Bacon's Rebellion

Runaway administrative costs are major reason that higher ed costs are increasing without let-up, concludes a new report by the Goldwater Institute. States the report:

Enrollment at America’s leading universities has been increasing dramatically, rising nearly 15 percent between 1993 and 2007. But unlike almost every other growing industry, higher education has not become more efficient. Instead, universities now have more administrative employees and spend more on administration to educate each student. In short, universities are suffering from “administrative bloat,” expanding the resources devoted to administration significantly faster than spending on instruction, research and service.

Between 1993 and 2007, the number of full-time administrators per 100 students at America’s leading universities grew by 39 percent, while the number of employees engaged in teaching, research or service only grew by 18 percent. Inflation-adjusted spending on administration per student increased by 61 percent during the same period, while instructional spending per student rose 39 percent.

Sayeth the report:

Virginia Commonwealth University (VCU) experienced a 75 percent decline in administrative employees per student. … In 1993, the university had an above-average rate of 12.0 full-time administrators per 100 students, but by 2007 that number had dropped to 3.0. … This decline was achieved in part because VCU increased its enrollment by 45.1 percent between 1993 and 2007, much faster than the average enrollment increase of 14.5 percent. But unlike other institutions, VCU spread its fixed cost of administration over a larger base as it gained more students.

Give credit to former VCU President Eugene Trani, who presided over the university during its period of unprecedented growth. Kudos, too, to former UVa President John Casteen, who retired last month.

On the other hand, the leadership at George Mason University and the College of William & Mary have some ‘splaining to do. There may be legitimate reasons for the apparent bureaucratic bloat, but I would like to know what they are.

Once again, Virginia wins national kudos for excellence… this time for its fast-food hamburgers. The burgers made by Lorton-based Five Guys Burgers and Fries were voted America’s favorite in a Zagat survey of fast food and full-service restaurants.

I can personally attest to Five Guys burgers. They are unbelievably good.

Coming soon… Virginia’s rating in the “fattest state in the country” survey.

The Carilion Health System, headquartered in Roanoke, is betting its future on a new concept embraced by the Obama administration in the Accountable Care Act: Accountable Care Organizations (ACOs).

The idea is to shift the delivery paradigm from a fee-for-service system, which encourages excess utilization of health resources, to a paradigm that rewards Carilion for efficiently managing large populations of patients. In theory, Carilion will engage in more preventive care and will do a better job of coordinating care between hospitals and doctors, thus saving costs by reducing the number of complications and readmissions.

It’s a great theory. And it may work. As Alec MacGillis writes for the Washington Post:

To integrate care, Carilion spent $100 million on electronic medical records. Nurses provide immediate follow-up when patients are released from the hospital in an effort to prevent costly readmissions. And the clinic is turning its 37 primary-care practices toward the “medical home” model: “Care coordinators” reach out to people with diabetes, hypertension and other chronic conditions who have gone too long without a checkup; and physicians meet nightly with nurses to review the next day’s appointments to ensure the visits are productive.

Carilion’s grand experiment will bear watching. As Carilion goes, so goes the U.S. health care system under Obamacare. Carilion dominates the health care market in the Roanoke region and surrounding counties. Although it does have some competition, most notably by the HCA hospital in Salem, by any definition it owns a monopoly share of the marketplace. Which brings me to the subject of my latest post on the “Boomergeddon” blog, “Evidence from England: Competition in Health Care Works.” To quote myself in full:

When the Labour government in the United Kingdom introduced a reform in 2006 that promoted competition between state-owned hospitals, it created a the kind of social scientific experiment that economists dream of. By maintaining the same administrative pricing mechanisms for its hospitals, the National Health System (NHS) ensured that price variations would not muddy the equation. Measuring the quality of health care before and after the introduction of competition — in effect isolating a single variable — would yield answers to the much-contested question of how much competition matters.

Admittedly, the competition wasn’t the all-out, balls-to-the-wall competition one might expect of a market-driven economy. The profit motive never came into play as a motivator. But the NHS did hold hospital managers accountable for results, and their pay and career prospects could be affected by the outcome. So, the competitive pressures were real, even if less than if the hospitals were for-profit entities.

Now the results are in. Competition leads to superior patient outcomes, according to a paper published by Martin Gaynor, Rodrigo Morena-Serra and Carol Propper by the National Bureau of Economic Research, “Death by Market Power: Reform, Competition and Patient Outcomes in the National Health Service.”

