Tariffs

Let’s increase the tax on everything in the store by 25%! Don’t we all like taxes? No, wait; let’s have China pay a 25% tariff on everything they export to the US. They can pay their money directly to the US treasury. Wait, who pays what to whom? Gibberish, I tell you!

A couple of weeks ago another #POTUS lie appeared, blazoned across my twitter screen[i]. It boasted that tariffs on goods coming into the US would result in China paying billions of dollars to our Treasury. It was a lie, but more importantly, it was a demonstrated lack of basic economic know-how. The leaders of the homeland don’t understand economic theory.

Aghast at this blatant lie, I read the string of tweets that followed @realDonaldTrump’s claim. In minutes, there were many hundreds of comments; most of the posters were overjoyed with the prospect of hurting the Chinese and any other country that wanted to ship cheap goods to our shores. Oh, there were the occasional crazy liberal left-wingers who disagreed. But, you just knew they were coastal elites spouting their socialist mantras.

Some say that if you put eight economists in a room, and ask them any question, they will give you at least twenty-four differing opinions. However, Adam Smith, (1723-1790)[ii] the father of economics, and most economists since the 18^th century, pretty much agrees that tariff wars are never a good thing. That may be even truer today because of the extent of the global marketplace.

It’s true that the US has a big trade deficit vis-à-vis China, and a few other countries. We import more than we export. The normal approach to world trade is to have agreements among countries: respect patents, intellectual property, play fair and don’t flood the markets with below-cost merchandise. It generally works. China doesn’t always follow the rules. Will tariffs end their bad behavior? History tells us no.

When the US places a 25% tariff on products coming from China, who actually pays the tariff? Is it China? Nope! Do Costco, Walmart, Target and other companies that import goods from them pay the tariff? Yes, but the extra cost is passed to the American consumer. China does not pay one red cent of the tariffs. But the trade war still escalates.

China has announced new tariffs on US goods exported to their markets, like our agricultural products. If our farmers can’t export their product, they can’t sell their product. If they can’t sell their product, they go broke.

We live in a global marketplace. The small population of the US (326 million)[iii] must sell to the world market because it can’t survive on just the US consumer. Automakers, for example, sold 17- million cars in the US in 2018. Europeans bought 18- million cars, and Chinese bought 28- million cars in 2018. If you want to be in the car business, you had better be in the global market. Eighty percent of Buick’s sales are in China.[iv] Toyota, Honda, Acura, BMW, Mercedes, and others manufacture cars in the US. It’s a global market, so companies manufacture where the market dictates.

If we know that tariff wars seldom work, why do we start them? Sometimes it’s a message to other countries that we expect them to play fair. Usually, it’s a political move to assuage a base of supporters and those were hurt by the massive regional economic shifts.

A better way to tweet out an explanation of the tariff war would have been to tell the people that the government was imposing a 25% tax on nearly everything imported from China. Then the government should have reminded consumers how many Chinese goods they purchase each year. It could have also reminded the people that nearly everything we export to China will be subject to a tariff/tax, which will reduce the number of goods that they will purchase from the US.

Tweeting can’t possibly be the best way to communicate serious government policy. Yet, the millions who follow our leader are satisfied with his comments, like his ideas and comment on them regularly[v]

Too many of us lack a foundational understanding of economics, so we accept tweets about the goodness of tariffs, even when they are lies. Many victims of lost jobs to the global market need and want to hear that our government is doing something to return manufacturing to the heartland, even when they are lies. People want meaningful jobs, they want to contribute, and desperately want to make things better for their children, so they buy into the lies.

So, should we be concerned about the lack of economic knowledge among our government leaders or the extent to which they use lies as a strategy? Yes, to both! The reality of the marketplace will help ease economic illiteracy. But, will we trust them in times of crisis? I wonder. I suspect not, and that will be to our detriment.

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[i] @chuckwoods56

[ii] Adam Smith – The Wealth of Nations – W. Strahan & T. Cadell, London, 1776

[iii] China and India are both well over a billion people – World Population Review 2019

[iv] Carsalebase.com 2019

[v] 12K comments, 18K retreats, 86K likes, 60.2 million followers - @real Donald Trump – May 10, 2019

Back to Work?

In a weak moment, I wondered if I could go back to work. I didn’t really want to go back to work; I was just curious. What would it be like? Could I adapt? It didn’t take much research to figure out I wouldn’t fit in; I wouldn’t know how to live in a modern office. I wouldn’t be comfortable in the modern tech spaces they call offices. Excuse me, workspaces.

