Philip Greenspun’s Weblog

… until Americans are paying more for a set of tires than Indians pay for an entire car (Tata Nano; also the subject of an analysis of what our Detroit bailout money would have bought). According to this New York Times story, President Obama has imposed a 35 percent tariff on Chinese tires, not because they were doing anything unfair, but simply because some American factories are unable to compete on price and quality, at least with their current union labor contracts. If you’re managing one of the businesses that is not fortunate enough to command Washington’s attention, e.g., a software company, you now have to pay your workers extra so that they can buy tires to get to work. This comes on top of the extra money that you have to give them because they are required to participate in the world’s most expensive health care system and the extra money you have to pay them so that they can pay enough property and state income tax to make good on public employee pension commitments from 30 years ago (more).

Separately, EMC, the data storage company, announced that it would invest $1.5 billion to expand its services, customer support, and research and development operations. Is the money going to be invested in Massachusetts, where EMC is headquartered and where we already have achieved the kind of health care reform currently being proposed in Washington? This Boston Globe article says that the money will be invested and the jobs created in India.

For an American of my age (45), there is something humiliating about being engaged in a trade war with China. The Chinese were supposed to be rural peasants in rags, too poor to feed themselves, and oppressed by Communism, the world’s worst system of government. Now it seems that our Democracy, supposedly the world’s best system of government, has transferred much of our wealth to cronies of the rulers (Wall Street executives, Detroit automakers, specific labor unions, health insurance companies (soon)). The evil and inefficient Communists, by contrast, spent their stimulus money on solar power and lithium battery technology and infrastructure. The Chinese economy is recovering nicely (source) while we continue to stagger. Can we afford to start a trade war with these guys? Aren’t we eventually going to need to buy renewable energy and battery technology from them?

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Virtually every product sold in America that requires consumers to have expert computer system administration skills has experienced rapid growth among early (geeky) adopters and then hit a sales wall. Even VCR programming was something that most Americans couldn’t be bothered to learn. The first million people who bought VCRs read the manual carefully and time-shifted all of their favorite shows. The next 200 million bought them, lived with the flashing 12, and rented tapes.

Let’s consider iTunes. A music-loving consumer purchases 400 albums worth of music from Apple. Assume there are 10 tracks per album at a cost of $1.30 per track. That’s a $5,200 contribution to Steve Jobs’s Gulfstream fund (will pay for about one hour of fuel and overhaul reserves). These are downloaded to the consumer’s $3,000 desktop Macintosh and used to feed his home music system. The hard drive dies. If our consumer is one of the 80 percent of home computer users who don’t have a  backup regime in place, this $5,200 investment in Apple’s low-quality compressed music files evaporates. (Of course, our music lover might have a copy on an iPod, but in order to protect the recording industry from its consumers, Apple software prevents him from copying the data back from the iPod onto his new $3,000 Macintosh.)

After a few such incidents, you’d think that word would get around and people would stop paying big money to listen to music while they pick cotton on Steve Jobs’s plantation.

How could a product that requires home computer users to be expert sysadmins continue to enjoy expanding sales? Especially as an increasing number of consumers have migrated all of their data onto cloud-based services, such as Hotmail, Flickr, Google Docs, etc.

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On this 8th Anniversary of the 9/11 attacks on the United States, I’d like to devote a little space in this Weblog to remembering the heroes of that day. For me, the essence of heroism is choosing to take a personal risk, especially, but not necessarily, a physical one. A hero is someone who chooses to help others despite the risk of a terrible negative consequence for himself. Anyone who walked into the World Trade Center after the first airplane hit, in order to help those who were originally inside, meets my definition of hero. A good example of a civilian who did this is Rick Rescorla, profiled in “The Real Heroes are Dead”, a February 11, 2002 New Yorker story that I recommend highly. Any of the firefighters and police who went in could have called in sick or otherwise found an excuse to run in the opposite direction.

So I’m giving thanks today that I live in a society in which there are so many who step up to the hero level when the situation requires it.

[My personal 9/11 story is not inspiring. I was on a camping trip in Nova Scotia for most of September 2001 and missed almost everything.]

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I’m reviewing the transcript of Barack Obama’s health care speech to Congress yesterday. I’m confused by a couple of points.

Obama was careful to stress that there will be no health insurance for illegal immigrants. Why does this matter? If a very sick illegal immigrant shows up at a hospital, the hospital has to provide him with emergency care. If a very sick and very old illegal immigrant shows up at a hospital, he will have the same $250,000 death in the ICU as an American citizen. The current standard of care does not consider costs and does not consider citizenship. Why would people get excited over whether an illegal immigrant gets a free flu shot or not? As far as the expensive stuff goes, we’re already paying for it (where “we” includes the illegal immigrant, of course, since, as I pointed out in my own health care reform plan, illegal immigrants pay most of the taxes that citizens pay).

