Debt Scare - Lessons from Billy Beane

 

The national debt as of March 2012 is $15.5 trillion

This article represents independent research and has not been peer-reviewed in any way. Many simplifications have been assumed to present a more understandable forumla to the reader. Where they have been recognized in the article by the author, they have been described.

 Fifteen trillion is an unfathomably large number. Try to count to it at a tick every second and it would take you nearly 500,000 years; our species has existed for about 100,000. In miles, the number represents over half of the distance to our nearest neighboring star, Alpha Centauri. In cubic miles, the number represents 50,000 times the volume of all of the Earth's oceans. So folks are understandably concerned when that number represents the number of dollars our country is indebted. But is their concern legitimate? I worry that we are not looking at the right number, and I believe the great American pastime of baseball can give us clues on how to find it.

For those of you that don't follow baseball, the game is a treasure trove of statistics. Any one player is tracked by dozens of metrics, all used to analyze their productivity on the field. With such an overwhelming wealth of information, it becomes difficult to find a single number that represents a player's ability, and as a result managers, scouts, and fantasy owners developed their own non-scientific methods to do so. But this all changed in 2002 when Billy Beane, immortalized in the book and recent film Moneyball, crunched the numbers down to one statistic that he used to evaluate each of his players: on-base-percentage. This number best represented a player's likelihood to score runs, which Beane correctly identified as the most important area of productivity for a baseball player. Beane's success in analyzing players changed the game of baseball and revitalized the field of sabermetrics (applied statistics) in sports. But how does this apply to the debt problem?

When looking at the debt of a nation, there are many figures that get thrown around, with total debt (shown above) and the deficit (the difference between a country's taxes and its public expenditures) as the two most popular. But these numbers do not tell the whole story. Is $15 trillion too much for a nation with a GDP of $10 trillion? How about for a GPD of $100 trillion? Is it an acceptable level of debt if it grows by $500 billion a year? What about $3 trillion a year? These questions cannot be answered just by looking at the debt level of a nation and the level with which the debt grows, even if the GDP of that nation is known.

To truly answer the question of whether our debt is growing to high, we need to understand what the debt accomplishes for our nation and what it costs to incur that debt. If a nation takes on new debt to pay for things other than servicing old debt, then that new debt is an investment. If that investment yields positive returns, then those returns can be measured as a net-positive effect on the nation's GDP. However, debt comes at a cost: the principle of the debt, plus any interest demanded by creditors, must be paid back at some time in the future. These payments - assuming, for the purposes of simplification, that all creditors are foreign - can be measured as a net-negative effect on the nation's GDP.  Therefore, the real measure of the health of a nation's debt level, measured in terms of GDP, becomes:

Deficit - Cost of debt

GDP

By using this measure, it becomes more clear whether a country's level of debt is healthy for its economy. In the example of the United States, let us further simplify our model and assume the country is currently not paying any principle on its debt. We will also skip the step of dividing by the GDP to lessen the required calculations. Interest payments for US debt was nearly $500 billion in FY 2011. Government contribution to the GDP in that year was $3 trillion (after transfers are accounted for), with $1.2 financed through additional debt. That gives $1.2 - 0.5 = $700 billion net-positive effect of debt on the US economy for FY 2011. This would imply that debt has spurred economic activity to the tune of $700 billion. But what if the interest payments were higher? An interest payment of $1.5 trillion would yield a net-negative effect of $300 billion, which would imply that $300 billion in taxes had been used to finance debt.

Does this mean that the US doesn't really have a debt problem? Well, no. This calculation does not have the accuracy to tell for sure, but it provides a valid blueprint for those with the right information (looking at you, Federal Reserve!) to get the answer. But for those out there that look at the debt clock and worry, my advice to you is this: don't complain that our debt and deficits are too high. Instead, do what Billy Beane did. Get it down to the one number. Once we all start to look at the effect of debt in this manner, we can begin to make more appropriate decisions concerning borrowing in the future.

Health Care Costs: a Libertarian Solution

Too true.

Health care has been in the news lately as Republicans attack the PPACA.  This caught my attention because I have recently found work in the health care industry and have a better-than-average understanding of the law's provisions.  While I typically side with Republicans on the issue of providing health care and agree that the PPACA really doesn't do much to help, the Republicans really aren't attacking it for the right reasons.  The typical sound-byte produced during these attacks go something like this: "Barack Obama wants to mandate what health care you will receive," "Obama wants to ration your health care," or "The President is forcing you to take coverage X regardless of whether you want to or not."

My first beef with these attacks are that they're really not true.  No where in the law does it dictate what treatment you receive.  Rationing of care is a very unlikely outcome (insurance premium hikes, however, seem much more plausible). The PPACA should (in theory) even improve the selection of coverage you can choose through it's exchange programs.  So what should we really be up in arms about?

Basically, the PPACA doesn't attack any of the real problems with high health care costs.  Americans pay something like $5,000 per capita for health care services and something like $500 for administrative (read: insurance overhead).  Both numbers are roughly twice as high as the next most expensive country.  Why are we focusing on the second when we can make so much more progress on the first?