There was a certain comfort knowing that each morning I could head to my own office to do whatever it was I did; a functional desk, a couple of chairs, a bookcase, maybe even carpet on the floor. If you were lucky, the spaces got bigger, the carpet thicker, the desk nicer, a couch filling one wall, and a small conference table for meetings. Some folks called it working in silos. Marketing had its silo, Research had its silo, and Accounting had its silo. The Legal department had its silo, but they wouldn’t tell you what they did. The executives had their silos as far from the troops as possible; usually on a different floor. Today’s workspaces have all those people working at the same table or in the same workspace. How productive can that be? Well …

For reasons unknown, items about office design flooded my computer monitor recently. Always curious, I did a deep dive into office layouts, furniture sketches, workplace expectations, and work processes. I’m reasonably adaptable, but this stuff is over the top. The modern office looks like a place to rest a laptop. Long, high tables with bar stools seem to be the norm; eight or ten people sitting side by side; they call them teams. Conference tables appear in open spaces rather than in rooms. And the colors! Who wants to work in an environment filled with lime green, orange, yellow, and gray? It makes mid-century Danish-modern and shag carpeting positively inviting. But that isn’t the half of it.

One day in these workspaces would give me away. What do I know about Slack software? It’s some kind of intra-office messaging, email, voice mail, conversation gathering, and filing system. They invented it because regular text messaging and email is too slow for today’s work teams. OK, I could learn to use it, but why. In a few months, they will replace it with something faster. I could fake it until then.

Work isn’t what it used to be. Teams are much more interactive than in the past. Collaboration is very much needed to scale a business, but so is amazing technology. Companies used to concentrate on growth; if you stopped growing and your competitors didn’t, you would find yourself on the south side of market share. It worked then, but not anymore.

Today’s companies are all about scale; how you scale a company is completely different from how you grow a company. Scaling is about increasing a customer base exponentially without increasing cost and doing it quickly. A well-designed piece of software can accommodate one million customers for about the same costs as one hundred customers.

Airbnb, founded eleven years ago has 150 million users in 191 countries that make nearly 70 million reservations a month. Uber, with three million drivers and 91 million users provides about 75 million rides a month. Slack, mentioned earlier, has 10 million daily users in 85,000 companies. It is ten years old. For comparison, the telephone took 75 years to reach 50 million users worldwide. Ma Bell grew up but Uber, Airbnb, and Slack scaled up.

The way companies work today, and the way the people in them work reverberates with the incessant drumbeat of technology in all work environments. We know that AI is becoming a strategic weapon both economically and militarily. We know we’re not ready for that onslaught and it’s only just begun. We know that G4, only a few years old, which allowed the Smartphone, introduced in 2007, to do its magic is being replaced already by G5. These two technologies and those we do not know about yet will change the world of work even more and likely in a shorter time.

I see myself slowing down a bit and the work world speeding up - at a furious pace. I’ll stick to reading, writing, and golf. Work sounds too fast, too data-driven and too …

It’s not for me this year. I’ll think about it next year.

Insurance for Everyone?

If you really want to scare the heck out of people, tell them that you favor medicare-for-all. It gets the juices going. People say they do not want to pay for someone else’s insurance, they do not want to be forced to change their doctors or their hospital, they like their current insurance plan, and they do not want socialized medicine. Some say we cannot afford it; it will bankrupt the nation. Understanding healthcare is complicated. It requires deep dives into minutia. Most would rather listen to nails on a blackboard, so I’ll paint a picture in broad strokes and leave the details to others.

I start with the belief that good healthcare is a human right. Everyone should have access to good healthcare regardless of economic status and should be able to choose their own doctor and medical care facilities. We can’t do that in America today.

Definitions are hard to come by. I’ve heard so many people say they hate Obamacare but like the Affordable Care Act. Everyone running for President this year has a different version or approach to the issue of healthcare. Some suggest a massive overhaul of our insurance system over a four or five year period, while others would move more slowly. Nevertheless, let’s start with the basics.

“Medicare-for-all” is an insurance plan that covers everyone in the country. It is not socialized medicine and it isn’t free. Today, people must choose from among 5,977 health insurance companies[i], or their employer chooses for them. Most people who have insurance belong to a network of doctors and hospitals with which the insurance company has negotiated rates.

Therefore, if you have health insurance with company X, you must choose your doctor and hospital from their network. If you go to a doctor or hospital that is not in that network, you pay dearly. So, you really can’t choose any doctor or hospital, just those in the network. Many people experience this when they go to a hospital in their network for an operation, but get a surprise bill from the anesthesiologist who is not in their network. Medicare-for-all will let you choose any doctor and any hospital in any state because they will all be in the same network. This alone should increase competition and lower prices, especially among specialists.

Employers provide healthcare for 55.7 percent of the population. However, we know that 61% of companies shop for new insurance plans each year. When an employer changes its insurance carrier, employees must shop for a new doctor and hospital. The Bureau of Labor Statistics points out that nearly two million people lose their jobs or change employers each month, another four million quit their jobs, and nearly a half a million people retire each month. Looking for new doctors and hospitals is normal for millions of people. Medicare-for-all would eliminate that search.

Most employers pay about 80% of an employee’s healthcare premium. Some argue that that cost will go away, to be replaced by a tax for healthcare. Some worry that the $1,000 per month or more that a company pays for employee healthcare will then increase bottom line profits, with the employee experiencing increased taxes.[ii] There is no reason for that to happen under a single insurance plan if it is designed properly. Competition for workers won’t allow companies to pass on that cost to the employee. Companies will either increase worker pay or subsidize the health care tax.  

