A WSJ story begins with two facts that appear in tension:
Hospitals and pharmaceutical companies have been pushing through hefty price increases aimed at bolstering earnings, even as government and private insurers are struggling to rein in healthcare costs.
And includes a fleeting nugget about how they are apparently related:
Credit Suisse’s Catherine Arnold said that drug companies have increased prices so aggressively in recent months to wring sales out of products before any healthcare cost-cutting efforts eat into profits.
“When the government is talking about more aggressive discounts, your start price is going to determine your end price,” she said.
The article is otherwise full of examples of price increases, the problems they cause, and what people think about it, including the obligatory denunciation by a “consumer advocate.” The above quote is one of the few clues about why they are happening.
Maybe it’s just me, but I believe that economically relevant facts help a story. I think it’s informative to look at the underlying causes and not just the effects of things like price increases.
Instead of talking about “hospitals” or “drug companies” as unitary agents, it would be interesting to see how these institutions comprise of thousands of economic agents doing what comes naturally–gaming the system they are familiar with to their personal profit. I think its important to show how most of the counterproductive gaming is driven by increasingly complicated rules established by various third parties, including government agencies. I think it’s relevant that as health care costs get more constrained by public policy, they diverge from costs that would be dictated by supply and demand, and that the market will react accordingly. A story could illustrate this in the form of threatened negotiations from an agent positioning itself to be a monopoly buyer, and how dispersed sellers will react with preemptive price increases or, to the extent they can’t implement them themselves, price increases somewhere else along the chain of treatment delivery.
Of course, all we see are the price increase, and that’s all the average journalist sees, too.
The intent of the law was to encourage alternative fuels, and reduce dependence on products like diesel that result in greenhouse gases. But the paper companies figured out how to get paid to do the opposite:
The origins of the credit are innocent enough. In 2005 Congress passed, and George W. Bush signed, the $244 billion transportation bill. It included a variety of tax credits for alternative fuels such as ethanol and biomass. But it also included a fifty-cent-a-gallon credit for the use of fuel mixtures that combined “alternative fuel” with a “taxable fuel” such as diesel or gasoline.
Enter the paper industry. Since the 1930s the overwhelming majority of paper mills have employed what’s called the kraft process to produce paper. Here’s how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it’s so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It’s a neat, efficient process that’s cost-effective without any government subsidy.
The paper companies figured out that if they add diesel to the black liquor, voila, a fuel mixture that qualifies for the mixed-fuel tax credit.
“You use the toilet every day,” said one hedge fund analyst who’s been closely following the issue. “Imagine if you could start pouring a little gasoline into the bowl and get fifty cents a gallon every time you flushed.”
No one in Congress seems to have anticipated this creative maneuver. This past fall the Joint Committee on Taxation computed the cost of extending the tax credit for three months and projected it would cost a manageable $61 million. It now appears that the extension (which was passed as part of the TARP) could cost as much as $2 billion before the credits expire at the end of this calendar year.
And yet, because the paper industry has invested in lobbying, and now has even more incentive to do so, Congress will probably not repeal this law before it expires.
The NYT provides a good story about how the Wall Street pay restrictions may be having its effect. Some of the remaining glib tropes we’ll undoubtedly to hear:
– “So what? How much can these people have been worth to companies they helped drive under?”
– “They don’t need these people. The industry had to shrink anyway.”
– “These people are just being greedy, looking for other ways to get rich doing useless things.”
In the meantime, we taxpayers will reap the ‘benefits’ of our government’s politically driven HR policies at institutions completely dependent on the quality of their human resources. What we’ve saved from not “wasting” money on compensation, what we’ve cathartically gained from “tough talk” to the bankers, we will lose a thousand-fold from sub-optimal bank earnings and, in New York’s case, crippled tax collections. Hopefully, the NYT will run a story on those items when they happen, as well.
How would you finish that sentence? I would perhaps say something like, “but if someone were to physically threaten by wife or child, watch out for my stick or gun.” Someone else might say, “but if I catch that guy abusing his dog again, I swear I’ll sock him.” What would you say?
"My job! Down with property!"
Well, in France, this rationale seems perfectly acceptable among at least 45 percent of the people:
“I’m against violence but if these things keep happening it’s because there is an underlying despair,” said Socialist legislator Jean-Marc Ayrault
“These things” refers to the French phenomenon of ‘bossnappings’–the forcible detention of top management by workers in response to the threat of layoffs. That’s right, getting laid off from your job is an excuse for violence in France.
In the U.S., few people would condone getting laid off as an excuse for violence. It’s not a coincidence that the closest thing we have to a company run on French attitudes is also the source of the phrase “going postal.”
Socialists, however, believe that one person hiring another is an immoral act, yet also claim that being fired warrants a violent response. Inconsistent, I know, but I’m not making this up.
“This sort of thing (bossnappings) will inevitably happen again,” said Bruno Lemerle of the CGT union in the Peugeot car plant in Sochaux, France’s biggest factory.
“Those who sow misery reap fury. The violence is done by those who cut jobs, not by those who try to defend them,” he said.