The answer to this is because there really is no good way to do it.  Medicare has attempted in the past (late 70s) to apply pricing pressure to keep costs down by forcing hospitals to use DRG codes on their claims in order to get paid.  The idea was that if every procedure was codified, they would be easier to track and analyze and they would therefore be able to set better prices.  Well, instead of this lowering costs, it ended up raising costs because hospitals simply go around the system: they generate procedures that are unnecessary and tack it on to the hospital encounter.  They also cherry-pick certain procedures or supplies that cost more than they should and charge these more often than they should (anyone ever gotten a bill for $2 cotton swabs).

What about legislation?  Couldn't the government step in and say "you cannot charge more than X for a hospital stay" or "hospital encounters need to only contain medically necessary procedures...?"  Well, in the first scenario hospitals go broke because the cost of care will always increase as the quality of care increase (that and certain procedures will always cost far more than others).  In the second, hospitals would just get around that in some other way, either by skirting around the "medically necessary" requirements or by jacking up prices on their procedures.

I believe a Libertarian solution really is best in solving the health care cost problem in our country.  We simply have way too many people requiring health care, and the high prices are a result of this high demand.  If we collectively used these services less, theory has it that the lessened demand would cause prices to fall.  But we cannot just break from our commitments: we have promised our seniors that we would provide for their medical needs. And what of those who desperately need medical care now? What about those who can't afford the care?

These problems cannot be erased over night.  No amount of sound-byteing or legislating can solve the essential problem: we, as Americans, are unhealthy.  We don't take care of each other.  We don't value health in this country, and as a result we rely on health care providers to fix us. In order to change our behavior (using health care services too much), we must change our attitudes.  It must become unacceptable to lead an unhealthy lifestyle.  In order to change our attitudes, we must change our values. We must embrace healthy lifestyles. I believe a great way to do this is to simply make it more difficult to be unhealthy.  Phase out Medicare.  Phase out Medicaid.  Set an age (35) where you are no longer eligible for the program.  Give back tax money taken from those who are younger and no longer are eligible. Create new, far smaller programs that support only those that truly need it: the disabled, and those who by no fault of their own cannot support themselves. Knowing that there is no safety net to pay for all of their medical needs, people will live much healthier lives. They will save for future medical expenses.  And knowing that the government will no longer be writing out the checks, hospitals will be forced to become more efficient and charge less: you can only expect to earn what others can afford to pay.

Now, lower taxes would certainly help individuals with that plan. But it's all probably too much to ask for (especially the lower taxes :) ).

Super Tuesday: Will it Matter?

Romney wins Michigan with Santorm a close second and Paul a surprising third.  But what now?

We are entering what has historically been considered the most important event in the primary season, a day that propels the winner a step closer to the oval office and sends the loser home to contemplate their defeat (until they win next cycle, but more on that later) - Super Tuesday. But that was then and this is now. 

For those of you that don't follow this as closely as I do (good for you), Georgia, Ohio, Tennessee, Virginia, Oklahoma, Massachusetts, Idaho, North Dakota, Nebraska, and Vermont all cast their votes for a potential Republican nominee on March 6th, the day known to us junkies as Super Tuesday. Not two, not three, but four candidates aspiring for the nation's highest office are looking to take home the most votes next Tuesday, and the stakes are high: 437 delegates are up for grabs.   This is over a third of the amount required for the nomination, three times more than the amount of delegates the NY Times gives Mitt Romney as of today, and over 100 more delegates than have been contested for during the last two months combined, all in a single day. Any candidate that wins a majority of the voters on Tuesday would immediately gain enormous momentum that would propel their candidacy towards nomination.  So Super Tuesday matters a whole lot, right?

I'm not particularly convinced.  Although Mitt Romney and Rick Santorum are polling at the top of nearly every state voting on Tuesday (with the exception of Georgia, which is behind Newt Gingrich for reasons unknown), it is likely that both candidates will receive closer to one third of the total delegates or less each rather than splitting them evenly. Why is this the case, if they are likely to win around the same number of contests?

The Republican party made and interesting choice this cycle to change their nomination rules in favor of more non-binding and proportional contests, practically ensuring that the nomination process becomes a long and dragged out affair, perhaps in an effort to simulate the excitement around the Clinton-Obama primary contest of 2007.  The result of this is that at least 371 of the delegates to be decided (or not decided, in the case of the 28 from North Dakota, whose caucus is non-binding) are very likely to be awarded proportionately.  Although certain states such as Virginia have a winner-takes-all clause, a candidate reaching the 50% required popular vote to trigger the clause is unlikely (except in Virginia where only Romney and Paul are on the ballot), and has only happened in one contest so far.  This means that while Romney and Santorum may "win" most of the states with the most popular vote, the margin of victory between the winner and second (and even third) place will require delegates to be split rather equally.  

So what does this mean for the importance of Super Tuesday? In terms of delegates, barring a major surge and unlikely but devastating sweep from Romney, not a whole lot.  The projected delegates will likely maintain similar proportions to today once the dust has settled.  Super Tuesday is much more about momentum: for Romney, it's about proving he really is "electable" and can consistently win these contests; for Santorum, it's showing that his support amongst rural and grassroots voters really can push him past the Romney money machine; for Gingrich, it's about stealing some southern states and getting his campaign some much-needed free airtime; for Paul, it's about leveraging the format of the contests to nab as many delegates as possible, despite the media favoritism towards his opponents and his resulting lag in popularity.

The really interesting thing here is that because of the sheer number of states voting, each candidate can accomplish (or claim to accomplish) his goal without the others failing. So it's probably worth asking the question again: does Super Tuesday really matter?