Nearly every retiree in the US has Medicare as his or her primary health insurance. That runs about $100 per month. Many retirees have the Medicare Advantage plan to supplement their basic plan. That runs about $100 per month. Others have a “Medigap” insurance plan to cover healthcare costs not covered by Medicare. These plans are typically between $260-400 per month. The typical retiree, with modest co-pays, can have outstanding medical coverage. Should not everyone in the country have the same opportunity? High-quality healthcare is the norm in most industrialized nations. There is also no reason why medicare-for-all can’t have differing levels of plans so that people can choose the kind of coverage they want to pay for their care; larger co-pays, and deductibles

It will not be easy to change to a single insurance plan. Several fundamental issues need resolution. We must agree that good healthcare is a basic human right regardless of income. We need to agree that everyone needs to be covered and needs to contribute to the plan. If we can’t agree on that, no system will be effective.

 The fractured healthcare system in the US needs fundamental change because it is not efficient. It is an amalgamation of lots of unrelated processes. Try to construct a flowchart of how a hospital works and you will throw up your hands in despair. We pay about 18 percent of GDP for healthcare, nearly twice that of other nations. Our outcomes are at the bottom of the OECD[iii] countries. Hospitals account for 33% of healthcare costs.[iv] The government’s Center for Medicare and Medicaid Services estimates that hospitals could save $23 billion dollars a year simply by tightening up their supply chain processes.[v]

Let’s use the emergency room visit as an example. You see your doctor because you don’t feel good. She checks you out, does an EKG, and determines you are having heart problems. Get thee to the ER. You arrive and the first thing they do is hook you up to an EKG machine. Why don’t they have the results of the one your doctor did? Oh, the doctor uses a different electronic file system than the hospital; they don’t talk to each other. After a few hours of tests and observation, they tell you to go home. A few weeks later, you see the bill: $30,000 for a day in the ER, $2,000 for the MRI, and $45 for the mini-aspirin they gave you and it goes on for pages. Wow! Actually, you find out that your insurance paid $13,000 and your co-pay is $300. Without insurance, you would be stuck with the entire bill instead of only $13,300. If you can’t pay the collection agency will put a lien on your house, freeze your checking account, and threaten to take your first-born. How much does it really cost to spend a day in the ER or a night in the hospital?

If a single insurance company covers everyone in the country, hospitals, outpatient surgery centers, medical labs, ambulances, drug manufacturers and other medical providers will have to come to grips with their costs and their processes. If they don’t change their systems, medicare-for-all won’t work, or at least it will be difficult to implement.

Prescription drugs account for about 10% of healthcare costs. US drug prices are about three times more than in Europe or Canada for the same product.[vi] It is now against the law for Medicare to negotiate pricing with big pharma. We could change that law and save over $100 billion dollars per year. Pharmaceutical companies spend $30 billion a year in advertising and promotion, $20 billion of which is directed at doctors.[vii] The United States and New Zealand are the only two nations that allow pharmaceutical companies to promote to the consumer.[viii] Let’s cut that expenditure in half and save another $15 billion dollars.

MRI machines cost as much as $3 million dollars to purchase the top of the line and require extensive building construction to ensure personnel safety; $3,300,000 in round numbers. The average charge for an MRI is $2,600. So it takes about 3 years to pay off the investment, at which time the price should come down to a few hundred dollars. The US has four times as many MRI machines per million people than most other countries; France has 5.8 machines per million people.[ix]

We have seen fits and starts for decades with no discernable improvement in the system. So, what can we do to keep the process moving toward a single insurance plan? Medicare is a major contributor to the healthcare economic pot. Let’s start there: reduce payments for pharmaceuticals by two thirds, outlaw pharmaceutical advertising in all media, streamline FDA approval processes to increase research into needed drugs, and improve hospital supply chains. We can continue to require hospitals to post their prices: real prices, defined as the lowest payment they currently receive from any insurance plan. This will force hospitals to increase lean management processes, work toward 6 Sigma standards, and take the waste out of their processes. These steps alone will reduce healthcare costs by hundreds of billions of dollars each year.

Yes, the devil is in the details, and healthcare is complicated, but there are any numbers of big-ticket items that we can fix quickly. Big Pharma will oppose it, the AMA will oppose it, hospital groups will oppose it, and members of Congress who get financial contributions from those groups will oppose it. I guess if all those folks are against improving the system, it must be the right thing to do.

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[i] National Association of Insurance Commissioners 2016

[ii] Chris Weigant – The One Problem “Medicare-for-All” Must Address – Chris Weigant.com

[iii] Organization for Economic Cooperation and Development (OECD) 2019

[iv] Kaiser Family Foundation 2017

[v] Susan Morse – Hospitals Could Save About $10 Million a Year In Supply Chain – Health Care Finance – 2017

[vi][vi] Ben Hirschler – How the US pays 3 times more for drugs - Scientific American 2016

[vii] Beth Mole – ARS Technica - 2019

[viii] Reuters - 2017

[ix] OECD – Number of MRI Units per Million Population - 2019