Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips
Most of us look at the economy from an individual perspective. Do we or don’t we have jobs that pay well? Can we make the monthly mortgage payment? How are we holding up under the rising cost of food, heating oil, health insurance, gasoline, and higher education? Kevin Phillips takes our concerns and offers us a broader perspective, regarding the American economy and its place in the global economy. Bad Money is about the insecurity of America’s future as the world’s leading economic power. Phillips’ book discusses the two major components contributing to that insecurity: the rapid and unregulated growth of America’s financial services sector and the vulnerability of America’s oil supremacy, resulting in the embattled dollar.
On the first theme, he begins with some sobering statistics. Manufacturing, which comprised 29.3% of the Gross Domestic Product (GDP), in 1950, shrank to 12% by 2005. Financial services grew from 10.9% to 20.4%, during the same period. In conjunction with the growth of the financial services sector, credit market debt increased from $11 trillion in 1987 to $48 trillion in 2007. In Phillips’ words, we have gone from actually producing things to “moving money around.”
Why is this a problem? The reason is that in order for financial services to have grown to this degree at such a rapid rate, the sector has embraced increasing risk, facilitated by deregulation, as typified by the repeal of the Glass-Steagall Act (1930’s legislation preventing common ownership of banks, investment firms, and insurance companies). In addition, while in previous generations Americans were encouraged to save and those savings were invested in increasing our productive capacity, today Americans are encouraged to borrow. In the past several years, any individual, on any given day, may find in his mailbox, multiple credit card promotions as well as encouragement to borrow against the equity in his home.
In one of the more traditional areas of financial services, home mortgage lending, established lending standards have been relaxed in order to enlarge the pool of borrowers. By 2007, roughly 20% of home mortgages were being made in the “sub-prime” market, to low-income borrowers. Roughly another 20% of home mortgages were being made to borrowers with good incomes, but poor credit histories. These two groups taken together presented considerable risk, particularly because many of these loans were at adjustable rates. A borrower, who could initially make payments on his mortgage, would eventually default and see his home go into foreclosure. As long as home prices continued to rise, this was a problem for the borrower, but not for the lender, who could take the property and resell it to a new buyer, at a similarly high rate of interest. However, with an increasing number of foreclosures, home values dropped, and before long, many people had mortgages that were higher than the current value of their homes. The whole scheme began to fall apart. It is not hard to understand that these trends ended in hardship for a growing number of families. What is less well understood is how they threaten the American economy and its place within the world economy.
In recent years, a trend developed in which mortgage lenders sold off the mortgages they originated to securities firms who would pool them into mortgage backed securities. These securities, because they involved risk, offered a greater rate of return, making them attractive to buyers. The embedded risk came precisely from those less qualified borrowers who were paying higher interest rates. It was only when large numbers of those borrowers could not make their mortgage payments that it became clear that the risk of these mortgage backed securities was too great.
A lot of these securities were being purchased by overseas borrowers. In trading with foreign countries, we purchased their manufactured goods, but we had a declining number of manufactured goods to sell to them. What we did have were these financial instruments, and now there was evidence that they may not be sound. Interest in purchasing them has dropped off. What then will we sell to foreign countries, as we buy their manufactured goods?
Looking at the early history of selling financial instruments to other countries leads us to Phillips’ second major theme: oil. Back in the mid-1970’s, the United States struck a deal with Saudi Arabia and the Persian Gulf states. We agreed to higher oil prices and to arm and protect the monarchies in the region. In return, there was unofficial agreement that oil was to be paid for in dollars. Much of the payment received was recycled back to the United States through investment in Treasury debt, the first financial instrument that we heavily promoted overseas.
The agreement to only accept dollars for oil gave the United States enormous purchasing power, because any country interested in buying oil from the region needed to trade with us to get our currency. Buying and selling in “petrodollars” became the worldwide standard practice.
The first leader of an oil producing nation to rebel against this arrangement was Saddam Hussein. In 2000, chafing after nearly a decade of economic sanctions by the United Nations and periodic bombing attacks by the United States, both of which inflicted great hardship on Iraq, he decided that international oil purchases from Iraq would be paid for in euros and not dollars. He urged members of OPEC to do the same. The 2003 invasion and occupation of Iraq quickly reversed his action. What the United States didn’t count on was the sense of outrage the invasion of Iraq would provoke throughout the world, and particularly among oil exporting nations.
Within a few years, Venezuelan president, Hugo Chavez, instructed the state owned oil company to shift accounts to euros and several Asian currencies. President Ahmadinejad in Iran shifted accounts to euros and yen. Saudi Arabia and several Persian Gulf states didn’t abandon the dollar completely, but significantly reduced the percentage of their oil sales to be paid for in dollars. They, too, were upset with the United States for invading Iraq, but they had a second more practical reason for moving toward other currencies. As the first few countries abandoned the dollar as the currency for oil sales, the value of the dollar began to decline. In that environment, any country which was tied too closely to the dollar would suffer economically.
Phillips believes that these two crises – the one that involves housing and credit and the other involving the end of our domination of world oil -- signal the end of our control of the world economy.
He looks at previous world economic powers – Spain, Holland, and Great Britain – and notes similarities. All three overemphasized the financial sector of the economy above all else. All three developed great wealth disparities between rich and poor. Holland and Great Britain were dominant in the prevailing energy sources of their day – wind and water in the case of Holland and coal in the case of Great Britain. The good news, Phillips reminds us, is that all three are far more prosperous today than they were in the height of their global reach.
