Understanding Piketty, part 3

Part 3 of Thomas Piketty's Capital in the Twenty-First Century is the longest section of the book (230 pages out of 577), providing his analysis of inequality at the level of individuals. Notably, Piketty largely avoids the use of the familiar Gini index because, in his view, it obscures the issue by combining the effects of inequality based on income with those of inequality based on wealth. He treats the two sources of inequality separately throughout this analysis.

The first point Piketty emphasizes is one regular readers will be familiar with from my previous discussions of the Crédit Suisse wealth reports: Wealth is always more unequally distributed than income. The disparity is stark (p. 244):

...the upper 10 percent of the labor income distribution generally receives 25-30 percent of total labor income, whereas the top 10 percent of the capital income distribution always owns more than 50 percent of all wealth (and in some societies as much as 90 percent). Even more strikingly, perhaps, the bottom 50 percent of the wage distribution always receives a significant share of total labor income (generally between one-quarter and one-third), or approximately as much as the top 10 percent), whereas the bottom 50 percent of the wealth distribution owns nothing at all, or almost nothing (always less than 10 percent and usually less than 5 percent of total wealth, or one-tenth as much as the wealthiest 10 percent).

 One finding from his data which impressed me is that the inequality of wealth is virtually the same in all age cohorts, refuting the view that advanced industrialized societies are riven by inter-generational warfare (pp. 245-6). In other words, Baby Boomers may be less wealthy than their parents, but their incomes are just as unequally distributed, on average, and will continue to be so after they build up a few more assets and retire.

For my American readers, it is worth noting that Piketty claims that the United States today (meaning 2010) has the highest level of wage inequality ever seen in history, with 35% going to the top 10% and only 25% going to the bottom 50%. If current trends continue, though obviously an iffy proposition, the share of the top 10% would rise to 45% vs. just 20% for the bottom 50% (Table 7.1). In terms of wealth inequality the U.S. has as of 2010 almost reached the astronomical levels only seen by Europe circa 1910, with the top 10% owning 72% of all wealth, versus a 90% share in 1910 Europe (p.257). As this is survey-based data, Piketty says that 75% is a more likely figure, since surveys understate the top income and wealth shares. The bottom 50% of Americans own just 2% of the country's wealth. As I noted before, if r>g, this concentration of wealth is likely to become even more uneven over time.

Piketty then turns to the evolution of inequality over the course of the 20th century. He takes the French case and the U.S. case as representatives of "two worlds," one where inequality is largely caused by differentials in capital income (France) and one where it is caused more by wage inequality.

In France in 1910, the top 10% received over 45% of total income from both labor and capital, whereas its share of labor income was under 30%. Over the course of World War II, the share of the top decile (10%) dropped by about 15 percentage points, which rose and fell between 1945 and 1982, but since then is on the upswing once again (Figure 8.1). Wage inequality has been much more stable for France from 1910 to 2010. The higher you go in the income hierarchy, particularly within the top 1%, income from capital becomes more and more important, fully 60% of the income of the top .01%  of the French population (Figure 8.4). Piketty points out that while the upswing in capital income since 1982 does not yet appear large (only a few percentage points), it is built on an increase of capital as a percentage of national income, of inherited wealth, that will cause capital income to explode in the near future.

In the United States, we see the same decline in the income share of the top decile after 1940 as in France, but unlike France, since 1980 the United States has seen the share of the top 10% fully restored (Figure 8.5). Moreover, the vast majority of that recovery in the wealthy's share of income is due solely to the increasing income share going to the top 1% (Figure 8.6). Behind this is an increase in what he calls "supersalaries," the vast majority (60-70%) of which come from top managers and less than 5% from superstars in sports, acting, and the arts. Of course, though the route is different from that of France, it again causes an increase in capital's share of national income, making it likely that inherited wealth will rise in importance in the United States as well.

What caused this explosion of labor income inequality in the United States? Piketty cites several factors. First, he highlights the findings of Claudia Goldin and Lawrence Katz that wage inequality began to grow in the 1980s, "at precisely the moment when for the first time the number of college graduates stops growing, or at any rate grows much more slowly than before" (p. 306). Second, institutions matter in the labor market. The biggest factor holding down the low end of wages in the United States is the low level of the minimum wage, which peaked in 1969 at $10.10 in 2013 dollars (p. 309).

