Saturday, May 4, 2013

Jihad vs McWorld and the Radicalization of American Conservatism

The basic argument of Jihad vs McWorld is very informative regarding the radical shift to the Right of many conservatives and much of the GOP.  In it, Benjamin Barber basically argues that the challenges to tribalism posed by modernization cause the radicalization of traditional sentiments and a backlash against the modern world.

We see this process at work in the US, where modernization has forced societal shifts that challenge America's traditional myths of individuality and self-responsibility.  Consider, for example, how globalization and technological change produced an army of people who no longer had access to good health insurance.  By most accounts, the solution required intervention at the government level, a fact which obviously challenged and threatened, and apparently radicalized, those on the Right.

Of course there are more obvious manifestations of McWorld, including the browning of American society and the fact that our President is of international, inter-racial, and multi-religious origin.  Barber's theory suggests the threat Obama symbolizes to the end of the the white, Christian, "American" way radicalized many members of that particular population.  Of course outright racism played a key role for some people.  But racism is not a necessary component to the theory.  In fact, its resurgence--to the extent it did become more blatant in politics in certain parts of the country--is more of an output than an input in Barber's theory.

Wednesday, December 21, 2011

Friedman gets Iraq invasion's strategic benefits wrong

Shouldn't Friedman know better?  Disappointingly, he is perpetuating some myths in today's column with claims that the Iraq War had "strategic benefits" regarding:

1) "the defeat of Al Qaeda [in Iraq], which diminished its capacity to attack us."  --Certainly not.  Al Qaeda had no or minimal presence in Iraq before the war.  Hussein viewed it as a threat to his regime.  Since Al Qaeda's presence was minimal to non-existent in Iraq before the war, defeating it there should be presented, at most, as a zero-gain/loss event.  Moreover, any claim that the Iraq War sucked in Al Qaeda so the US could defeat it militarily needs to be counterbalanced by the obvious fact that America's ability to focus on Al Qaeda in other theaters would have been much stronger without the distraction of a nation-building occupation.

2) "the intimidation of Libya, which prompted its dictator to surrender his nuclear program."  --Perhaps, but this argument is missing an important context.  As Jacques Hymans (a nuclear proliferation experts) told me, Libyan scientists had no idea what they were doing.  Reportedly, many of the tools they needed to really start their program were still in boxes.  What the Iraq invasion did was give Libya an opportunity to come clean and rejoin the world community on good terms, something it had wanted for quite a while.  Much of what changed with the Iraq invasion was that the Bush administration changed its tune and became willing to give Libya easier terms.

3) By saying there were "strategic benefits" Friedman is missing the main problem with the overall strategy, which is that the invasion greatly improved Iran's strategic position by removing a Sunni dictator and handing most of the ruling authority in Iraq to Shias, who are less likely to view Shia Iran as a natural enemy.

Link to Friedman column: http://www.nytimes.com/2011/12/21/opinion/friedman-the-end-for-now.html?ref=global-home

Monday, December 19, 2011

Predictions about North Korea following death of Kim Jong-il.

Predictions on North Korea: 

1) There is little chance of a popular uprising against the Kims. If Kim Jong-un loses power it will almost certainly happen at the hand of a general. 

2) China will work very hard to ensure there is either no coup, or that the generals responsible for it are committed to a future in which NK remains allied with China and at odds with SK. 

3) It will be very hard for the America and its friends to leverage the same kind of pressure that China can bring to bear against NK. We simply don't have the extensive ties to NK that China does. This suggests that the most likely outcome will be a NK ruled by Kim Jong-un or generals with close ties to China. 

4) It is extremely unlikely that Kim Jong-un will be able to enact meaningful social, political, and economic reforms. He inherited all of his legitimacy from his father and grandfather. Any reform he implements implicitly questions their policies--i.e., the very foundation of his own legitimacy. 

5) In the event of the removal of Kim Jong-un, NK will have its first real opportunity to enact reforms. Expect tepid economic reforms along the lines China first tried following the death of Mao, and minimal social and political reforms. NK has been unable to reform because of the family lineage and legitimacy question, and because reform increased the likelihood that average Koreans would realize that an incredible foundation of lies upheld the Kim clan. 

6) A major war between the two Koreas (and involving the US) is an unlikely outcome. However, hawks within NK have incentive to instigate small scale military actions to keep relations tense and therefore bolster the argument that these generals are important.

7) Of the above, the least certain is China'a ability to shape NK outcomes. North Koreans are very serious about their independence, and would accept with only the greatest difficulty the idea of being more dependent on China. Expect NK to lean to China strongly, but also make appeasement moves toward Japan and the US to diminish Chinese influence. Given that the generals in NK know they will end up being hot dog vendors in the event of a reunified Korea, they will be disinclined to reach out to SK. The Korean nation is likely to remain divided for quite some time.