But the transition from leading world economic power to a simple nation state among other nation states is not easy. No one prominent in U. S. politics will want to embrace an agenda of managing and minimizing the trajectory of our country’s fall from being the dominant economic power. The same was true in Spain, Holland, and Great Britain. Each experienced a few decades of hardship.
We are already feeling the impact of the transition. The cost of living is skyrocketing, as we pay unprecedented amounts for food, health insurance, heating oil, and gasoline for our cars. At the same time we periodically hear of our low inflation rates. How is this possible? According to Phillips, over time there have been changes in how the Consumer Price Index is calculated. For example, consumer electronics, which have been dropping in price, have been given greater weight in the calculation, and food and energy costs have been given lesser weight.
We need to realize that our entire lifestyle – how we get from place to place, our suburban residential patterns, the products we use – is all predicated on abundant, cheap oil. Within the next few years, the world will reach peak oil production, and it will decline from there. That and our diminishing control over the global oil business, as well as our failure in global credit markets, point to major changes in global economic power.
Recognition that this shift in world economic power is already underway will help us adapt to it. If we can develop high end manufacturing and alternative energy sources sooner rather than later, the transition will be far less painful.
Monday, July 28, 2008
Tuesday, July 1, 2008
Health Care Meltdown by LeBow and White
Health Care Meltdown: Confronting the Myths and Fixing Our Failing System
By Robert H. LeBow, MD
Revised and Updated by C. Rocky White, MD
Robert LeBow spent two years as a U.S. Peace Corp physician in Bolivia, and was headed toward a career in international health, when he realized that the economic forces in play in our own American health care system resulted in poor health outcomes here at home. He joined a health center for migrant farm workers in Idaho and became a life long health care activist. C. Rocky White arrived at the same conclusions, coming from a completely different background. His fundamentalist Christian boyhood on a Nebraska farm shaped his conservative views. His experience as a caring physician convinced him that while he was a strong believer in capitalism and the profit motive, he drew the line on issues relating to human health and questions of life and death. A few years after LeBow’s death in 2003, his widow asked White to revise and update her husband’s book, the very book that White himself would have written, had LeBow not done it first.
What exactly did these two men find wrong with the American health care system? Our medical technology is among the finest in the world and we have thousands of competent and compassionate health care providers. One problem is that our health outcomes are not very good in comparison to the rest of the world. A World Health Organization Study in the year 2000 ranked us at 27th in life expectancy, 29th in maternal mortality, 35th in infant mortality, and 36th in mortality before age five. In virtually all measures of health care, we rank in 20th place or worse, and we are the only industrialized democracy in the world which does not provide universal coverage to its entire population.
In light of these facts, it is surprising that in the United States, per capita spending on health care is roughly twice as much as in most other industrialized nations. We are also unique among our peers in being the only place where illness can lead to financial ruin. A full 50% of personal bankruptcies are medically related, and those affected are primarily middle-class people. 75% of those driven to bankruptcy due to health care costs had health insurance when they became ill.
What is contributing to such high costs? LeBow and White say that it is our fragmented, for-profit system for financing health care. A recent study of 2277 people in Washington state, for example, revealed that they were covered by 755 different health insurance policies and 189 different health plans. Such complexity results in increased administrative costs, as health care providers and hospitals submit claims to a variety of payers. In fact, up to 30% of health care costs involve administration, marketing of various insurance plans, inflated CEO salaries, commissions to insurance agents, and corporate profits. If these resources were instead devoted to patient care, all those currently insured could be covered.
How many people are currently uninsured? Out of a population of 300 million roughly 46 million have no health insurance. Adding those who are underinsured – in other words, those whose co-payments and deductibles are so high that their lack of a good plan presents a barrier to care – the figure is closer to 90 million.
When one is among the 90 million, he tends to delay health care, simply because it is too expensive. Or he sees a doctor, but forgoes the follow up visit. Or he doesn’t buy the prescribed medications, because he can’t afford them. Ultimately, the lack of preventative care or early intervention, results in many of the uninsured or underinsured developing serious problems that could have been avoided.
At the point where conditions become catastrophic, members of the uninsured or underinsured groups may gain entry to the system. Their aggravated conditions require immediate attention and the accompanying economic devastation makes them qualify for government programs for the very poor. However, the price is great – both in terms of human suffering and financial waste.
On the other side of the spectrum, there may be a tendency for overutilization. A person with back pain, for example, might come in and demand an MRI. A physician’s inclination might be to go with conservative approaches first, but he might be pressured into going along with the request, provided that the patient has a health plan that would cover it. In a similar vein, someone might see a particular medication advertised on TV and insist upon it, even though another medication might be less expensive and just as effective.
However, the middle class is vulnerable, as well. Our unique approach to health care which ties coverage to employment – a concept unheard of in other industrialized nations – means anyone is one layoff away from losing insurance. In addition, anyone who has been seriously ill (e.g. a cancer survivor) is someone labeled with a “pre-existing condition.” Insurance premiums for such a person become so high that many can no longer afford to buy it.
Physicians are suffering under the current system as well. They are devoting a significant amount of time to paperwork in figuring out who is covered by what and submitting and resubmitting claims. They also find themselves chasing favorable demographics, in order to survive. Rocky White tells of his own experience in the San Luis Valley, in South Central Colorado. In 1996, when he began working there, he was one of eleven internists in the Valley. The uninsured rate there is close to 24%. 23% of the population is on Medicaid and another 28% are on Medicare. With Medicaid patients, his practice lost 30 cents on the dollar, and with Medicare, he broke even. With such demographics, it is hard to sustain a practice, and White found that after nine years, he was the only internist left in the Valley. In this manner, many regions throughout the country are left with few or no internists.