However, these factors do not explain what is going on at the very top of the wage distribution, according to Piketty. One piece of evidence is that the supermanager phenomenon is a characteristic of the Anglo-Saxon countries after 1980, whereas there are only very small increases for the top 1% in Continental European countries or Japan (Figures 9.2-9.4). But another important point is that, among the English-speaking countries, the United States has the largest increase in the income of the top 1%, and the same is true for the income share of the top 0.1% of incomes (Figures 9.5-9.6). So, something is going on specifically in the United States. It is not, however, that there is some fantastically higher level of productivity growth in the U.S. All of the countries considered are at the world's technological frontier; indeed, the evidence suggests that telecommunications infrastructure and cost are worse in the United States than many other industrialized countries.

Instead, what appears to account for the sharply divergent incomes of supermanagers are the difficulty of determining the marginal productivity of top managers (Piketty cites evidence that firms with the highest-paid executives do not perform better than those with lower-paid executives); the ability of top managers to "set their own salaries," for example by appointing the compensation committees that will judge them; and, as Part 4 will show, the decrease in top marginal tax rates and the change in compensation norms related to that (pp. 334-5).

Piketty then turns to inequality in capital ownership, beginning with the treasure trove of data compiled in France since 1790. One of his most amazing findings is that in France, despite the 1789 Revolution, the inequality of wealth increased throughout the 19th century, to the point where the top 1% owned 60% of all wealth on the eve of World War I (Figure 10.1). As noted before, the World Wars, the Great Depression, and higher taxation brought about a dramatic fall by 1970 in the share of of both the top 10% (to 60%) and the top 1% (20%). Here, too, the data yield a striking finding: essentially none of this went to the bottom 50% of the wealth distribution, but was redistributed downward only to those below the top 10% but in the top 50% (p. 342). This "patrimonial middle class," as Piketty calls it, has largely maintained its wealth share, with the top 10% and top 1% gaining a few percentage points from their 1970 low point.

Contrasting with France and other European countries for which there is reasonable wealth inequality data, the United States has seen a stronger recovery of the top shares of wealth holders, and in fact U.S. wealth inequality passed European wealth inequality in the mid-1950s, and has been higher ever since. In none of these countries, however, has wealth inequality returned to its highest levels. Piketty has three main explanations for why we have not (yet) seen a return to 1910 levels of wealth inequality. First, there simply hasn't been enough time to rebuild from the 1945 low point; indeed, wealth inequality did not even start increasing again until the 1970s in most industrialized countries. Second, the decline in wealth inequality was accompanied and intensified by a sharp increase in taxation on capital. Third, there was a high rate of economic growth for thirty years after 1945. However, all these factors may reverse in this century. 1945, obviously, is steadily receding from view. Tax competition may well spell the end of capital taxation. Finally the slowdown of demographic growth will reduce economic growth as well, exacerbating the key r>g relationship.

Piketty then turns to inheritance, again with data going back to 1790. Here his foil is economist Franco Modigliani, who posited that people save in order to finance their retirement, but bequeath essentially 0 wealth. Piketty finds that "the desire to perpetuate a family fortune has always played a central role" in savings decisions (p. 392). As evidence, he points out that "annuitized wealth" (non-heritable, such as Social Security but not a 401-k account) makes up a tiny fraction of private wealth (under 5% in France, and 15-20% in "English-speaking countries, where pension funds are more developed"). In other words, the desire to leave a bequest to one's heirs is the predominant fact behind large-scale savings behavior.

Piketty contends that a society dominated by inherited wealth becomes less democratic over time. Not only do the wealthy have increased mechanisms to influence political outcomes, but unearned income is an "affront" to the meritocratic story we tell ourselves. If high incomes are not based on merit, an important justification for this inequality disappears. He goes on to note that "rent" is not originally a pejorative term (as in, for example, "monopoly rent"). If capital is used in production, it yields income, and this is not due to monopoly and cannot be "solved" by greater competition. As Piketty says, universal suffrage [which in the 19th century had often been posed as fatal to the economy - KT] "ended the legal domination of politics by the wealthy. But it did not abolish the economic forces capable of producing a society of rentiers" (p. 424).

