New York Times journalist Annie Lowry reports, in a Sunday article:

In 2009 and 2010, total nationwide health care spending grew less than 4 percent per year, the slowest annual pace in more than five decades, according to the latest numbers from the Centers for Medicaid and Medicare Services…..

A recession has caused part of the slowdown, but health care experts and economist’s say the slowdown is greater than the recession impact.

Still, the slowdown was sharper than health economists expected, and a broad, bipartisan range of academics, hospital administrators and policy experts has started to wonder if what had seemed impossible might be happening — if doctors and patients have begun to change their behavior in ways that bend the so-called cost curve….

“The tectonic plates might be beginning to shift,” said Karen Davis, the president of the Commonwealth Fund, a nonprofit research group in New York. “It’s hard to believe everything that’s been tried over the last decade to slow spending wouldn’t be making a difference.”

Experts were surprised, for instance, at a drop in spending on some hospitalized seniors — people enrolled in Medicare, whose coverage the recession should not affect. They also noted that some of the states where health care spending slowed most rapidly were states that were not hit particularly badly by the recession, suggesting that other factors were at play.

“The recession just doesn’t account for the numbers we’re seeing,” said David Cutler, a Harvard health economist and former adviser to President Obama. “I think there’s much more going on.”

The implications of a bend in the cost curve would be enormous. Policy makers on both sides of the aisle see rising health care costs as the central threat to household budgets and the country’s fiscal health. If the growth in Medicare were to come down to a rate of only 1 percentage point a year faster than the economy’s growth, the projected long-term deficit would fall by more than one-third.

The loss of private insurance has been going on for almost two decades.  It’s not a phenomenon unique to any particular administration.  As insurance rates rose quickly, employers reduced benefits and increased employee co-pays, which has an effect on health care use.  But still health care costs rose smartly.  Maybe it’s hitting some type of wall, some sort of limit as to what health care can charge for services.  Maybe employers, hospitals and employees are beginning to push back on the fee for service type of care.

“In Massachusetts, we had a lot of political pressure to understand the growth in costs as unsustainable,” said Sandra Fenwick, the chief operating officer of Children’s Hospital Boston, which has put more than 100 reforms into effect, saving millions of dollars, in the past four years. “We had to figure out how we were going to be part of the solution, not part of the problem.”

Ms. Davis of the Commonwealth Fund said that “a lot of the big gains have come from keeping people out of the hospital and the emergency rooms.”

“Five or seven years ago, the private sector started rewarding providers that got their patients’ chronic conditions like diabetes and asthma under control,” Ms. Davis said. “That was couched as a quality-control measure, or putting an emphasis on chronic-disease care. But the direct result is going to be a reduction of hospitalization.”

Moreover, experts said not to discount the accountable-care revolution just because it remained small or because the changes implemented by the Obama health care law had not come into full effect yet.

“In the past, these slowdowns have occurred not just because of the direct effect of reforms, but because of greater attention to reforms changing provider and patient behavior,” said Mark B. McClellan, the economist and doctor who ran Medicare and Medicaid under President George W. Bush.

Beezer here.  Oh well, it would be nice if this moderation, or flattening out, of health care cost increases continues.  Nobody knows if it will.  That’s the problem with projecting trends out into decades, they’re almost always significantly off.  If they do continue, then a lot of pressure on longterm debt is lifted because all those debt projections assume the past rates of growth in health care costs.

George Orwell’s classic book about all seeing, all propaganda, all manipulative government applies to us today.  Orwell’s dystopic version is of a government by bureaucrats and technocrats but there are many well worn paths to the same destination.  Stalin’s version came through dictatorship and terror.  Iran’s comes through the church and its inflexible theocracy.   Another version, the one that threatens the United States today, is that of corporate ownership interests.   Mussolini’s Italian government prior to and through World War II was a version of a corporatist run state.

All the paths utilize the same propaganda tools.  No matter what class of the population that’s taking control, the techniques are pretty much unchanged:  It’s much easier to maintain rule if the population can be convinced without force to obey.

America’s version of Orwell’s society is boiled down to ‘Money talks.  Everyone else walks.’  Whether it’s a Tea Party controlled Congress that rejects social programs for the populace in favor of tax breaks and tax shelters for the wealthy or a Supreme Court that unleashes great wealth to manipulate political discourse, the takeover always circulates around fooling the public.

The enemy of all these efforts is a skeptical, informed public.  That’s why propaganda, the control of information, is so critical to theocracies, dictators, technocrats, and the like.

As the headline to this post indicates, we are now well into in a pre-1984 type of world.  The corporatist propaganda machine is well disciplined and more than adequately funded.  The most outrageous statements of propaganda, defying all common sense, are being constantly broadcast into the public domain.  Cut pay and people will spend more.  Contraction is expansion.  Fire people and more people will be put to work.  Cut taxes for the already wealthy always and the country will prosper.   Ignorance is strength therefore cut education spending.  Continuous war secures our peace.  Eliminate health programs, particularly for the elderly and women and children, and the nation’s health will improve.