LeBow and White argue that the only way to fix our health care system is to move to a single payer, one risk pool system. Health care delivery would continue to come from private providers but the financing mechanism needs to be done on a non-profit, public interest basis. With a single payer, health care administrative costs can be cut dramatically and resources could go back into patient care.
Who could object to health care as a human right and a simplified payment mechanism which would save billions of dollars? There have been four primary opponents: physicians, hospitals, pharmaceutical companies, and insurance companies. However, things are beginning to change. While the American Medical Association has long been an opponent of a single payer system, 57% of physicians overall now support it. These physicians are from varied backgrounds and political inclinations, but are aware of the inherent wastefulness in the current system and how it makes it increasingly difficult to practice medicine.
Hospitals, primarily those run as non-profits, should welcome a change that would streamline administration and cut down on paperwork. For-profit hospitals might consider converting to non-profit status.
A single payer opponent with more to lose is the pharmaceutical industry. Drug companies have one of the highest profit margins of all American companies, at 19% of sales. (In comparison, the median profit margin of Fortune 500 companies is 5%.) Drug companies spend three times as much money on marketing as they do on Research and Development, in order to maintain those high profits. A single payer system would have tremendous power to negotiate better pricing. Drug companies would still make a profit, but would not be able to “maximize profit.” The well being of our citizens would come first.
Finally, the player with the most to lose is the insurance industry. Their middleman role would be all but eliminated, except for some basic administrative functions within a non-profit context.
Perhaps the greatest obstacle to change, say the authors, is that the public knows so little about how the present system works or what alternatives might look like. The opponents of single payer have huge budgets to convince us that single payer is not a good idea. The opponents would like us to think that single payer would offer us less choice, when, in fact, the opposite is true. With today’s system, you can’t see a physician who is not approved by a particular health plan. Under single payer, there would be no such restrictions. A single payer, one risk pool system would continue to utilize health providers in the private sector. It is only the financing mechanism that would operate on a non-profit basis, in the public interest.
The authors emphasize that the “single risk pool” aspect of single payer is a critical element. Under the current system, health insurance companies are only too happy to delegate high risk patient responsibility to the government. The elderly are more likely to need medical services as are the truly poor, who have not had the same level of preventative care or early intervention. The profits are to be made among those in the healthy, employed middle-class. What could be more profitable than having a family of four pay well over $10,000 per year in health insurance, when the vast majority have little or no need to actually use health care services? Then, of course, should someone in this group become seriously ill, for example, develop cancer, the insurance industry looks for the first opportunity to deny coverage, or establish premiums that are well above the affordable level.
The one risk pool approach, advocated by the authors, requires us to think beyond our individualistic approach to health care and assume community responsibility. However, it is not simply a matter of altruism. We need to acknowledge that someone close to us may some day grow old or develop a serious illness. Just as we would want the members of the larger community to be there for us, we need to be there for them.
By Robert H. LeBow, MD
Revised and Updated by C. Rocky White, MD
Robert LeBow spent two years as a U.S. Peace Corp physician in Bolivia, and was headed toward a career in international health, when he realized that the economic forces in play in our own American health care system resulted in poor health outcomes here at home. He joined a health center for migrant farm workers in Idaho and became a life long health care activist. C. Rocky White arrived at the same conclusions, coming from a completely different background. His fundamentalist Christian boyhood on a Nebraska farm shaped his conservative views. His experience as a caring physician convinced him that while he was a strong believer in capitalism and the profit motive, he drew the line on issues relating to human health and questions of life and death. A few years after LeBow’s death in 2003, his widow asked White to revise and update her husband’s book, the very book that White himself would have written, had LeBow not done it first.
What exactly did these two men find wrong with the American health care system? Our medical technology is among the finest in the world and we have thousands of competent and compassionate health care providers. One problem is that our health outcomes are not very good in comparison to the rest of the world. A World Health Organization Study in the year 2000 ranked us at 27th in life expectancy, 29th in maternal mortality, 35th in infant mortality, and 36th in mortality before age five. In virtually all measures of health care, we rank in 20th place or worse, and we are the only industrialized democracy in the world which does not provide universal coverage to its entire population.
In light of these facts, it is surprising that in the United States, per capita spending on health care is roughly twice as much as in most other industrialized nations. We are also unique among our peers in being the only place where illness can lead to financial ruin. A full 50% of personal bankruptcies are medically related, and those affected are primarily middle-class people. 75% of those driven to bankruptcy due to health care costs had health insurance when they became ill.
What is contributing to such high costs? LeBow and White say that it is our fragmented, for-profit system for financing health care. A recent study of 2277 people in Washington state, for example, revealed that they were covered by 755 different health insurance policies and 189 different health plans. Such complexity results in increased administrative costs, as health care providers and hospitals submit claims to a variety of payers. In fact, up to 30% of health care costs involve administration, marketing of various insurance plans, inflated CEO salaries, commissions to insurance agents, and corporate profits. If these resources were instead devoted to patient care, all those currently insured could be covered.