I have left out some of the technical detail of Piketty's argument, but one more point here needs emphasizing. As he shows (Figure 11.12), inheritance flows are increasing in Europe, and have been since 1980. The situation is not quite as bad in the United States, because the U.S. population is still growing, while Europe's is stagnating. However, long-term forecasts point to an eventual slowdown in population growth in the United States as well, in which case inherited wealth would emerge just as strongly as it already has in Europe.

Piketty's final points refer to global dimensions of inequality of wealth. His argument here is that while most people's instinct is to object less to entrepreneurial fortunes than to inherited ones, in fact there is less difference between the two that meets the eye. This is because, he argues, the largest fortunes are able to command the highest rates of return. He gives the example of the fortunes of Bill Gates, who obviously worked to build Microsoft, and that of Lillian Bettencourt, the heir of the L'Oréal fortune, "who never worked a day in her life" (p. 440). As it turns out, from 1990 to 2010, both saw their wealth increase by a factor of 12.5 times in that period. Large fortunes command the highest rate of return. However, the data Piketty presents do not fully support this. Gates' fortune was twice that of Bettencourt in 1990 and 2010, yet his rate of return was no more than hers. Furthermore, when Piketty reports on the returns made by sovereign wealth funds, we can see that Abu Dhabi's, the world's largest, worth more than all U.S. university endowments combined, nonetheless had lower earnings than did Harvard, Princeton, and Yale on their endowments. I think there is much merit to his overall claim, but it would appear to be a little more complicated than he lets on.

Last but not least, a couple of international wealth quick hits. First, will sovereign wealth funds own the world? No, but they could wind up amassing 10-20% of global capital by 2030 or 2040, which would be a much greater percentage of liquid global assets. Second, will China own the world? The short answer is no. Third, why do rich countries so frequently have negative asset positions? Are these counterbalanced by positive asset positions in poorer countries overall? The answer to this last question is no, so the answer to the previous question is that so much wealth has been diverted to tax havens, it makes the rich countries look poor, even though they aren't. Indeed, even the relatively low estimate of tax haven assets by Piketty's colleague Gabriel Zucman comes to more than twice the negative asset position of the rich countries.

This long section of the book is the necessary set-up for Part Four, where Piketty takes on still more received theories, and proposes his own recommendations for what can be done about inequality. I will turn to those questions in my next post.

UPDATE: Thanks to jack for catching a couple of typos.

Cross-posted at Angry Bear.

Understanding Piketty, part 2

In my last post, I gave an introduction to the massive data work underlying Capital in the Twenty-First Century, as well as two clear results from Piketty's work. First, he showed that the optimistic Kuznets view after World War II that inequality was well on its way to being conquered was wrong, based on putting too much stock into a short-term trend. Inequality in fact has been increasing in the industrialized world since about 1980. Second, Piketty showed that a slow-growth economy is ripe for an increasing concentration of wealth in society, absent government action to counter that trend. He introduced the relationship r>g, which says the private return on capital is greater than the economic growth rate. When this holds true, as it has for most of history, inequality is likely to increase.

In this post, I address Part Two, "The Dynamics of the Capital/Income Ratio. The next two posts will address parts Three and Four, followed by a summation and critique of certain aspects of the book.

One important observation that Piketty makes is that in Europe, capital in the form of agricultural land accounted for 300-400% of gross national income (GNI), and total capital reached about 700% of GNI in the early 1700s. In Britain (Figure 3.1), France (Figure 3.2), and Germany (Figure 4.1), total capital fell below 300% of GNI in the period encompassing World War I and World War II. By 2010, total capital was back up to about 600% of GNI, but its composition had changed, with agricultural land falling to vanishingly low levels, replaced by housing and other domestic capital. In the United States (Figure 4.2), by contrast, farmland in 1770 was plentiful and cheap, making up about just 150% of GNI. Total capital also was much lower than in Europe, only about 300% of GNI. In the twentieth century, however, the U.S. did not suffer the devastation of the World Wars, so it had fewer and smaller dips in the value of total capital, which had risen to about 450% of national income in 2010; like in Europe, however, the value of U.S. agricultural land had also fallen to a tiny fraction of national income. Piketty points out if one includes the value of slaves, total U.S. capital in 1770-1810 rises by another 150% of national income (Figure 4.10), meaning that the capital/income ratio in the United States has been even more stable than it appears at first blush.