Within two years of implementation the NHS reforms resulted in significant improvements in mortality and reduction in length-of-stay without changes in total expenditure or increases in expenditure per patient. Our back-of-the-envelope estimates suggest that the immediate net benefit of this policy is about £277. While this is small compared to the annual cost of the NHS of £100 billion, we have only calculated the value from decreases in death rates.

While the UK is introducing more competition into its health care system, the U.S. is strangling competition. Provisions in the Affordable Care Act will severely curtail the expansion of physician-owned hospitals, which provide much-needed competition in many markets. Indeed, Obamacare threatens the ability of existing physician-owned hospitals to compete at all over the long haul. Obamacare will lead to the cartelization of the health care industry around large health care systems that dominate their markets with little to fear from interlopers.

While Obama’s academic gurus expect wonderful things to arise from nifty ideas like Accountable Care Organizations, the ossifying structure of the health care industry, I predict, will nullify the gains from such innovations as hospitals gain increased pricing power in the marketplace.

(Photo credit: Washington Post.)

Baconauts and Boomergeddons are something of a cult. They have their own leader, their own religion, their own pecking order and at times, their own Kool-Aid. Since it is a somnambulent August Monday morning, here are a few things to wake you up.

How quickly will Virginia’s employment bounce back from the mother of all recessions? That will depend upon the extent to which employment is “structural,” in the sense that there is little demand for the skills that unemployed workers have, as opposed to the skills required for new and emerging jobs.

The skills mismatch is particularly acute for industries less likely to recover quickly, such as manufacturing, construction and finance. Further, the mismatch is aggravated by low housing prices, which inhibit people from selling their houses, possibly at a loss, and moving to other parts of the country where job prospects are better.

That’s the thinking of the International Monetary Fund, in its annual “Selected Issues” paper on the United States. The IMF publishes a map showing the increase in the Skill Mismatch Index since the onset of the recession for the 50 states. Virginia is in the second quartile (the 1st quartile being the best), suggesting that Virginians’ skill mismatch is less severe than the national average. That consideration, combined with the “best state” business climate and the ongoing expansion of federal employment, bodes well for the economy in the near-term. (Go out 15 years, when Boomergeddon strikes, and it’s a different story.)

If Gov. Bob McDonnell is looking for an innovative way to boost employment in Virginia, he should encourage his economic development brain trust to address this issue. One good place to start would be to consult with Chmura Economics & Analytics, a Richmond-based economic consulting firm that has developed proprietary software and databases for that very purpose. (My apologies if those consultations are taking place.) This map, taken from Chmura’s “Underemployment in the United States” ranking, shows where highly skilled workers are in most excess supply, broken down by metropolitan statistical area.

How bad is the gap between promised entitlement benefits and the taxes that Congress has appropriated to pay for them? The International Monetary Fund has taken a look, and the results are scarier than anything you’ll read in “Boomergeddon.” It appears that I am not alarmist enough.

Says the IMF in its 2010 “selected issues” paper for the United States: “Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

In Boomergeddon, I suggest that the U.S. should strive to cut spending/raise taxes by $1 trillion a year, or about 7-8 percent of the GDP to get back onto a fiscally sustainable path over the next decade or two. But the IMF projects further out than I did, to 2083. Thus, even if the U.S. made the “fiscal adjustments” that I call for — adjustments so cataclysmic that the odds that our dysfunctional political system will make them are just about nil — the job will be only half done.

Put another way, the fiscal gap amounts to $202 trillion, says Boston University economist Laurence J. Kotlikoff in a Bloomberg op-ed. That’s trillion, not billion. The GDP in 2010 will be less than $15 trillion.

Looks like the 21st century will be one long bummer.

First there was “Boomergeddon.” Then “Grovergeddeon.” And now, “Goozergeddon.”

Virginia politicians from Republican Gov. Bob McDonnell to Democratic Senators Mark Warner and Jim Webb are mobilizing to block the closing of the U.S. Joint Forces Command, which could result in the loss of 6,100 military, civilian and contractor jobs in Hampton Roads. (Read the Washington Post story here.)

At the risk of incurring universal opprobrium among my fellow Virginians, let me stake out a contrarian view: Let it go, guys. Do what’s best for the country. The Defense Department is trying to shave $100 billion a year in spending, which it needs to do, and Virginia is going to share in the pain. Accept the cuts with good grace. Let Defense Secretary Robert Gates do his job.

Massive cuts in federal government spending are coming sooner or later. As I argue in my book, “Boomergeddon,” the feds will go into default within 15 to 20 years, at which point private investors will be unwilling to lend to the government, and spending will be limited to the amount of money generated by taxes (about 60% of spending) plus whatever the Federal Reserve Board can provide by cranking up the printing presses. As the state with the highest level of federal employment and federal spending (excluding only Washington, D.C.), Virginia will get hammered.