How many people are currently uninsured? Out of a population of 300 million roughly 46 million have no health insurance. Adding those who are underinsured – in other words, those whose co-payments and deductibles are so high that their lack of a good plan presents a barrier to care – the figure is closer to 90 million.
When one is among the 90 million, he tends to delay health care, simply because it is too expensive. Or he sees a doctor, but forgoes the follow up visit. Or he doesn’t buy the prescribed medications, because he can’t afford them. Ultimately, the lack of preventative care or early intervention, results in many of the uninsured or underinsured developing serious problems that could have been avoided.
At the point where conditions become catastrophic, members of the uninsured or underinsured groups may gain entry to the system. Their aggravated conditions require immediate attention and the accompanying economic devastation makes them qualify for government programs for the very poor. However, the price is great – both in terms of human suffering and financial waste.
On the other side of the spectrum, there may be a tendency for overutilization. A person with back pain, for example, might come in and demand an MRI. A physician’s inclination might be to go with conservative approaches first, but he might be pressured into going along with the request, provided that the patient has a health plan that would cover it. In a similar vein, someone might see a particular medication advertised on TV and insist upon it, even though another medication might be less expensive and just as effective.
However, the middle class is vulnerable, as well. Our unique approach to health care which ties coverage to employment – a concept unheard of in other industrialized nations – means anyone is one layoff away from losing insurance. In addition, anyone who has been seriously ill (e.g. a cancer survivor) is someone labeled with a “pre-existing condition.” Insurance premiums for such a person become so high that many can no longer afford to buy it.
Physicians are suffering under the current system as well. They are devoting a significant amount of time to paperwork in figuring out who is covered by what and submitting and resubmitting claims. They also find themselves chasing favorable demographics, in order to survive. Rocky White tells of his own experience in the San Luis Valley, in South Central Colorado. In 1996, when he began working there, he was one of eleven internists in the Valley. The uninsured rate there is close to 24%. 23% of the population is on Medicaid and another 28% are on Medicare. With Medicaid patients, his practice lost 30 cents on the dollar, and with Medicare, he broke even. With such demographics, it is hard to sustain a practice, and White found that after nine years, he was the only internist left in the Valley. In this manner, many regions throughout the country are left with few or no internists.
LeBow and White argue that the only way to fix our health care system is to move to a single payer, one risk pool system. Health care delivery would continue to come from private providers but the financing mechanism needs to be done on a non-profit, public interest basis. With a single payer, health care administrative costs can be cut dramatically and resources could go back into patient care.
Who could object to health care as a human right and a simplified payment mechanism which would save billions of dollars? There have been four primary opponents: physicians, hospitals, pharmaceutical companies, and insurance companies. However, things are beginning to change. While the American Medical Association has long been an opponent of a single payer system, 57% of physicians overall now support it. These physicians are from varied backgrounds and political inclinations, but are aware of the inherent wastefulness in the current system and how it makes it increasingly difficult to practice medicine.
Hospitals, primarily those run as non-profits, should welcome a change that would streamline administration and cut down on paperwork. For-profit hospitals might consider converting to non-profit status.
A single payer opponent with more to lose is the pharmaceutical industry. Drug companies have one of the highest profit margins of all American companies, at 19% of sales. (In comparison, the median profit margin of Fortune 500 companies is 5%.) Drug companies spend three times as much money on marketing as they do on Research and Development, in order to maintain those high profits. A single payer system would have tremendous power to negotiate better pricing. Drug companies would still make a profit, but would not be able to “maximize profit.” The well being of our citizens would come first.
Finally, the player with the most to lose is the insurance industry. Their middleman role would be all but eliminated, except for some basic administrative functions within a non-profit context.
Perhaps the greatest obstacle to change, say the authors, is that the public knows so little about how the present system works or what alternatives might look like. The opponents of single payer have huge budgets to convince us that single payer is not a good idea. The opponents would like us to think that single payer would offer us less choice, when, in fact, the opposite is true. With today’s system, you can’t see a physician who is not approved by a particular health plan. Under single payer, there would be no such restrictions. A single payer, one risk pool system would continue to utilize health providers in the private sector. It is only the financing mechanism that would operate on a non-profit basis, in the public interest.
The authors emphasize that the “single risk pool” aspect of single payer is a critical element. Under the current system, health insurance companies are only too happy to delegate high risk patient responsibility to the government. The elderly are more likely to need medical services as are the truly poor, who have not had the same level of preventative care or early intervention. The profits are to be made among those in the healthy, employed middle-class. What could be more profitable than having a family of four pay well over $10,000 per year in health insurance, when the vast majority have little or no need to actually use health care services? Then, of course, should someone in this group become seriously ill, for example, develop cancer, the insurance industry looks for the first opportunity to deny coverage, or establish premiums that are well above the affordable level.
The one risk pool approach, advocated by the authors, requires us to think beyond our individualistic approach to health care and assume community responsibility. However, it is not simply a matter of altruism. We need to acknowledge that someone close to us may some day grow old or develop a serious illness. Just as we would want the members of the larger community to be there for us, we need to be there for them.
Wednesday, June 18, 2008
The Three Trillion Dollar War by Stiglitz and Bilmes
The Three Trillion Dollar War: The True Cost of the Iraq Conflict
By Joseph E. Stiglitz and Linda J. Bilmes
Joseph Stiglitz, a Columbia University professor and winner of the 2001 Nobel Prize in Economics, and Linda Bilmes, a government finance expert at Harvard’s Kennedy School, are almost defensive about having come together to write this book. Given the human suffering that war causes, they say in their preface, it may seem callous to focus on financial cost. However, financial resources are not infinite, and whether one was or is for this war or against it, it behooves all of us to examine the costs. When making choices between real world options, financial costs need to be one of the factors under consideration.