For Piketty, the resurgence of the capital/income ratio in the late 20th century is a consequence of slow growth. One important result of this is that capital's share of national income has increased since 1975, and labor's share has consequently fallen. According to his data for eight rich countries (the United States, the United Kingdom, Germany, Japan, France, Canada, Italy [the G-7, as they are usually called] and Australia.), "Capital income absorbs between 15 percent and 25 percent of national income in rich countries in 1970, and between 25 percent and 30 percent in 2000-2010" (Figure 6.5, p. 222). Notably, he raises the important point, central to my own academic work, that the increasing mobility of capital increases capital's bargaining power vis-a-vis both labor and governments (p. 221). He considers it likely that this factor has been mutually reinforcing with  the ability to substitute capital for labor. I would consider it not merely likely, but close to self-evident. Moreover, he omits (though I am sure he is aware) that one use capital mobility has been put to is to substitute less expensive for more expensive labor.

This increase in capital's share of national income shatters another comforting standard economic view, that the relative share of capital and labor is fixed. This assumption is built into a workhorse of neoclassical macroeconomic analysis, the Cobb-Davis production function. Piketty shows that, as with Kuznets work, the results of Cobb and Douglas generalize from a data sample that is far too short in term (p. 219).

My next post will analyze Part Three, "The Structure of Inequality." See you soon.

Understanding Piketty, part 1

Thomas Piketty's (CV) Capital in the Twenty-First Century is the most important book on economics published in this century. The book has made a huge splash, and drawn the ire of conservatives, for its straightforward argument that recent increases in inequality in numerous countries are likely to rise to unprecedented heights unless governments can reach democratically based solutions to this problem.

As I mentioned previously, the book's success is built on a mountain of data that a multinational team of researchers has been compiling for 10 years, the World Top Incomes Database, as well as long-term wealth records dating back to 1790 in the case of France. Piketty, in fact, has been working on inequality issues for 20 years. As he remarks in the book, until the creation of these datasets, debate on inequality was a "dialogue of the deaf" with precious few facts to back up anyone's arguments. A lot of this work has been taking place out of sight of most pundits, as Piketty's early books and papers are published in French, with the exception of the reasonably well-known papers he co-authored with Emmanuel Saez on U.S. inequality.

Most notably, there has been only one significant challenge to Piketty's data, and it was easily swatted down. Chris Giles of the Financial Times claimed that wealth inequality in the United Kingdom had declined since 1980, not risen as given in Piketty's book. But Giles made the error of taking survey-based wealth data (which sharply underestimates the wealth of the rich) and splicing it on to much more accurate estate tax-based data, to get a declining share of wealth for the top 10% and the top 1%. As Piketty says in his response:

Also note that a 44% wealth share for the top 10% (and a 12.5% wealth share for the top 1%, according to the FT) would mean that Britain is currently one the most egalitarian countries in history in terms of wealth distribution; in particular this would mean that Britain is a lot more equal that Sweden, and in fact a lot more equal than what Sweden has ever been (including in the 1980s). This does not look particularly plausible.

Obviously I agree with Piketty, but don't take my word for it. According to Eurostat, the Gini index for income inequality (which runs from 0 to 1, but is often multiplied by 100, as here; higher is more unequal) in 2012 was 32.8 for the United Kingdom versus 24.8 for Sweden. (For comparison, the United States was at 45.0 in 2007, according to the CIA World Factbook.) Combine that with the fact that wealth is more unevenly distributed than income in every country, and it is impossible for U.K. wealth to be more equally distributed than Sweden's is today, let alone at its most equal point in the 1980s. Moreover, according to Piketty's data on Sweden, which Giles does not dispute, the top 10% there owned just a tad under 60% of wealth, and the top 1% fully 20% of wealth, in 2010 (Figure 10.4, p. 345).