We can start taking relatively small lumps now and start diversifying our economy away from its extreme dependence upon federal dollars, or we can be flushed down the sewer drain when Uncle Sam goes broke. Our AAA finance rating and our “best state for business” encomiums will avail us little then.

Now is as good a time as any to start coping with the inevitable retrenchment in military spending. As the Wall Street Journal reported, only three metropolitan areas among the Top 50 last year saw rising wages and rising average incomes: Washington, D.C., Hampton Roads and San Antonio. The common thread: All have strong ties to the federal government. Washington and Hampton Roads have prospered while the rest of the country has suffered. (I would add that the economy of the Richmond region has been bolstered by massive spending around Fort Lee.) Stop bellyaching and take the cuts like real men!

The shuttering of the U.S. Joint Forces command is a warning sign of what lays ahead. Virginians had better start preparing now for the inevitable. Failure to wean ourselves from our dependency upon federal spending — maintained only by federal indebtedness — will lead to the Old Dominion’s downfall.

Repent. Boomergeddon is coming. The end is only 15 to 20 years away.

Update: Norm Leahy with the Tertium Quids blog questions McDonnell’s response to the news. Rather than wean the region from dependency upon the federal government, he notes, the Governor’s Office has created a Commission on Military and National Security Facilities with the objective of bringing in more military-related development to the state.

Uh, oh. Wrong direction. As Leahy points out, we need “private endeavors that do not depend upon the whims of bureaucrats and politicians.”

Defense Secretary Robert M. Gates’s announcement of his plans to close the Norfolk-based U.S. Joint Services Command, end or change the jobs of 6,300 and save $704 million a year, has brought howls of protest from Virginia’s elected officials.

Beware the Boomerang

Through all the talk of the financial crisis, the housing crisis and various other crises I’ve developed a real misconception. Ok, some of you would say a whole host of misconceptions. However, for the sake of brevity, let’s focus on one of my misconceptions. I thought that once a homeowner had their home foreclosed that was that. I figured the unlucky homeowner would have to move out, they would be traumatised by the whole episode, their credit would suffer but … the bad decision to take out the mortgage would be behind them. Not so fast. Like a lot of things, it seems to depend on the state where you live. And “the best state for business” isn’t always the best state for consumers.

Vanessa Corey seems like a good egg. Ms. Corey built an attractive house with her husband in Fredricksburg back in 2004. Then a couple of bad things happened. The housing bust put a crimp in Ms. Corey’s finances and she and the hubby split. She took her lumps, negotiated a short sale of the house and assumed the $65,000 deficiency was negotiated away. Ooops. Last November, Ms. Corey got a letter from a lawyer demanding that she repay the $65,000. She couldn’t make that payment and had to file bankruptcy.

Here story can be found here.

I’ve done a bit of informal research and it seems that some states are non-recourse states. In California, for example, a combination of state laws allows a mortgage holder to walk away from their house (and loan) and leave the bank holding the bag.

However, about 30 states (apparently including Virginia) allow a lender to legally pursue a deficiency after a foreclosure. In some states the bank can wait up to 5 years to even sue you for the deficiency. During that 5 year interregnum you may have put your financial house back in order … only to see it torn down again.

My question is this – in an era where banks are being “loaned” taxpayer money to “de-leverage” their balance sheets, at a time when the Obama Administration is considering some form of mortgage assistance – do Virginia’s laws make sense? Why shouldn’t Virginia join California in letting borrowers walk away from loans they can’t repay without the dark cloud of potential future financial ruin over their head?

Is it because Virginia is the “best state for business”? Or is it because of the massive campaign contributions handed out to our politicians by the construction, real estate, banking, etc lobbies?

Note: I spent quite a bit of time looking into this matter but it is a very arcane and confused area. I am happy to hear about any factual errors in my post. They will be researched and, if true, corrected.

I just read an opinion piece which was slathered with invective against a sitting politician’s economic policies. The piece was titled, “The Flimflam Man” and described the politician as a charlatan and a member of the “audacity of dopes”. The politician’s financial plans were described as “leftovers drenched in flimflam sauce” and “a sham”.

At first I thought I must have been reading one of my own drafts on Obamanomics. But no. It was Paul Krugman’s Op – Ed piece from last Friday’s New York Times. You can read Krugman’s diatribe here, although you might need a free account.

