Tuesday, November 1, 2011

Another Round Of Mythbusting

Three of the biggies blown out of the water here.  Dig in!

Myth #1: Income Inequality

As Power Line says, someone at PBS screwed up by allowing Richard Epstein to explain why the current sturm und drang over “income inequality” misses the point. Epstein argues that whatever income inequality exists is the result of productiveness and success in the markets, and that imposing redistributive government policies to “correct” for the inequality will mean much less innovation and economic success. When Epstein’s interviewer points out that marginal and capital-gains taxes were much higher in earlier periods of economic growth, Epstein points out that the tax code had more shelters for investors that shielded capital from seizure — and that government was much less redistributive than it is today ...

While we cogitate over hearing this at PBS, of all places, James Pethokoukis reminds us that the central premise of “income inequality” is flawed anyway:

5. The Minneapolis Federal Reserve concluded — after taking into account household size and differing price index – median household income for most household types increased by 44 percent to 62 percent from 1976 to 2006. In addition, its research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.
6. As technological change accelerates and becomes more pervasive, the market will reward workers with more education and skills. As CBO notes: “Numerous researchers have concluded that, on balance, the technological changes of the past several decades— and perhaps the entire past century—increased employers’ demand for workers with higher skills and more education. That increase, along with a smaller increase in the supply of workers with higher skills and more education, generated substantial gains in the relative wages of more-educated worker. In the past decades, inequality has been going up everywhere.” It is a global phenomenon.
7. And why did the top 1 percent do particularly well? One potential explanation from CBO: ”The compensation of ‘superstars’ (such as actors, athletes, and musicians) may be especially sensitive to technological changes. Unique characteristics of that labor market mean that technical innovations, such as cheap mass media, have made it possible for entertainers to reach much wider audiences. That increased exposure, in turn, has led to a manyfold increase in income for such people.” The CBO also mentioned ”changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities” as possibilities.
My bottom line: a) income inequality has increased somewhat in recent decades, but not exploded; b) that increase is natural given technology and globalization; c) incomes could have risen faster with a better educated workforce (that also didn’t have to compete with an influx of workers from Asia), but did OK; d) we need to boost education to keep up with advancing technology and productivity; e) the past decade was one of slow growth followed by a nasty recession. No argument there. Looking forward, America will need a pro-growth tax system, smarter regulation and far better human capital (helped by higher teacher pay in exchange for eliminating tenure, more skilled immigration, etc.). That way, incomes won’t just be more equal, they’ll be growing.

“Income inequality” has always existed. It exists in every economic system ever invented. Does anyone doubt that income inequality exists in communist China, or existed in the Soviet Union? If you don’t want to argue from the extremes, take a look at western Europe, which has relied on massively redistributive policies for decades. The difference between these systems and the American experience is that membership in an economic class has never been static, but is changeable depending on one’s innovation and effort. That goes to the heart of American exceptionalism, and American success — or at least it did before we tried turning ourselves into a version of Europe’s sclerotic nanny states.

Myth #2: Global Warming

Last week, a research team at Berkeley led by a former climate change skeptic released a study of global temperatures that intended to set the record straight on controversial data collected by the East Anglia Project, NASA, and other organizations that have acted as advocates for action based on anthropogenic global warming.  Professor Richard Muller put together a graph of the data that supposedly showed warming from 1800 (roughly the beginning of the Industrial Era in Europe) through 1975, and then a steeper rise in temperatures that appears unstopped.  When this data was released, newspapers and other media proclaimed it the end of AGW skepticism and demanded capitulation from the “deniers.”

This led to an interesting e-mail exchange between myself and one of my blogging friends, whom I won’t name because (a) the e-mails weren’t really intended for publication, and (b) he’s a good guy who is passionate about doing what’s right.  I got an e-mail from him challenging me on this point, saying the correlation between rising temperatures and mass release of CO2 was undeniable. I explained to him that AGW skepticism doesn’t rest on the notion that global temperatures aren’t rising, but that the AGW crowd has yet to show causation between CO2 release and actual warming.  He replied that correlation was enough to prompt action, but that’s neither scientific or wise.  Correlation only shows that two trends parallel each other; if one isn’t the cause of the other, then “solutions” designed to change one trend won’t impact the other anyway — and it will waste time, money, and perhaps lives while the perceived problem continues unabated.