As of this writing – mid 2008 – the cost of the conflict is often stated as $645 billion, with the likely approval of 2008 war funding raising that to over $800 billion. Stiglitz and Bilmes say that this figure only represents funding for current combat operations. There are three other broad categories: hidden costs, future costs, and interest payments, which they analyze from a “best scenario” perspective (earlier withdrawal) and a “realistic-moderate” scenario. When the cost categories are added together, the total is conservatively estimated at $3 trillion. Adjusting for inflation, the only war that has been more expensive was World War II. And that is just the cost to the United States. The cost to the remainder of the world (primarily Iraq, but also those countries who have taken in refugees, or who have been pressured into forgiving Iraqi debt, so the Iraqis can rebuild) at least doubles that figure.
What are hidden costs? Hidden costs are essentially those which are buried in other budgets but are used to fund the Iraq War. The Department of Defense has an annual budget of roughly $500 billion per year, completely separate from war funding appropriations. Yet part of that budget is used to pay for the costs of current war. For example, the salaries of soldiers come out of the Defense Department budget. Only “extra” pay such as combat pay is taken out of the war appropriations budget. Also, due to difficulties recruiting, the military has hired thousands of new recruiters, increased signing bonuses and re-enlistment bonuses, and increased its national advertising campaign. All this has come out of the regular defense budget. Stiglitz and Bilmes meticulously delve into these and other hidden costs, while reminding us that they are being conservative in their estimates. Many hidden costs are not even included in their calculations, such as the insurance and workmen’s compensation for contractors, an expenditure that comes from the Department of Labor.
What are future costs? They are primarily costs which accrue now and are paid later. Primary among them is the cost of caring for our veterans. Due to advances in medicine and better protection of the torso, the ratio of injuries per fatality has skyrocketed since the second World War. At that time 1.6 soldiers were injured per fatality. Now the ratio is around 15 to 1. The signature wounds from this war are: traumatic brain injury, post-traumatic stress disorder, amputations, and spinal chord injuries. The costs of caring for these wounded veterans will go on for a lifetime, and they are not trivial.
Fully 38% of returning veterans are treated for mental health issues. A lot of those mental health problems stem from the difficulty of the soldier, once in Iraq, in determining who exactly the enemy is. Also, with repeated deployments, there is more likelihood of seeing the death or injury of a comrade. In addition, there are social costs tied to these future costs, like the lost income of the veteran whose disability prevents him from ever working, or the lost income of the caregiver who has given up a job to take care of him.
The fourth broad category is interest payments. This war has been funded on borrowed money. Foreign countries have purchased treasury debt and we pay billions each year in interest alone, on that debt. The longer the war continues, the more these debts will increase, since the current administration is pushing these costs onto future generations, and giving current taxpayers tax rebates. Eventually those debts will have to be paid.
One of the reasons the war has been so very expensive has been the unprecedented use of contractors in a variety of functions from personal services for soldiers to security detail, all of which used to be done by the military itself. These contractors are tremendously expensive. For example, private security guards working for Blackwater can earn as much as $1222 a day. By comparison, an Army sergeant earns $140 to $190 a day in pay and benefits.
Stiglitz and Bilmes anticipate that people will ask about the benefits of the conflict, but they have a hard time finding any. Had our goal been to find weapons of mass destruction, we soon discovered that there were none. Had we thought that Saddam Hussein was linked to those involved in the 9/11 attacks, we now know that is not true. Had our goal been to create a stable, democratic, and secular country that could be a model for the region, we are now far away from that goal. As the country plunged into chaos, the secular, educated middle class has largely fled to other countries and those who remain are more fundamentalist than ever. And finally, had we been after cheap oil, we have failed there, as well. Gasoline prices hovered around $1.60 per gallon at the start of the Bush Administration and are now over $4 per gallon. In fact, the authors argue that part of the rise of the price of oil is because of the war, and that adversely impacts other countries, as well. Only the oil companies, defense contractors, and security firms have benefited. Our international reputation has been tarnished and we have more enemies worldwide than ever. Our National Guard has been unavailable for domestic emergencies, such as Hurricane Katrina. Productive capacity that could have been used to manufacture goods that meet civilian needs instead went into armaments. Money spent on the war could have been spent on repairing our infrastructure, schools, and hospitals.
With regard to the continuation of the war, Stiglitz and Bilmes advocate getting out now. Iraq is not stable, but what makes us think that it will be more so in a year? In three years? In five years? We will only be adding to current and future costs. Adding to the difficulty is that most Iraqis want the Americans out of their country. There is not a lot of incentive for Iraqis to join forces with the Americans. Americans have imprisoned those who are part of the insurgency as well as those who are not. If “good” individuals (from the American viewpoint) are treated badly, there is little incentive to be good. On the other side, the insurgents are far more likely to only punish those complicit with the occupation. Being from Iraq and speaking Arabic, they are in a far better position to judge who is who. Being on the American side turns out to not be a very good bet from the Iraqi perspective.