So what does all this new data show? First of all, the data show that the optimistic post-war notion that inequality had been solved for good was an illusion. As Piketty points out, economist Simon Kuznets had posited that as countries developed from very poor to very rich, as their GDP per capita increased, countries became more unequal at low levels of income (think China today). However, after a certain tipping point was reached, as countries raised their per capita GDP, their income distribution would become more equal. This was based on what Kuznets saw in the 1950s, a situation where income inequality was indeed declining in the industrialized countries. Many people expected that as more countries developed, they would pass the tipping point, and income inequality would decline in more and more countries. Alas, since 1980, we have seen a resurgence of inequality in the wealthy countries, turning the second half of Kuznets' story into a "fairy tale."

According to Piketty, the reasons we saw a sharp decline in wealth inequality in the wealthy countries from 1910 to 1980 are that there were substantial destructions of capital in the two World Wars, plus high taxes levied on the wealthy to finance the wars, which could not be paid for otherwise. Then, after World War II, there were very rapid growth rates possible as the various countries played catch-up to get back to their pre-war growth trends.

This brings us to a second major point of Piketty's book. He argues that the relationship between the rate of return on investments (r) and the country's growth rate (g) is a critical determinant of how concentrated wealth becomes in a society. If r exceeds g, over time capital ownership becomes more concentrated and society less equal. In all probability, developed countries can only expect to see growth, after inflation, of 1% to 1.5% per year. Of course, China and some other developing countries are growing more rapidly, but as they reach the technological frontier, their growth will slow. Meanwhile, the return on investment is more on the order of 4-5% annually. Thus, for industrialized countries, there is considerable danger that the wealth will become significantly more concentrated, and Piketty considers it obvious that high inequality is dangerous to democracy.

Alas, it's late; I have to stop for the night (but not at Hotel California). I'll have more to say very soon.

Cross-posted at Angry Bear.

Tesla wants $500 million for its Gigafactory

Leigh McIlvaine (@Leigh M.) of Good Jobs First alerted me to this article on what Tesla Motors wants in incentives to land its $5 billion Gigafactory: $500 million. This massive 6500 worker facility will produce the next generation of batteries in order to introduce a less expensive line of cars in 2017, the Tesla Model 3. This would be a more affordable vehicle than the widely praised Model S, which starts at $69,900.

I'm not joking about the praise: Consumer Reports, my go-to source for product testing due to the fact that it does not accept ads and thus has complete independence, gave the Model S its best-ever score of 99 out of 100 when it tested the car earlier this year. It also leads the magazine's subscriber survey of customer satisfaction, with 99% of owners saying they would buy the car again. This is a vehicle, and a company, that is generating some serious excitement.

It's no surprise that the Gigafactory is generating serious excitement, too. 6500 jobs, a $5 billion investment, and cutting-edge technology is a heady mix for an economic development official. San Antonio, where Toyota makes pickup trucks, jumped into the auction quickly, offering "almost $800 million in incentives." Although Tesla has broken ground at a location near Reno, Nevada, last week CEO Elon Musk announced plans to break ground at one or two other sites as well. The company clearly considers speed to be of the essence.

It's unclear exactly what the company wants financially, and Tesla did not respond to my request for an interview to seek clarification of some important points. To be specific, does it want that $500 million in cash, in the form of property tax breaks over some number of years, land and infrastructure, or what? Most importantly, is Tesla's goal speed plus $500 million, or speed plus the highest bid? The company has sent mixed signals on this question.

As Forbes wrote, "Last week, Musk said that Tesla wanted to make sure a package was right for the winning state, as well as for Tesla." In the article's very next sentence, however, Tesla VP for communications and marketing, Simon Sproule, said, "Any publicly traded company has a fiduciary responsibility to get the best deal for its investment." Musk's comment seems to imply that $500 million is all the company wants. By contrast, fiduciary responsibility has often been used to justify a company going after the maximum incentives possible. Forbes quotes the business editor of the San Antonio Express-News that it was hard to tell if Tesla is conducting "a search (or) a shakedown."