As it turns out, the correlation isn’t exactly equal, either.  A closer look at the data and a Daily Mail interview with one of Muller’s team shows that the chart hides the fact that no warming has occurred in the last 11 years, as has been repeatedly pointed out:
Prof Judith Curry, who chairs the Department of Earth and Atmospheric Sciences at America’s prestigious Georgia Institute of Technology, said that Prof Muller’s claim that he has proven global warming sceptics wrong was also a ‘huge mistake’, with no  scientific basis. 
Prof Curry is a distinguished climate researcher with more than 30 years experience and the second named co-author of the BEST project’s four research papers. 
Her comments, in an exclusive interview with The Mail on Sunday, seem certain to ignite a furious academic row. She said this affair had to be compared to the notorious ‘Climategate’ scandal two years ago. … 
In fact, Prof Curry said, the project’s research data show there has been no increase in world temperatures since the end of the Nineties – a fact confirmed by a new analysis that The Mail on Sunday has obtained. 
‘There is no scientific basis for saying that warming hasn’t stopped,’ she said. ‘To say that there is detracts from the credibility of the data, which is very unfortunate.’
Let’s take a look at Muller’s chart, and then compare it to the chart for the last 13 years — which the Daily Mail labels an “inconvenient truth”:

global warming, climate change, AGW, BEST, Al Gore

First, let’s look at the top chart.  A closer reading of the top chart shows that, relative to the 1950-1980 average baseline BEST uses, temperatures didn’t actually warm at all until sometime during the Great Depression, so the entire first century of the Industrial Era apparently had no impact — in a period where the dirtiest of mass energy production processes was in widest use (coal).  Temperatures then started to slowly rise during an era of significantly reduced industrial output, thanks to a lengthy economic depression that gripped the entire world.    What we end up with is a 30-year spike that also includes a few years of reduced industrial output, starting in the stagnating 1970s where oil production also got restricted thanks to onerous government policies and trade wars.

In climate terms, a 30-year spike is as significant as a surprisingly warm afternoon in late October.  Man, I wish we were going to have one of those today.

But then look what happens in the past 11 years in the bottom chart.  Despite the fact that the world’s nations continue to spew CO2 with no significant decline (except perhaps in the Great Recession period of 2008-9), the temperature record is remarkably stable.  In fact, it looks similar to the period between 1945 and 1970 on the top chart.  If global temperature increases really correlated directly to CO2 emissions, we wouldn’t see this at all; we’d see ever-escalating rates of increase in global temperatures, which is exactly what the AGW climate models predicted at the turn of the century.  They were proven wrong.

And in fact, Curry explains that the failure of those models finally has some scientists going back to the drawing board:
‘This is nowhere near what the  climate models were predicting,’ Prof Curry said. ‘Whatever it is that’s going on here, it doesn’t look like it’s being dominated by CO2.’ … 
‘Of course this isn’t the end of scepticism,’ she said. ‘To say that is the biggest mistake he [Prof Muller] has made. When I saw he was saying that I just thought, “Oh my God”.’ 
In fact, she added, in the wake of the unexpected global warming standstill, many climate scientists who had previously rejected sceptics’ arguments were now taking them much more seriously. 
They were finally addressing questions such as the influence of clouds, natural temperature cycles and solar radiation – as they should have done, she said, a long time ago.
And what of Muller?  When confronted by the Daily Mail about the data from the past 11 years, he denied that temperatures had plateaued, and then admitted that the data shows exactly that:
Yesterday Prof Muller insisted that neither his claims that there has not been a standstill, nor the graph, were misleading because the project had made its raw data available on its  website, enabling others to draw their own graphs. 
However, he admitted it was true that the BEST data suggested that world temperatures have not risen for about 13 years. But in his view, this might not be ‘statistically significant’,  although, he added, it was equally  possible that it was – a statement which left other scientists mystified. 
‘I am baffled as to what he’s trying to do,’ Prof Curry said.
Even perfect correlation doesn’t prove causation, and this is far from being perfect correlation.  AGW scientists have still failed to prove that CO2 is responsible for the moderate rise in temperatures, nor have they proven their hypothesis that the rise is irreversible, or even bad.  As I pointed out to my friend, Greenland hosted a farming community for over 200 years before getting swallowed in ice in a global-cooling period that helped spread disease, death, and starvation throughout Europe.  If Greenland once again becomes farmland, then we might be entering a somewhat more remarkable climate period in human history, but until then this is more properly referred to as weather.

BEST did help settle the temperature record, an important step in climate research and a necessary corrective to the manipulations discovered in Climategate.  But they didn’t “prove” anthropogenic global warming or any kind of causation, and even their correlation proves rather weak.