Of course, the defining aspect of socialism is that they believe that worker violence is is OK, while employer attempts to thwart it are evil.
Here is the top legislator highlighting the difference between her interest as a citizen versus her interest as a legislator:
“I certainly don’t want my taxes raised but one thing I do recognize is that we are in the middle of a financial meltdown,” California Assembly Speaker Karen Bass, a Democrat, told Reuters in an interview.
“We have a constitutional obligation to balance the budget so we had no choice” but to raise taxes, Bass said.
Here is the basic equation she is hoping her sheeple will ignore:
State tax revenues – State expenditures = State income (deficit)
In other words, from her perch, the **only way** to prevent a deficit is to increase taxes. She would, in principle, have a point if state expenditures had already been cut to the bone. Here is how BOTH haves of that equation look:
Both halves of the equation
As you can see from this graph (which is impossible to find on the California’s Dept. of Finance site), declining tax revenues are clearly the driving force behind California’s budget problems. Not.
On the other hand, regarding the title of this post, they might be right.
“It’s a well-executed and targeted display of money as power,” Captain Boyes said. “It’s a weapon system. It’s great. We have to interact with the locals. Not only is the platoon leader going out to find a viable candidate for this grant, he has to spend that time analyzing the business, talking to the shop owner and seeing what the business needs. The money can be used for anything to start a business. It can be used to expand a business, to hire new employees, anything like that. They’ll go in there and talk to the shop owner and ask him what are the top three needs.”
Sadr City
“We typically don’t put any dollar amount on it,” Captain Looney said. “We say what are your top three needs to improve your business? And we’ll ask them how much that will cost. Most of the time they have a well thought-out plan. They’ll give us exactly what they need, how much each item costs, and we’ll bounce that off what we know from our own experience and how much we know it should cost. We’re not going to let them say it costs 5,000 dollars for a small generator. We’re not going to be raked over the coals. Most people are honest. They give us a fair estimate of the costs. As soon as we give them the money, they use the money immediately to improve their location.
“I can take you to a hookah bar and chai shop,” he continued, “where we’ve given them a grant and they made drastic improvements to the outside. That had a great impact because it showed what U.S. forces are willing to do for Iraqis. It’s a cultural and social hub of this neighborhood. Many people see what we’ve done for them. We didn’t just make an investment with one person, the business owner. There may be hundreds of local men in the area who go to this hookah shop every week, and we made an impact with all of them.”
Park, Sadr City
“We see it as a business opportunity for them and a security opportunity for us,” Captain Boyes said. “We’ve increased the general atmospherics. People are more open to talking to us or giving us a phone call and giving us information. We have had actual tangible results where people have called up and told us where IEDs were placed. And the only reason he called us is because his brother received a microgrant.”
What is lost on most voters in the more comfortable quarters of civilization is that any form of government spending is a “display of money as power.” Unfortunately, our’s is not quite as well-executed or targeted.
Goldman Sachs CEO shared his idea of how executive compensation should look:
• Compensation should take into account strict adherence to a firm’s management and controls, especially with respect to a person’s judgment and exercising that judgment in terms of risk in all of its forms. That evaluation must be made on a multi-year basis to get a fuller picture of the effect of an individual’s decisions.
• Individual performance must not be viewed in isolation. Individual compensation should not be set without taking into strong consideration the performance of the business unit and the overall firm. Employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak.
• No one should get compensated with reference to only his or her own P&L. Compensation should encourage real teamwork and discourage selfish behavior, including excessive risk taking, which hurts the longer term interests of the firm and its shareholders.
• Compensation should include an annual salary plus deferred compensation, which is appropriately discretionary because it is based on performance over the entire year.
• The percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.
• For senior people, most of the compensation should be in deferred equity. Only the firm’s junior people should receive the majority of their compensation in cash.
• As I mentioned earlier, an individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect. To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.
• And, senior executive officers should be required to retain the bulk of the equity they receive until they retire. In addition, equity delivery schedules should continue to apply after the individual has left the firm.
A very slick, new on-line journal has just come out tackling what is probably the biggest regulatory problem of our time: financial regulation. This journal has great stuff from David Evans and Arnold Kling. And the top compensation expert anywhere.
Fair share: What I think you should spend on stuff that I want
Example: Massachusetts experiment in universal health care, dubbed RomneyCare by some, is…guess what…costing more than anticipated. This was one of those public-private partnerships where the state makes a deal with private firms in order to get them to accept a big, hairy policy change. The state then sees that the changes they forced on everyone cost more and did less than originally advertised, then goes back to change the deal with the private firms to their detriment.
In Massachusetts, a consumer group called Health Care for All (don’t you love how these self-styled groups get labeled as such by the uncritical press?) says, through a spokesman:
Increasingly employers are getting tremendous benefits under health reform. The question is not whether employers are doing their fair share for the employees they are covering, it’s whether they are doing their fair share for their employees the state is covering.
The translation is, “The state needs the money. These private companies should be providing it, because that is how I figure it.” How this group or the state figures things, of course, is less important than that they’re doing the figuring.
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