Sproule disputed the shakedown thesis, despite invoking "fiduciary responsibility." How should we think about this project?

On the one hand, we could take Musk's comments as meaning that the company wants $500 million, no more, no less. Given that he expressed it as a percentage of the investment, my intuition is that we should assume that means $500 million in cash or cash equivalents like free land (my guess is that San Antonio's "$800 million" was mainly tax breaks, which would have a lower present value). If that's true, Sproule's contention that the incentive is not really so expensive is actually true in a comparative sense. A 10% aid intensity (subsidy/investment) would be the second-lowest for a large automotive facility in the modern history of megadeals. It would even probably be legal in the European Union under its Regional Aid Guidelines, if it were located in one of the EU's poorer regions. Moreover, the cost per job would be $76,923, substantially below the $100,000-$150,000 level common for most U.S. automobile assembly plants.

Of course, cost alone doesn't make a deal a good one. In particular, if Tesla wants its incentives up front, there is a substantial risk that the project won't ultimately produce 6500 jobs, or that changes in the market could even lead to the Gigafactory closing. New Mexico lawmakers have certainly recognized the importance of this vis-a-vis Tesla. In my email to Tesla, I asked what taxpayer protections, like clawbacks, the company is prepared to accept. Alas, no response, but I will update if I do hear back from Tesla.

On the other hand, if $500 million really is just meant as the minimum acceptable opening bid, all bets are off for saying how (comparatively) good a deal it might be.

Once again, we are confronting the issue of information asymmetry: government officials have less information about what the company really wants than the company has about the various governments, and of course its own intentions. This is a major source of bargaining power for companies shopping around for an investment location. If Musk really means that Tesla will voluntarily limit the incentives it requires, that would be a refreshing change from the typical bidding wars we have seen in so many industries. Or, it could just be business as usual, with the highest bid (adjusted for cost structure at the different locations) winning. We just don't know, but the decision is expected by the end of the year.

Cross-posted at Angry Bear.

Illinois' next governor may make Romney look like a saint UPDATED

Does the name Bruce Rauner ring a bell? No, me neither. It turns out he's the Republican nominee for governor in Illinois, which under normal circumstances would mean he's a nobody. But he's been leading incumbent Democrat Pat Quinn in polls all summer, and could actually end up as the state's next governor.

This is a problem, because he is even more out of touch with the middle class than Mitt Romney (Rauner is a private equity near-billionaire) whose idea of transparency is to release the first two pages of his 1040 tax return for 2010-12, and nothing else. Romney at least released his full tax return for each of two years. As Think Progress points out, Rauner is also a big fan of the Cayman Islands as a tax haven, just like Romney. In fact, Rauner is invested in at least five funds there. Also like Romney, Rauner takes full advantage of the "carried interest" tax break that lets him treat his fees, which should be ordinary income taxed at 35 39.6%, as capital gains, subject only to a 15 20% tax rate.

Rauner's agenda is insistent on the need to spur job growth, but somehow misses the fact that Illinois' unemployment rate has fallen from 9.2% (seasonally adjusted) in June 2013 to 7.5% in May 2013 (the figure Rauner used) and even more since the agenda was published, to 7.1% in June, the third-largest drop in the country year-over-year. Still a full point worse than the June national unemployment rate, but a lot better than it was.

One place where Rauner is worse than Romney is the minimum wage. Romney, rather surprisingly, supports an increase in the minimum wage, though he did not specify a number. Rauner, in both December and January, called for Illinois to lower its minimum from $8.25 to $7.25, the national rate. After getting a tremendous amount of blowback, he now claims to support an increase.

His agenda says the state "should implement a phased-in minimum wage increase, coupled with workers' compensation and lawsuit reforms to bring down employer costs." No mention of what the rate would be, or the period over which it would be phased it. He references an op-ed he wrote in the January 9th Chicago Tribune (now only available through the Nexis subscription service), where he clearly buys into the "job-killer" meme and drops a reference to the futility of a "$20 per hour" minimum wage, for good measure. Somehow I don't think he really supports an increase.