Myth #3: Medicare

By far, our largest unfunded liabilities are Social Security and Medicare.  According to recent actuarial reports, Medicare faces a $25 trillion liability and Social Security has an unfunded liability of $21 trillion.  And those numbers are regarded as low-ball figures, due to their unrealistic accounting for cost-cutting measures.  They already represent the largest expenditures of the federal government, with Social Security and Medicare consuming 20.2% and 14.6% of the budget respectively.  Those numbers are slated to skyrocket as the retirement population doubles over the next three decades.  Hence, any meaningful discussion of balanced budgets must include a plan to fix these two entitlement behemoths – brought to you by previous Democrat presidents.
The first step to entitlement reform must include an acknowledgement of the dichotomy between the two largest programs.  Social Security and Medicare are very different programs.  Consequently, they face divergent problems and require dissimilar solutions.
Last week, healthcare expert Christopher Conover posted an analysis at the American Enterprise Institute, illustrating the differences between Social Security and Medicare.  He found that while most people (except low-income earners) receive Social Security benefits that are roughly commensurate to their contributions from the 12.4% payroll tax, the same cannot be said of Medicare benefits.  The average Medicare recipient, according to Conover, received $2-$6 per every dollar paid into the system via the 2.9% Medicare tax.  Moreover, the only people who earn all of their Medicare benefits are those earning an average of $130,000 a year over their entire career – the very people who will see a payroll tax increase under Obamacare.
The two entitlement programs must be addressed with honest solutions, albeit with drastically different approaches.  Social Security is very simple.  It is not an entitlement program.  With the exception of low-income earners, most people receive less than the aggregate contributions paid into the system, when the expectation for reasonable interest returns is factored in.  Social Security is a mandatory Ponzi scheme that offers lousy returns, taxes some of those returns, and commandeers those returns from the estate of a deceased recipient.
Accordingly, people who decry attempts to cut Social Security by using the rallying cry, “it’s my money,” are absolutely correct.  It is their money – and if they were given an opportunity to invest that money in private accounts, they would be able to retire comfortably and enjoy a better rate of return.  Thus, a gradual move towards private accounts is the way to go.
Medicare, as Mr. Conover observes, is a very different challenge.  Not only is Medicare, as it’s currently constituted, a burgeoning budget-busting entitlement program, it is the most prominent market-distorter amongst the plethora of market distorting programs Democrats have injected into the healthcare system over the years.  This open-ended third-party program has engendered a self-fulfilling cycle of unaffordability into the healthcare system.  Its very existence has raised the cost of care to the point that very few people can afford to retire without it.  To that end, unlike with Social Security benefits, Medicare recipients lack the ability to say (they say it anyway), “give me my money back, and I’ll take care of my own healthcare.”
The bottom line is that the aggregate savings from the 2.9% Medicare payroll tax and the premiums for retirees are insufficient to pay for today’s healthcare costs – costs that were spiked by the counterintuitive nature of third-party open-ended payments.  This is how liberals have distorted the costs of healthcare and created dependency over the past few decades.  Whatever is left of free-market healthcare after Medicare, Medicaid, VA, SChip, and all the mandates on private insurance – will be decimated by Obamacare.
While the ultimate goal of any Medicare reform must be the same as Social security reform; less dependency and empowering individuals, we must first lower healthcare costs by fixing the entire system.  The way to lower direct healthcare costs is through malpractice reform.  The way to lower the cost of health insurance, and by extension, actual healthcare costs, is by reinstating the free market into the health insurance industry.  That will necessitate reforms that help peg services and healthcare usage with actual costs.
Being that Medicare is the biggest driver of healthcare costs, it should be the biggest priority on the agenda of reformers.  Medicare must be transformed from an unlimited third-party payer system to one that empowers the individual to buy his/her own insurance with the payroll tax funds that are commensurate to the cost of the plan.  Either a direct voucher system or Paul Ryan’s premium support plan would fit the bill.
Other reforms should include the following: expansion of tax free HSAs, removal of anti-free market mandates and one-size-fits-all mandates on insurance companies, block granting Medicaid to the states and allowing them to use funds to covert Medicaid and SChip to private insurance vouchers, converting VA benefits to vouchers for private insurance (but supplement all extra costs), and eliminating the tax incentive gap between employer-based insurance and personal insurance.  The last reform would involve either the elimination of the employer tax exclusion for health insurance, or the extension of that deduction to individuals who buy health insurance.
All of these reforms will have the effect of creating downward pressure on healthcare costs, while concurrently restoring the concept of health insurance to its original purpose – long-term protection; not a third-party market-distorting payment system.  Only these free-market reforms will lower healthcare costs to the extent that the payroll taxes would, for the most part, cover the medical costs of retirees.
In order to achieve these reforms, the next president will have to eloquently tell the truth about Medicare to the American people.  These free-market reforms will lower the cost of healthcare for everyone; however, future retirees will have to pay a reasonable, albeit higher price for their healthcare than they do under the current system.  As long as people are misled to believe that they pay for every cent of the current Medicare system, such reforms are untenable.  The next generation of retirees must understand that they are paying less than 50% of their Medicare benefits, a reality that is unsustainable.  They must come to realize that nothing in life is free, certainly not the best healthcare system in the world.  We all know those people who complain about paying even a $20 co-pay for medical care, while blithely shelling out hundreds of dollars for car repairs.  If we continue to seek the best healthcare for free, we will become free of the best healthcare system in the world.  We simply don’t have the money.
While it is impossible to continue a system in which we enjoy the best healthcare for free, the next best option is a system that is reasonably affordable.  There is only one panacea for our healthcare ailments; free-market reform – along with veracious leaders to champion the prescription.

An ugly truth is worth more than a pretty lie.  Have a happy Tuesday.

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