The authors end their book by saying that war is not a decision to be taken lightly. In the end war is about men and women brutally killing other men, women, and children. But the authors don’t delve into a discussion of alternatives such as diplomacy or a strategy of generosity as embodied in the Marshall Plan in the 1940’s. Rather they make the assumption that our government will at some point take us into war again. Within that framework, they make several recommendations for the future. Some have to do with taking good care of our veterans, and making those benefits an entitlement, as opposed to something that comes up for periodic consideration by our congressmen. They also argue for limiting the use of contractors. Not only do contractors command huge salaries, their primary goal is making money, so they have little concern for the public interest.
Stiglitz and Bilmes also recommend that the costs of any military action, lasting more than one year, should be borne by current taxpayers, through the levying of a war surtax, and that any funding of war – or yearly refunding – should at every turn be linked to strategy. These last two recommendations alone should be enough to compel all of us – average citizens and Congressmen alike – to pay better attention as to what we are doing and why.
Louellyn Lambros
By Joseph E. Stiglitz and Linda J. Bilmes
Joseph Stiglitz, a Columbia University professor and winner of the 2001 Nobel Prize in Economics, and Linda Bilmes, a government finance expert at Harvard’s Kennedy School, are almost defensive about having come together to write this book. Given the human suffering that war causes, they say in their preface, it may seem callous to focus on financial cost. However, financial resources are not infinite, and whether one was or is for this war or against it, it behooves all of us to examine the costs. When making choices between real world options, financial costs need to be one of the factors under consideration.
As of this writing – mid 2008 – the cost of the conflict is often stated as $645 billion, with the likely approval of 2008 war funding raising that to over $800 billion. Stiglitz and Bilmes say that this figure only represents funding for current combat operations. There are three other broad categories: hidden costs, future costs, and interest payments, which they analyze from a “best scenario” perspective (earlier withdrawal) and a “realistic-moderate” scenario. When the cost categories are added together, the total is conservatively estimated at $3 trillion. Adjusting for inflation, the only war that has been more expensive was World War II. And that is just the cost to the United States. The cost to the remainder of the world (primarily Iraq, but also those countries who have taken in refugees, or who have been pressured into forgiving Iraqi debt, so the Iraqis can rebuild) at least doubles that figure.
What are hidden costs? Hidden costs are essentially those which are buried in other budgets but are used to fund the Iraq War. The Department of Defense has an annual budget of roughly $500 billion per year, completely separate from war funding appropriations. Yet part of that budget is used to pay for the costs of current war. For example, the salaries of soldiers come out of the Defense Department budget. Only “extra” pay such as combat pay is taken out of the war appropriations budget. Also, due to difficulties recruiting, the military has hired thousands of new recruiters, increased signing bonuses and re-enlistment bonuses, and increased its national advertising campaign. All this has come out of the regular defense budget. Stiglitz and Bilmes meticulously delve into these and other hidden costs, while reminding us that they are being conservative in their estimates. Many hidden costs are not even included in their calculations, such as the insurance and workmen’s compensation for contractors, an expenditure that comes from the Department of Labor.
What are future costs? They are primarily costs which accrue now and are paid later. Primary among them is the cost of caring for our veterans. Due to advances in medicine and better protection of the torso, the ratio of injuries per fatality has skyrocketed since the second World War. At that time 1.6 soldiers were injured per fatality. Now the ratio is around 15 to 1. The signature wounds from this war are: traumatic brain injury, post-traumatic stress disorder, amputations, and spinal chord injuries. The costs of caring for these wounded veterans will go on for a lifetime, and they are not trivial.
Fully 38% of returning veterans are treated for mental health issues. A lot of those mental health problems stem from the difficulty of the soldier, once in Iraq, in determining who exactly the enemy is. Also, with repeated deployments, there is more likelihood of seeing the death or injury of a comrade. In addition, there are social costs tied to these future costs, like the lost income of the veteran whose disability prevents him from ever working, or the lost income of the caregiver who has given up a job to take care of him.
The fourth broad category is interest payments. This war has been funded on borrowed money. Foreign countries have purchased treasury debt and we pay billions each year in interest alone, on that debt. The longer the war continues, the more these debts will increase, since the current administration is pushing these costs onto future generations, and giving current taxpayers tax rebates. Eventually those debts will have to be paid.
One of the reasons the war has been so very expensive has been the unprecedented use of contractors in a variety of functions from personal services for soldiers to security detail, all of which used to be done by the military itself. These contractors are tremendously expensive. For example, private security guards working for Blackwater can earn as much as $1222 a day. By comparison, an Army sergeant earns $140 to $190 a day in pay and benefits.
Stiglitz and Bilmes anticipate that people will ask about the benefits of the conflict, but they have a hard time finding any. Had our goal been to find weapons of mass destruction, we soon discovered that there were none. Had we thought that Saddam Hussein was linked to those involved in the 9/11 attacks, we now know that is not true. Had our goal been to create a stable, democratic, and secular country that could be a model for the region, we are now far away from that goal. As the country plunged into chaos, the secular, educated middle class has largely fled to other countries and those who remain are more fundamentalist than ever. And finally, had we been after cheap oil, we have failed there, as well. Gasoline prices hovered around $1.60 per gallon at the start of the Bush Administration and are now over $4 per gallon. In fact, the authors argue that part of the rise of the price of oil is because of the war, and that adversely impacts other countries, as well. Only the oil companies, defense contractors, and security firms have benefited. Our international reputation has been tarnished and we have more enemies worldwide than ever. Our National Guard has been unavailable for domestic emergencies, such as Hurricane Katrina. Productive capacity that could have been used to manufacture goods that meet civilian needs instead went into armaments. Money spent on the war could have been spent on repairing our infrastructure, schools, and hospitals.