Not only that, but Rauner proposes turning the Illinois Department of Commerce and Economic Opportunity, the state's investment promotion agency, into what he calls a "public-private partnership." He doesn't say it, but this means there will be less public oversight into the agency's affairs. As Good Jobs First has shown, such privatized agencies have exhibited high levels of abuse in recent years.

Rauner is a living, breathing example of how we have one tax system for the 1%, and another one for the rest of us. His flip-flop on the minimum wage is as phony as the concern he professes for the middle class. Yet there's a very good chance he will be the next governor of Illinois.

UPDATE: Crooks and Liars links to a brief video where Rauner says it may be necessary to go through a period in Illinois like that when President Ronald Reagan fired the air traffic controllers.

Argyrios at Daily Kos reminds me that the tax brackets have increased. Thanks.

Cross-posted at Angry Bear.

Jon Stewart nails corporate tax inversions

Last night Jon Stewart (h/t BruinKid) went after tax inversion with style, showing up Republican hypocrisy on welfare programs vs. "corporate welfare," all the subsidies one company has received from multiple levels of government, government contracts, and government-funded research. His primary target was Mylan, a Pennsylvania-based generic drugmaker. Mylan, as Ron Fournier recently pointed out, has as its chief executive officer Heather Bresch, the daughter of West Virgina Senator Joe Manchin. Manchin now says inversions should be illegal, according to Fournier in a follow-up article.

As Stewart shows, while Republicans are outraged by one person apparently abusing the Food Stamp program while mainly surfing in California, they all cheer inversions, at least on Fox News. Mylan has benefited from millions in government subsidies and billions in government contracts. But it has to move to the Netherlands anyway. Stewart concludes that since corporations have been people only since the 2010 Citizens United decision, they are just toddlers and we need to be firm with them: "You're grounded!"

Enjoy!

"Inversion of the Money Snatchers"

Medicare report shows Obamacare is bending the cost curve

The 2014 Medicare Trustees Report has just been released, and it shows that the program is on noticeably sounder financial footing than it was just a year ago. One of the biggest signs of this is that the projected depletion date of the Hospital Insurance (Part A) Trust Fund has been pushed back by four years just since last year's report.

Indeed, Sarah Kliff points out that Part A actually spent $600 million less in 2013 than in 2012, even though it insured 1.6 million more people. As she emphasizes, the big news in this is that per capita Medicare Part A spending has been falling. This is a great sign that there is forward movement in controlling the actual cost of care.



Source: Vox.com, link above

This is a big deal because not only are Baby Boomers like myself inching towards Medicare eligibility in large numbers, but hospitals and other providers (unfortunately, these two groups are merged in OECD statistics) account for most of the excess of US health care spending compared to other industrialized nations. In fact, comparing the United States to Canada, specifically, I found that payments to providers made up 85% of the per capita cost difference between the two countries.

Moreover, as Kliff points out, even when you include Part B and Part D into the calculation, Medicare's per capita cost showed no increase in 2013. Zero.

Indeed, if you want to see a very graphic demonstration in the change in the cost curve, Louise Sheiner and Brendan M. Mochouk of the Brookings Institute (h/t Matt Yglesias) have just what you're looking for.


Source: Brookings Institute, link above

Yes, in just five years, the estimated federal health expenditure has dropped by more than 2 percentage points of GDP by 2035, what would be a difference of $320 billion per year today.

Of course, the Patient Protection and Affordable Care Act cannot take all the credit for this improvement. But, as the Washington Post reported, the law "is slowing payments to Medicare Advantage" and, as also mentioned here, the penalty for hospitals with high re-admission rates has produced a substantial fall in the 30-day re-admission rate, from about 19% in 2011 to less than 18% in 2013. With better care, fewer re-admissions means lower costs.

Thus, while no phenomenon this complex can have a single cause, it is clear that Obamacare is having an impact beyond insuring 10.3 million uninsured, working as designed to improve health outcomes and reduce costs.

Cross-posted at Angry Bear.