Another point that struck me as bizarre is “most of this [multi-trillion dollar] plan can be paid for by finding savings within the existing health care system, a system that is currently full of waste and abuse. … The only thing this plan would eliminate is the hundreds of billions of dollars in waste and fraud, as well as unwarranted subsidies in Medicare that go to insurance companies … Reducing the waste and inefficiency in Medicare and Medicaid will pay for most of this plan”.

The proposed changes to our health care system would start to be phased in during the year 2013, according to H.R. 3200. If we’re wasting hundreds of billions of dollars a year right now in Medicare and Medicaid, why aren’t we taking immediate steps to stop the waste? Why would we wait until 2013? Why would we say that we’re only going to stop this waste if we implement some unrelated changes to the U.S. health care system?

Speaking of immediate fixes, Obama says that the insurance market is not very competitive: “Unfortunately, in 34 states, 75 percent of the insurance market is controlled by five or fewer companies. In Alabama, almost 90 percent is controlled by just one company. And without competition, the price of insurance goes up and quality goes down.” The federal government pays for more than half the cost of health care in the U.S. The Feds regulate all sorts of other things whose connection to “interstate commerce” is more tenuous. If the 50 state insurance commissions and licensing procedures are reducing competition and raising pricings to consumers, why not get rid of them tomorrow? Why wait until 2013 and predicate the efficiency improvement on implementing unrelated new schemes?

The speech constantly equated health insurance with health care, as though it were not possible to have health care without insurance companies, despite the fact that a person’s routine health care is predictable and therefore classically would not be considered something to be insured at all (except against catastrophic accidents or rare disorders). Food is even more important than health care. Without food, an American would be dead within just a few months. Why don’t we have food insurance if it is so much more important than health care?

Nowhere did the speech mention the most obvious reason that our spending is so high: Medicare, Medicaid, and private insurers pay providers more if they do more and fancier procedures and tests. Nowhere did the speech mention any proposed change to this practice, only that the government would spend more money and hire more people to crack down on “fraud” and “abuse” by providers. Given that medicine is not a science and doctors often disagree on how to treat a patient, how is this ever going to work? Someone at a desk in Washington didn’t think the doctor in Texas should have ordered an MRI, perhaps done at a MRI clinic partially owned by that doctor? Did the desk jockey talk to the patient? Is the desk jockey an MD? If not, how is he going to be able to say with authority that the MRI wasn’t necessary? Some of the words in the speech are fine, but when one puts forward a specific example it is impossible to understand how it could work in practice.

“For some of Ted Kennedy‘s critics, his brand of liberalism represented an affront to American liberty.” Finally a part of the speech with which I can agree, as there is no doubt that Ted Kennedy’s brand of liberalism deprived Mary Jo Kopechne of her liberty.

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One of our new neighbors here in the western suburbs of Boston is a recent refugee from Cambridge, home to some of the most expensively funded public schools in Massachusetts (and therefore among the most expensive in the world). Sadly for the taxpayers, they aren’t very effective schools and she had her son enrolled in a private school for 3rd grade. Now that the kid is in a high-scoring school district, she decided it would be okay to test the public school waters. I asked the kid how he liked the public school. “It is much better than private school,” he enthused. Were the teachers, inspired by Barack Obama’s address to the nation’s schoolchildren, encouraging him to stretch his intellect to its limits? “We get two recesses every day; in private school we only had one.”

More: New York Times story on the back-to-school scene.

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… in tortured election rules. In 1812, our Governor Gerry redrew electoral district boundaries to ensure the reelection of incumbents and the term gerrymandering was born. Lately we’ve decided that we should change the rule on what happens what a Senator leaves office in the middle of his term. The rule was last changed in 2004 to prevent a Republican governor, Mitt Romney, from appointing a successor to John Kerry, whom we felt sure that the country would grow to love as its President. When Senator Kerry ascended to the White House, a special election would be held and the people of Massachusetts would pick a new senator. Now that Ted Kennedy has followed Mary Jo Kopechne into the grave (having outlived his victim by 40 years), folks want to change things back to the way they were five years ago. Our current governor, Deval Patrick, is apparently better qualified to choose a senator than was Romney.

More: New York Times story.

[You might wonder how Massachusetts legislators could possibly have the time and energy to rewrite laws every five years. According to the NCSL, we live in one of the few states where the legislature is in session “all year”. Given that the legislature has been controlled by the Democratic Party almost continuously since 1812 and that the Democrats have a supermajority, it is unclear to me why they need to be in session (and get paid by the taxpayers, approximately $200,000 per year including travel supplements, health care, and pension benefits) for more than one day. The party’s Web site contains a platform. They could have staff members come up with a full set of legislation for each year, circulate it around for discussion via email or Google Docs, and then come into the State House to approve it in 10 minutes. The only reason they should need to come back to the State House would be if there were some dramatic change in external conditions, e.g., a catastrophic fall in tax revenues.]

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I’ve drafted an essay on health care reform. Comments would be appreciated.