With regard to the continuation of the war, Stiglitz and Bilmes advocate getting out now. Iraq is not stable, but what makes us think that it will be more so in a year? In three years? In five years? We will only be adding to current and future costs. Adding to the difficulty is that most Iraqis want the Americans out of their country. There is not a lot of incentive for Iraqis to join forces with the Americans. Americans have imprisoned those who are part of the insurgency as well as those who are not. If “good” individuals (from the American viewpoint) are treated badly, there is little incentive to be good. On the other side, the insurgents are far more likely to only punish those complicit with the occupation. Being from Iraq and speaking Arabic, they are in a far better position to judge who is who. Being on the American side turns out to not be a very good bet from the Iraqi perspective.
The authors end their book by saying that war is not a decision to be taken lightly. In the end war is about men and women brutally killing other men, women, and children. But the authors don’t delve into a discussion of alternatives such as diplomacy or a strategy of generosity as embodied in the Marshall Plan in the 1940’s. Rather they make the assumption that our government will at some point take us into war again. Within that framework, they make several recommendations for the future. Some have to do with taking good care of our veterans, and making those benefits an entitlement, as opposed to something that comes up for periodic consideration by our congressmen. They also argue for limiting the use of contractors. Not only do contractors command huge salaries, their primary goal is making money, so they have little concern for the public interest.
Stiglitz and Bilmes also recommend that the costs of any military action, lasting more than one year, should be borne by current taxpayers, through the levying of a war surtax, and that any funding of war – or yearly refunding – should at every turn be linked to strategy. These last two recommendations alone should be enough to compel all of us – average citizens and Congressmen alike – to pay better attention as to what we are doing and why.
Louellyn Lambros
Thursday, June 5, 2008
The Myth of Free Trade by Ha-Joon Chang
Bad Samaritans: The Myth of Free Trade and the
Secret History of Capitalism
by Ha-Joon Chang
The concept of free trade, as promoted by today’s economic superpowers, is a set of principles based on unfettered capitalism (e.g. no tariffs or government subsidies) with a few notable exceptions (e.g. subsidies for agriculture, intellectual property rights). Promoted as beneficial to the world community at large, free trade simultaneously promises to lift developing nations out of poverty and give the greatest number of human beings the greatest number of goods, at the lowest possible cost. Ha-Joon Chang, a distinguished economics professor at the University of Cambridge, challenges these notions. Instead of examining them from a theoretical perspective, he reviews actual trade history to provide an empirical framework for discussion.
He begins his review with his own native South Korea which achieved a level of economic growth in forty years that it took the United States a century and a half and Great Britain two centuries to achieve. He asks if this was a result of practicing the principles of free trade and concludes that it was not. The South Korean government methodically selected key industries and nurtured them through a combination of tariffs, outright import bans, and subsidies. They heavily controlled foreign investment, welcoming it in certain areas and shutting it out in others. Some critical industries that would not be immediately profitable were undertaken as state-owned enterprises, the steel maker, POSCO, being the best example.
Chang then reviews the British and American experience and finds a similar history. Britain imposed high tariffs on wool for many years, while developing a woolen industry that could compete against the Low Countries. The United States imposed high tariffs on British cotton textiles in order to develop its own textile industry. In fact, this was the primary source of tension between the North and the South in the run-up to the Civil War.
As producers of raw cotton, it was understandable that the South would want to purchase cotton cloth at the best possible price. The 40 to 50% tariffs that the United States imposed on all manufactured goods, from that period through the First World War, was seen as an imposition on a region that was primarily agricultural. Yet in order to grow and prosper as a nation, the United States needed to protect our new industries until they reached a point where they could compete on the world stage. There was no stronger advocate for this than Alexander Hamilton, our first Secretary of the Treasury, whose ideas in “Report on the Subject of Manufactures” became the foundation of our economic prosperity.
There appear to be only two areas within the free trade framework that government intervention is encouraged: agricultural subsidies and intellectual property rights. The United States heavily subsidizes agriculture and the result is that our food products are available in other countries at lower prices than locally grown foods. For example, after the implementation of NAFTA, low cost corn from the United States reached the Mexican market, resulting in many Mexican corn farmers going out of business. This was not only devastating to individual farmers. It put the entire country in a difficult position since it became dependent upon another country for the staple of its diet.
In the area of Intellectual Property Rights, particularly as granted to pharmaceutical companies, Chang shows where such policies often result in scarcity, rather than abundance, of goods. When a local economy is prevented from creating a cheaper generic alternative, many go without badly needed medicines, simply because they cannot afford them. Recent changes in patent laws have extended the life of patents, 97% of which are held by rich countries, making economic development in poorer countries that much more difficult. Interlocking patents make it hard to generate medicines and other innovations that are founded on previously patented knowledge. Chang dispels the myth that without a strong profit motive, advances in medicine would not occur, pointing out that much research is done in university settings for reasons having to do with scientific curiosity and the desire to do something beneficial for mankind.
On another front, and as part of the free trade framework, the giants of world finance, the World Bank and International Monetary Fund, favor private enterprise over state owned at all times, and these preferences are usually part of the terms of business. Chang looks at the criticisms leveled against state owned enterprises, which he calls the “principle agent problem, the free rider problem, and the soft budget constraint.” He shows through actual examples that these problems are not exclusive to state owned enterprises, and that there are poorly run and well run state, as well as private, enterprises. He shows that even in countries such as France, many successful companies from Renault to Rhone-Poulenc began as state-owned, the most powerful reason being that some critical industries need to be nurtured for years, before they can become profitable.