Let's hope the last point is wrong.  How prescient will this post prove over the next 1-10 years?

Tuesday, March 8, 2011

Medicare Still Cheaper Than Private Sector, Even When Considering Fraud

Conservative bloggers such of Avik Roy and Jeffrey Anderson are criticizing Obamacare by rehashing old arguments about fraud.  Both noted that Medicare lost $48 billion to fraud in 2010 in contrast to $12.7 billion in profits earned by private insurers.  Roy mocks Obamacare Visa-advertisement-style as being “priceless.”

However troubling we might find fraud, the real issue at hand is not fraud but total costs—the bottom line for taxpayers.  That means we must contextualize the $48 billion in terms of Medicare’s total expenditures, as well as the total expenditures and profits of the most equivalent entity in the private sector.

As Jacob Hacker argues, the closest equivalent to Medicare is Medicare Advantage, Medicare’s privately administered cousin.  Since Medicare Advantage has to follow the same regulations as Medicare and must treat the same population, comparing these two entities allows us to avoid a lot of the confusion found in comparisons between Medicare and purely private insurance companies.

Medicare spent $528 billion in 2010.  Fraud therefore accounts for 9.1 percent of total Medicare spending.  Medicare spends another 2 or 3 percent on administrative costs, bringing its total costs to 12.1 percent, at most.  In contrast, in 2006 Medicare Advantage's administrative costs (10.1 percent) and profits (6.6 percent) totaled 16.7 percent.  In short, even after considering fraud, Medicare is 4.6 to 5.6 percent cheaper than its nearest private equivalent.  It is remarkable that this gap would be even greater if we included the presumably lower levels of fraud suffered by Medicare Advantage.


Comparing Medicare and Medicare Advantage allows us to factor out many confusing elements that we would otherwise have to deal with if we compared Medicare to pure-play private insurance companies.  We don’t have to concern ourselves with things like Medicare’s premium collection, which is handled by the IRS, because Medicare Advantage enjoys these same services.  Moreover, unlike Robert Book, we need not consider whether it is best to compare visits per patient or expenditure in dollars.  The very similar nature of Medicare’s and Medicare Advantage’s customer base and rules regarding payments obviates the need to ask these normally important questions.

Thursday, March 3, 2011

Getting Rid of Automatic Dues Collection Could Unleash a New Wave of Teacher Strikes

The anti-union governors don't know their history.  States and localities eliminated the viability of strikes by teachers in the mid-1970s, by using automatic union dues collection as both a carrot (we'll give it to you if you don't strike) and a stick (we'll give it to your competing union/association if you do strike).  In interviews I conducted while writing my MA thesis on the 1974 Baltimore teachers strike, there was broad agreement among Union and Association leaders that Mayor Schaefer's heavy-handed approach regarding dues collection was successful in buying off the unions and making strikes impossible.  There is a good chance that elimination of this carrot/stick will bring back a wave of strikes similar to that of the late 1960s and early 1970s

Monday, February 28, 2011

Why State Workers Cannot Retire For 30 Years after Working For 30 Years

Though I support unions and their right to collectively bargain, I do not support the terms they have negotiated regarding retirement benefits.  In localities where there are pressing funding shortfalls for those benefits, a solution must be found that is fair to both union members and tax payers who would otherwise have to make up all the difference in the funding shortfall.  By 2013 the CBPP predicts a funding shortfall of around 28 percent, a deficit that has increased steadily since pensions were last fully funded in 2000.   (See Figure 3: http://www.cbpp.org/cms/index.cfm?fa=view&id=3372)

The key problem is that officials on both sides of the table have assumed in past negotiations, and continue to assume today, a completely unrealistic rate of investment return of 8 percent in nominal terms (i.e., before reducing that percent by inflation).

As Figure 4 in the CBPP webpage shows, pension funds have actually achieved 8 percent returns over the past 20 years.  After reducing that amount by the 2.78 percent inflation experienced during those 20 years, the real annual return enjoyed by these funds was a healthy 5.22 percent.  (For inflation, see http://www.measuringworth.com/inflation/.)

Unfortunately real returns of 5.22 percent are not sustainable over the long term.  Real World GDP growth seems to have a ceiling of around 4 percent per year. (http://www.economist.com/node/15127371)  Quite a bit slower, annual real US GDP growth per capita between 1949 and 2007 was 2.2 percent. (http://www.measuringworth.com/usgdp/)  It is worth noting that these starting and ending years help those who think 5.22 percent in real returns is obtainable annually, because I’ve removed the early post-WWII stagnation and the decline of GDP beginning in 2008.  Moreover, most economists think the financial crisis has lowered America’s long-run, real potential growth rate to 1.5 percent.  (http://www.economist.com/node/17493288?story_id=17493288)

As any economist will tell you, it is simply impossible for investment returns to outstrip growth of real wealth over the long term, unless the investor takes on more risk. If we can surprisingly match our post-war 2.2 percent growth rate, a portfolio that perfectly matched America’s economic profile would not exceed 2.2 percent gains. Similarly, a portfolio that perfectly matched the world’s economic profile could not exceed more than 4 percent or so of gains per year. Of course, even perfectly matched world-wide investment would entail considerably more risk than an investment targeting just the US. Investors who wish to beat the above figures will have to increase the amount of risk they are willing to take on. There is no way around that fact.