Needless to say, Krugman was not pillorying his BFF (best friend forever) Barack Obama. No, he was busy personally insulting Rep. Paul Ryan (R-WI) as well as ranting about Mr. Ryan’s proposed “Roadmap” budget blueprint. During his hissy-fit Krugman manages to construct one or two cogent thoughts. The first is that the Congressional Budget Office didn’t address the tax loses from Ryan’s proposed tax cuts. The second is that Krugman is disappointed that the reliably liberal Washington Post actually thinks Rep. Ryan’s plan may have some merit. Both are cardinal sins in the conscience of a liberal.

But just as the spittle is drying on his chin after what must have been a violent keyboard concerto, Mr. Krugman realizes that he really hasn’t bothered to read Mr. Ryan’s plan. So, he issues a preemptive attack in defense of his own sloppiness. You can read it here. Even the Washington Post can’t stand much more of Krugman’s infantile insults so Ezra Klein responds with this. Infuriated at being abandoned by his liberal buddies at the Post, Krugman fires off his third salvo in two days here.

Once again, Krugman fumes about the lack of a CBO assessment of the tax proposals. He asserts that lack of an assessment makes Rep. Ryan a flim-flammer. Only one teeny weenie problem – the CBO doesn’t score the tax impacts of proposed legislation. The Joint Committee on Taxation does that. Meanwhile, Ryan has asked for just such a scoring. Mr. Krugman would do well to read Megan McArdle’s article in The Atlantic here.

Fundamentally, Krugman doesn’t know what he’s talking about with this. However, as the First Lady parties in Spain and the President lines up his next putt the Fed is getting ready to downgrade its assessment of US economic prospects. Meanwhile, one of Obama’s snarling lap dogs has managed to bite himself three times in two days.

Anyone care to wager whether Krugman admits his mistake?

As for the Washington Post … first, a positive article on Ken Cuccinelli and then an intelligent discussion of Rep. Ryan’s plan? I may have to renew my subscription!

From my latest Washington Times column:

After a three-month delay, the trustees of the Social Security and Medicare trust funds have finally published their annual report. Now we have an explanation for the wait. Thanks to program changes made by the Affordable Care Act (aka Obamacare), the report summary says, “The outlook for Medicare has improved substantially.”

The Hospital Insurance Trust Fund, expected only last year to run out of money in 2017, is now expected to remain solvent until 2029, says the report. What is responsible for this 12-year lease on life? Another document, released by the Center for Medicare and Medicaid Services earlier this week, fills in the details: Reforms to the health care delivery system will shave government spending by $575 billion over the next 10 years, and trillions of dollars more in the following decades. To use the jargon of the health care wonks, Obamacare will “bend the cost curve down” – from 6.8 percent annual increases in Medicare spending, as projected previously, to a more fiscally sustainable 5.3 percent.

In Obamaworld, those gains will not come from health care rationing, as Republicans fear, but by transforming the health care system from a fee-for-service model that encourages wasteful spending into a system that rewards hospitals and doctors for economic efficiency and improved quality.

Alas, the Obama administration is living in never-never land. The positive components of Obamacare – and there are several – may have a beneficial effect, but they will be swamped by the bureaucratic nature of the legislation. The Medicare budget deficit will turn out far worse than the Obama team imagines. Read more.

Update: In retrospect, I realize that I don’t make the argument in the Times column as strongly as I could have. I spent too much space articulating the Obama administration’s thinking behind Obamacare (bending over backwards to be fair and balanced), and not enough space to explaining how the legislation actually undermines the intent. As I explained in my Boomergeddon blog post, “Where Are the Health Entrepreneurs?” (warning, none of this will make much sense until you finish reading the Times column):

There is one critical element that Cutler, a key architect of Obamacare, left out: The number one reason there is so little innovation in new health care delivery systems is that the key established players in the system — hospitals, insurers and doctors — have utilized their political power to entrench their positions in the medical marketplace and ward off competition. For all practical purposes, independent entrepreneurs are prevented from devising new models for delivering health care.

That’s why Obamacare is not the answer. Although the Affordable Care Act does set up mechanisms to fill the information void on medical outcomes, and it aims to change the incentives to reward efficiency, rather than punish it as the current fee-for-service system does, it also protects the big insurers and hospitals against competition from entrepreneurs, and it does nothing — indeed, in practice, it discourages — patient/consumers from taking more ownership of their health care purchases.

There’s fascinating news in TV Land — only 1.38 percent of the viewers of Fox News are African-American.

It’s only 2-3 weeks before the “Boomergeddon” publication date. If you pre-order your copy now, Amazon.com will give you a discounted price — $10.08, or half the list price. (For those who have pre-ordered already, Amazon.com will honor the lower price.)