That you can find this echo chamber literally 24/7 on television in a capitalist system means the system has run amok.  The public constraints on greed and manipulation have been broken.  When it is warned that danger lies this way, the response is that even less regulation, just like even less taxation on the wealthy, will result in overall economic improvement shared fairly by all.

Nothing could be further from the truth.  Firing people and cutting their pay doesn’t result in a better economy, it only forces recession or depression, oftentime resulting in fire sale prices for the few assets the public owns, like their homes.   Tell the public education is a waste of time for most people.  Most people should stick to working with their hands and forego any other type of education, we are all told.  We are told efforts to protect domestic employment, particularly in manufacturing, are counter-productive.

All of this is patent nonsense.  That it is allowed to remain dominant in public discourse is a clear sign of danger, a clear sign of the dominance of one class over the others, forcing policies that protect this classes’ interest over all others.

For the past 30 years productivity has grown by 80%, as measured by economists.  Economist’s also think that income gains from this growth will be enjoyed by all productive members of a society.  Actually, ‘think’ is probably the wrong word.  ‘Assume’ is probably more accurate.

It’s been a bad assumption.

Lawrence Mishel provides the facts over at the Economic Policy Institute.

Income inequality has grown over the last 30 years or more driven by three dynamics: rising inequality of labor income (wages and compensation), rising inequality of capital income, and an increasing share of income going to capital income rather than labor income. As a consequence, examining market-based incomes one finds that “the top 1 percent of households have secured a very large share of all of the gains in income—59.9 percent of the gains from 1979–2007, while the top 0.1 percent seized an even more disproportionate share: 36 percent. In comparison, only 8.6 percent of income gains have gone to the bottom 90 percent” (Mishel and Bivens 2011).

A key to understanding this growth of income inequality—and the disappointing increases in workers’ wages and compensation and middle-class incomes—is understanding the divergence of pay and productivity. Productivity growth has risen substantially over the last few decades but the hourly compensation of the typical worker has seen much more modest growth, especially in the last 10 years or so. The gap between productivity and the compensation growth for the typical worker has been larger in the “lost decade” since the early 2000s than at any point in the post-World War II period. In contrast, productivity and the compensation of the typical worker grew in tandem over the early postwar period until the 1970s.

Productivity growth, which is the growth of the output of goods and services per hour worked, provides the basis for the growth of living standards. However, the experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards: Recent history, especially since 2000, has shown that wages and compensation for the typical worker and income growth for the typical family have lagged tremendously behind the nation’s fast productivity growth. This paper uses data from EPI’s upcoming The State of Working America, 12^th Edition (Mishel, Bivens, Gould, and Shierholz 2012) to document and explain these trends, particularly those of recent years.

Beezer here.  Yet more data that shows the system is somehow broken.  Income is flowing up towards the top of the income pyramid, especially to the very tip top .01%!  Based on the chart above, the divergence began sometime around 1970.  There is no consensus about what’s causing the divergence, but there is no question there’s a divergence.  My view is there’s more than one reason.  One is the loss of bargaining power by labor.  Another is the gaming of the tax system so that not only are the wealthy grabbing most of the gains, they are being allowed lower tax rates and specific tax avoidance tools too.  Another is probably the loss of manufacturing jobs which would have provided employment that paid living wages.  That I blame on a government indifferent to employment and labor issues.

New York Times columnist and Princeton economics professor, Paul Krugman, has produced four charts even a simpleton can understand that explain our current deficits and why these deficits do not constitute stimulus.

Here’s an exercise I did for my own edification — and to prepare for questions on book tour — but others may be interested in the results. I wanted a simple answer to the people who always insist that we must be having massive fiscal stimulus because we have a big budget deficit; my answer is that the deficit is a result of the depressed economy, but how do we show that without getting too much into the weeds?

Well, here’s a quick and dirty approach. Suppose that spending and revenues would, in the absence of the slump, have risen at 5 percent per year — roughly GDP growth plus inflation, and actually a bit slower than actual spending growth (6 percent per year) from 2000 to 2007. With this assumption, I can draw three charts for the federal government (using CBO data) and one for state and local (using FRED) that, I think, tell the story.

 

First, most of the surge in the federal deficit is about plunging revenue. In the figure below, the “No recession” line shows what would have happened if federal revenue had grown 5 percent per year after 2007:

That’s about an $800 billion per year shortfall.

What about spending? Well, it is higher than you would have expected in the absence of the slump, by around $300 billion:

What’s that $300 billion about? Well, they’re mainly about the category CBO calls “income security”, mainly food stamps and unemployment insurance:

Income security spending is, of course, strongly related to the state of the economy. So are some other forms of spending — Medicaid, of course, but also things like disability insurance, where people on the cusp are more likely to seek the benefits if they can’t find work.

So basically, the federal deficit is all, yes all, about the recession and aftermath.

And meanwhile, there has been austerity at the state and local level (calendar years here instead of fiscal, but that’s not crucial):

So the reality is that we have deficits because the economy is depressed, but relative to previous policy we’ve been imposing fiscal austerity, not stimulus.