The nominal returns of 3.9 percent earned by pension funds over the last 10 years are much more reflective of what we can realistically expect heading into the future.  After factoring out US average inflation of 2.35 percent over that same time period, our real return was 1.55 percent per year, which is very close to both the real growth the US realized at that time and what it can generate over the long term.  (For inflation see http://www.measuringworth.com/inflation/.  For Nominal return, see CBPP Figure 4.)

In short, any attempt to replicate a nominal return of 8 percent or a 5.22 real return will have to entail a lot of risk. Yet, I think everyone can agree that pension funds have a responsibility to be conservatively allocated, given that tax payers are obliged to make up for shortfalls.  It is therefore remarkable that the 26 to 28 percent pension shortfalls the CBPP predicts we will suffer over the next three years require an 8 percent annual investment return. Without 8 percent returns on pension investments, this yawning gap will obviously grow and become increasingly problematic. Yet, since investment returns cannot possibly exceed real wealth creation over the long term, without taking on extra risk, expecting an 8 percent return over the long term is total fantasy. 

Let’s run the numbers for two Maryland workers as generously as possible, but without irresponsibly assuming we can beat the total real growth of American GDP.  If you wish to check my figures, I use a compound interest calculator that can compound annually and monthly (http://www.webmath.com/compinterest.html) and the resources at Measuring Worth (http://measuringworth.com/graphs/indexan.php).

1) In 2011, the starting salary for a Maryland govt analyst with a BA is $40,291. A skilled state auto mechanic starts at $29,855. Let’s set a retirement goal for both of them at a quite low $20,000 per year in 2011 dollars, for 30 years, and assume 30 years of work. (http://www.dbm.maryland.gov/jobseekers/Pages/JobSearch.aspx)  Since all the growth rates are “real”—i.e., they already filter our inflation—our $20K retirement goal, current and future salaries, and investment returns will remain in 2011 dollars.

2) The average annual wage gain enjoyed by the bottom 90 percent of wage earners from 1949-2007 was $266.76 per year or 1.73 percent in real average salary increases per year. I’m going to apply this same rate of real salary gain to both our workers, a fact that helps unions out, because over the last 40 years none of the increases in real wages have accrued to the bottom 90 percent, and there is no reason to think this trend will reverse in the short and mid terms. Also, as I noted earlier, the years I selected are generous to unions. (http://www.stateofworkingamerica.org/pages/interactive?%2F%3Fstart=1997&end=2008#/?start=1947&end=2007)

3) Applying our generous 1.73 percent real salary increase, compounded annually for 30 years, results in a final year salary for the analyst of $67,403 and for the mechanic of $49,945. The analyst therefore makes an average career salary of $53,847, while the mechanic makes an average of $39,000. These are the salaries we will work with to approximate the ease with which these workers can meet their retirement contribution.

4) Applying a monthly compounded real US GDP growth rate of 2.2 percent (annualized)—a safe rate of real return—means that our analyst will have to set aside $10,411 per year, or 19.3 percent of his average pretax salary to retire on $20k per year. Our mechanic would have to invest 26.7 percent of his pretax salary to enjoy the same retirement.  If unions wish to earn a higher rate of return, they will have to take on additional risk on their investments. 

Conclusion: These 20K per year retirements would be very uncomfortable, especially until social security kicked in at some point in our workers’ late 60s. Moreover, the required rates of employee contributions are draconian. It is completely unrealistic to think that Americans can successfully save 19.3 to 26.7 percent of their pretax earnings—ie., before they contribute even to Social Security or Medicare. Unless tax payers are willing to underwrite extra investment risk for pension funds, there is no way that state workers can retire for 30 years after working for 30 years. The math only works if they work longer and/or retire for a shorter period of time.

Incidentally, assuming 5.22 percent real returns means that our mechanic would have to contribute $4,346, or 11.1 percent of his average salary.  This should be achievable, although he would still have a fairly miserable retirement.  But only if we imagine the impossible—i.e., that our investment returns can outpace real US GDP growth by 240 percent over the long term and do so safely; that real salaries of workers in the lower 90 percent will rise by 1.73 percent per year despite not rising in the past 40 years; and that our average gain in real GDP will equal the 2.2 of our generously selected years of 1949 to 2007, despite the financial crisis—can we assume what supporters of state workers take for granted. It's a total pipe dream.