail outlets and restaurants and accumulated too much inventory to keep up with a non-saving consumer.

Now, all these firms must share a reduced level of consumer spending to support them. Not all will succeed unless, of course, consumers return to their old spending ways. In the meantime, the Treasury found it a lot easier to finance our trillion-dollar deficit. But when the private sector begins to expand and private credit demands explode, “crowding out” will provide a strong headwind to private sector growth.

Assets, whether human capital or physical assets must “earn their keep”. Workers don’t get hired unless they have high odds of generating enough sales to pay for the cost of hiring them. Equipment isn’t purchased unless it can be productively used to pay for itself. You can give owners interest free loans and they will not spend the money because they have to repay the loan and in this environment the assets are unable to earn their keep.

Business tax cuts won’t be spent on endeavors that have a low probability of paying off. Anyway, $30 billion isn’t much to throw at the problem if the Administration really believes that small bank reticence to lend is the problem. One firm with a handful of employees got twice that amount (and will not pay that back to taxpayers with all likelihood because it was a loan that rational private sector lenders wouldn’t make for that reason).

So, lending to small business is down primarily because credit demands are down, and, of course, firm balance sheets and income statements are in poor shape. In this recovery, inventory rebuilding (manufacturing) and exporting have led, not housing and the consumer. This has favored large firms (and the stock market), not small businesses that are usually the first to see the turnaround in the economy. Yes, credit standards are higher than they used to be, using 2007 as a benchmark!

But making bad loans is not the key to stimulating the economy.

Government has done this, sadly, but the private sector is more careful with the funds entrusted to its lending institutions by savers, especially small banks. Small business produces half of private sector GDP in normal times. Perhaps the reason GDP growth is rather anemic (and inventory driven) is that the small business sector of the economy is not participating. Certainly developments in Washington offer little encouragement for small business owners and the consumer is less than exuberant. But all of this is not a result of unwillingness on the part of small banks to lend and make good loans.

Small Business Owners Perk Up a Little Bit

For almost two years now, the mood among small business owners, who collectively account for half of GDP and a far larger share of net job creation, has been drowning in a seemingly endless whirlpool of woe. Their “Optimism Index” had been anything but, scoring below 90 for seven consecutive quarters.

Finally, it rose to 90.6 in April and on June 8, the National Federation of Independent Business (NFIB) reported that the May Index of Small Business Optimism had risen to 92.2 (1986=100). That’s the first back-to-back gains since before the collapse of Lehman Brothers on September 15, 2008, which put the US and global economies into a stunning tailspin.

The May reading was the best since the 92.9 of September 2008. The index and the economy are performing far worse than after the last two long and deep recessions. Those were the 16-month long oil price shock recessions of November 1973 to March 1975 and July 1981 to November 1982.

There are certainly no inflation pressures coming from this sector. May marked the 18th consecutive month that more owners reported cutting prices than raising them. That is a big contributor to their lingering gloominess.

Some thirty percent of small business owners reported “weak sales” as their biggest problem in May. That was up one percentage point from April.

On a seasonally adjusted basis, the net percentage of owners reporting higher sales improved four percentage points to a net negative 11 percent. That’s 22 percentage points better than May 2009 and up 14 points in just two months.

It’s the highest level since May 2008. Clearly things are improving for small business owners. It’s yet another good sign that the economic expansion remains on track although growth is very slow by comparison to previous long and deep recessions.