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In “Universities and Economic Growth”, I blamed the poor job that colleges do of educating for our sluggish economic growth. A story in today’s New York Times also blames colleges for our dim economic prospects, but says that the problem is that students don’t stick with the full program.

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A friend of mine, let’s call him “Jim”, was recently in neighborhood park in a wealthy Midwestern suburb with his two boys, age 2-3. It was warm and there was a fountain so the kids do what they like to do in such weather, i.e., take off all of their clothes and splash around in the fountain. Jim pulled out his video camera to capture the charming frolicsome scene. Two police cars quickly converged on the scene and the cops held Jim for 45 minutes of questioning. Was he sexually exploiting his children? They never doubted that the kids were his, so their only real question was whether he had chosen to make his exploitative films in a public park, in full view of a bunch of houses, rather than in his own backyard (real criminals hate to do their work in private, apparently).

Fortunately, Jim had recently watched this helpful instructional video, and therefore things did not progress to the next step, which the cops helpfully explained: they would take the kids and put them into “protective custody” (i.e., farm them out to foster parents who would be paid thousands of dollars to keep them in their double-wide trailer with almost no supervision by the state). Jim and his wife could then hire a lawyer and attempt to get their children back.

The saddest thing about this incident is that everyone involved was white and nobody was a Harvard professor. Therefore there will be no beers at the White House.

[Tried to find some background on what could actually be illegal about making such a video. I found a 2000 article about still photos at Salon.com. The next relevant article was also on salon.com, a first-person account by a father accused by a drugstore photo clerk. It seems as though it is a “we [civil servants] know it when we see it” situation.]

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The central portion of While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis covers the history of public employee unions, which turn out to be a surprisingly recent phenomenon. Politicians were traditionally opposed to public employees’ right to unionize, strike, or collectively bargain for wage and benefit increases. They saw their constituents as the taxpaying public and did not think that the government was such an abusive employer that unionization was necessary to protect workers. Calvin Coolidge, as governor of Massachhusetts, summarized the feeling of the average politician: “There is no right to strike against the public safety by anyone, anywhere, any time.”

The result was that public employees were generally paid less than private sector workers, but could not be fired for incompetence or unproductivity and had better benefits, including small pensions that typically started at age 65 or 70 or upon becoming totally disabled.

All of this was changed in 1958 when an aide to New York Mayor Robert F. Wagner, Jr. suggested that city workers could be a large enough voting bloc to ensure his reelection. Wager signed an executive order authorizing city workers, notably those of the transit system, to unionize and bargain collectively. As the percentage of Americans working for the government grew, other politicians began to see support for public employee unions as a way to get votes. State politicians around the country allowed public employees to unionize shortly after Wagner’s executive order. President John F. Kennedy allowed federal government workers to unionize starting in 1962.

According to the author of While America Aged, public employee unions should be able to win much higher wages and benefits than private company unions. The UAW could shut down GM or Ford with a strike, but they couldn’t vote the GM and Ford CEOs out of office. Once a sufficiently high percentage of voters are unionized public employees, there is essentially no limit to the obligations imposed on the state. Because it would cause too much backlash from non-union non-government employed voters, most of the money extracted from taxpayers will be taken in the form of long-term health care and pension promises. A voter working at Walmart gets upset hearing that a bus driver is earning $130,000 per year. If instead the bus driver is paid $70,000 per year and able to retire at age 41 (MBTA here in Boston), it is tougher for a voter to figure out how much is being spent. Pushing most of the spending out 10-50 years gives the politicians who agreed to the obligations at least 10 years in which to move to the next level of government before the true cost of the agreement becomes apparent.

Reading this book makes it clear that recovery from the Crash of 2008 is speculative. In the previous severe economic downturns, e.g., the 1980 Jimmy Carter malaise, U.S. workers did not face effective competition from workers in India and China. Government was a smaller percentage of GDP and public employees were not paid so much more than private sector workers. Most importantly, the pension obligations of governments were tiny compared to today because they’d only had a decade or two to develop. As all of the wealth and value that was in GM eventually had to be transferred to retirees (and then another $100 billion of taxpayer money, when the value of GM’s business was not sufficient), it may be the case that most of society’s wealth has to be transferred to the 41-year-old retired bus drivers of the MBTA here in Massachusetts, the 50-year-old retired fire department workers of California, et al.

Private companies have gotten out of this trap by wiping out their shareholders and shedding their obligations in bankruptcy. For governments, however, there is essentially only one way out of this trap: grow the tax base dramatically. That was essentially what the GM management and politicians who agreed to the pensions had relied on. The company or economy would expand forever at whatever rate it had in the best decade that anyone could remember. According to classical economics, however, wage growth is impossible without capital investment. If a company spends $1 billion to equip its factories with better machines, an hour of labor will have more value and the company will bid up wages until the factory is fully staffed. In our prostrate economic condition, however, business isn’t investing. So the tax base isn’t going to grow via wage increases. The alternative is to grow the population size until the U.S. is as densely populated as mainland China.

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