Economist Paul Krugman, a professor at Princeton and popular columnist for the New York Times, has throughout the Great Recession provided analysis that correctly predicted what would happen with our current policies, both here and in Europe:  Interest rates would not soar; Inflation would not soar; Unemployment would be stubborn without sufficient  stimulus; And austerity policies would backfire and make recovery more difficult and slow.

Krugman has written a brilliant summary post in the New York Times.  It’s a must read for anyone who has shared Krugman’s frustration over wrongheaded economic policies pushed both here and in Europe.  Krugman thinks the leadership is coming close to admitting their errors, but he doesn’t hold out much hope for a reversal of policy prescriptions that have hurt recovery.

This was the month the confidence fairy died.

For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.

The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.

So, about that doctrine: appeals to the wonders of confidence are something Herbert Hoover would have found completely familiar — and faith in the confidence fairy has worked out about as well for modern Europe as it did for Hoover’s America. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic.

None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011. Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

However, something has changed in the past few weeks. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

The question now is what they’re going to do about it. And the answer, I fear, is: not much.

For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs.

Now, claims that only austerity can pacify bond markets have proved every bit as wrong as claims that the confidence fairy will bring prosperity. Almost three years have passed since The Wall Street Journal breathlessly warned that the attack of the bond vigilantes on U.S. debt had begun; not only have borrowing costs remained low, they’ve actually fallen by half. Japan has faced dire warnings about its debt for more than a decade; as of this week, it could borrow long term at an interest rate of less than 1 percent.

And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.

But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.

Beezer here.  Stubborness may be all that’s keeping this ‘reign of error’ afloat but eventually the public at large will begin to understand that their misery can be reversed and will demand action.  These wrongheaded prescriptions of austerity have clearly failed by every metric and the situation keeps just getting worse, particularly in Europe.  Only in the United States, where a Democrat President has called for stimulus now and long term fiscal prudence once recovery takes hold, is there any sign of recovery–and it’s been made unnecessarily weak by an austerity loving, Tea Party Republican controlled House of Representatives.

Economist’s have a phrase ‘omitted variable bias,’ that refers to studies that draw conclusions from data without also considering other variables that may be part of the dynamics influencing events.

The best example we can use here is the claim that President Reagan’s initial tax cuts were responsible for the subsequent economic recovery from a severe recession that began just before Reagan took office.  The variable omitted here was the fact that the recession itself was brought on by Federal Reserve Chairman Paul Volcker who hiked the fed funds rate into the mid-teens in order to bludgeon inflation.    Doing this cratered the economy as well as inflation.   Once Volcker believed inflation was sufficiently subdued (the economy was certainly subdued) he dropped the Fed funds rate as quickly as he had raised it before.  Once Volcker’s brakes were relaxed and he stepped on the gas pedal, the economy rebounded smartly and almost immediately.

In brief, Volcker created the recession and he also created the recovery.  The Reagan tax cuts were merely happy bystanders.  Reagan, by the way, spent the next seven years of his Presidency reversing most of his initial tax cuts.

The reason we bring up omitted variable bias is because of disagreement over the impact, good or bad, of stimulus.  Former economic advisor to President Obama, economist Christine Romer, discussed this issue in a speech delivered November 7, 2011 at Hamilton College.  You can read the entire speech here.

Romer concludes that the $787 billion American Recovery Act passed by Congress early in President Obama’s first term resulted in 3 million more jobs being available compared to what would have been available without any stimulus.   She asserts that studies concluding the stimulus had no positive impact made the mistake of omitted variable bias–of ignoring variables such as the depth of the housing collapse, for one example cited by Romer–in concluding the stimulus had no net positive impact.

Romer also concludes that government spending, as opposed to tax cuts, had more positive impact than economists expected, greater than that of the tax cuts.  These findings, made in more recent studies, came after researchers carefully designed their research to avoid the mistake of omitted variable bias.

Despite all of the claims and protestations, the evidence is that fiscal stimulus does raise output and employment significantly. Now, it would take another bold move—probably substantially larger than the $450 billion program President Obama has proposed—to really create a lot of jobs. But the evidence says it would work.
We could do the near-term fiscal expansion in a more cost-effective way by listening to what studies say about the types of stimulus that work best. For example, larger temporary tax cuts may not be the best way to go. State fiscal relief and government infrastructure spending are two measures with particularly high bang for the buck.

And if you want to see how austerity is working out in Great Britain, economist Paul Krugman offers the following chart depicting  recent economic performance now that the austerity measures are taking hold.

Beezer here.  And why, pray tell, would state fiscal relief and infrastructure spending be the most effective?  Because they guarantee jobs, not just promise them.  Near term that's what the doctor is ordering, but Congress, at least the Tea Party which controls the House, isn't listening.  So we remain stuck with a weak, tenuous recovery that keeps millions of able bodied men and women sitting on their duffs for far too long.  Long term fiscal reform is also needed, of course.  The nation does need to better balance it's revenues and spending.  A major reform of health care that reduces the current growth path of spending in that industry will be necessary. But for right now, austerity policies will only make matters worse, not better.