The strength of the book is that it does not rely on hypothesis and conjecture regarding the result of free trade, but rather examines actual trade history. Chang’ concludes that the notion of a “level playing field” is unfair when the players themselves are unequal. He certainly supports the idea of international trade, and in fact, blames the lack of it for North Korea’s dismal economic performance, since 1950. However, as was the case in South Korea, Britain, the United States, and the vast majority of prosperous nations, he strongly believes that countries must be allowed to integrate into the world economy on their own terms.
What is lacking here is any discussion of the impact of free trade on the citizens of wealthier countries. Chang does not address the concerns of displaced workers in a nation that has been losing its manufacturing base, nor does he give possible remedies for those concerns. That, perhaps, is the subject of another book.
Louellyn Lambros
Secret History of Capitalism
by Ha-Joon Chang
The concept of free trade, as promoted by today’s economic superpowers, is a set of principles based on unfettered capitalism (e.g. no tariffs or government subsidies) with a few notable exceptions (e.g. subsidies for agriculture, intellectual property rights). Promoted as beneficial to the world community at large, free trade simultaneously promises to lift developing nations out of poverty and give the greatest number of human beings the greatest number of goods, at the lowest possible cost. Ha-Joon Chang, a distinguished economics professor at the University of Cambridge, challenges these notions. Instead of examining them from a theoretical perspective, he reviews actual trade history to provide an empirical framework for discussion.
He begins his review with his own native South Korea which achieved a level of economic growth in forty years that it took the United States a century and a half and Great Britain two centuries to achieve. He asks if this was a result of practicing the principles of free trade and concludes that it was not. The South Korean government methodically selected key industries and nurtured them through a combination of tariffs, outright import bans, and subsidies. They heavily controlled foreign investment, welcoming it in certain areas and shutting it out in others. Some critical industries that would not be immediately profitable were undertaken as state-owned enterprises, the steel maker, POSCO, being the best example.
Chang then reviews the British and American experience and finds a similar history. Britain imposed high tariffs on wool for many years, while developing a woolen industry that could compete against the Low Countries. The United States imposed high tariffs on British cotton textiles in order to develop its own textile industry. In fact, this was the primary source of tension between the North and the South in the run-up to the Civil War.
As producers of raw cotton, it was understandable that the South would want to purchase cotton cloth at the best possible price. The 40 to 50% tariffs that the United States imposed on all manufactured goods, from that period through the First World War, was seen as an imposition on a region that was primarily agricultural. Yet in order to grow and prosper as a nation, the United States needed to protect our new industries until they reached a point where they could compete on the world stage. There was no stronger advocate for this than Alexander Hamilton, our first Secretary of the Treasury, whose ideas in “Report on the Subject of Manufactures” became the foundation of our economic prosperity.
There appear to be only two areas within the free trade framework that government intervention is encouraged: agricultural subsidies and intellectual property rights. The United States heavily subsidizes agriculture and the result is that our food products are available in other countries at lower prices than locally grown foods. For example, after the implementation of NAFTA, low cost corn from the United States reached the Mexican market, resulting in many Mexican corn farmers going out of business. This was not only devastating to individual farmers. It put the entire country in a difficult position since it became dependent upon another country for the staple of its diet.
In the area of Intellectual Property Rights, particularly as granted to pharmaceutical companies, Chang shows where such policies often result in scarcity, rather than abundance, of goods. When a local economy is prevented from creating a cheaper generic alternative, many go without badly needed medicines, simply because they cannot afford them. Recent changes in patent laws have extended the life of patents, 97% of which are held by rich countries, making economic development in poorer countries that much more difficult. Interlocking patents make it hard to generate medicines and other innovations that are founded on previously patented knowledge. Chang dispels the myth that without a strong profit motive, advances in medicine would not occur, pointing out that much research is done in university settings for reasons having to do with scientific curiosity and the desire to do something beneficial for mankind.
On another front, and as part of the free trade framework, the giants of world finance, the World Bank and International Monetary Fund, favor private enterprise over state owned at all times, and these preferences are usually part of the terms of business. Chang looks at the criticisms leveled against state owned enterprises, which he calls the “principle agent problem, the free rider problem, and the soft budget constraint.” He shows through actual examples that these problems are not exclusive to state owned enterprises, and that there are poorly run and well run state, as well as private, enterprises. He shows that even in countries such as France, many successful companies from Renault to Rhone-Poulenc began as state-owned, the most powerful reason being that some critical industries need to be nurtured for years, before they can become profitable.
The strength of the book is that it does not rely on hypothesis and conjecture regarding the result of free trade, but rather examines actual trade history. Chang’ concludes that the notion of a “level playing field” is unfair when the players themselves are unequal. He certainly supports the idea of international trade, and in fact, blames the lack of it for North Korea’s dismal economic performance, since 1950. However, as was the case in South Korea, Britain, the United States, and the vast majority of prosperous nations, he strongly believes that countries must be allowed to integrate into the world economy on their own terms.
What is lacking here is any discussion of the impact of free trade on the citizens of wealthier countries. Chang does not address the concerns of displaced workers in a nation that has been losing its manufacturing base, nor does he give possible remedies for those concerns. That, perhaps, is the subject of another book.
Louellyn Lambros
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