An Arizona man has been sentenced to 300 hours of community service and a year of probation for a genuine crime. This evil man was leaving plastic bottles full of drinking water in the Buenos Aires National Wildlife Refuge in Arizona near the Mexican border. The reason for the crime is to help the illegal immigrants who regularly cross the border to come northwards in search of a job. This man wants these disgusting aliens to drink the water when they are extremely thirsty from exhaustion when they could easily help the authorities by dying due to thirst. Here is the full story.
http://www.cnn.com/2009/CRIME/08/13/arizona.immigrant.advocate/index.html
He was found guilty of leaving plastic bottles in the wild life area which could endanger the lives of the animals in the refuge. The prosecuting lawyer argued that some animals could try to eat the plastic bottles and choke to death while some deer may get their antler stuck in the bottle.
This is serious crime against US citizens. Since the animals in the refuge were all born in the USA, they are US citizens by birth. This man was trying to, albeit unknowingly, harm US citizens to protect the illegal aliens who have the audacity to come to USA and clean our office bathrooms and vacuum our office floors. Not only that, when that privilege of cleaning our bathroom is awarded to them, they want money in exchange. Why should we care when they get half the minimum wage?
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Here is a poem written by Nobel winner poet from India, Rabindranath Tagore :
Where the mind is without fear and the head is held high;
Where knowledge is free;
Where the world has not been broken up into fragments by narrow domestic walls;
Where words come out from the depth of truth;
Where tireless striving stretches its arms towards perfection;
Where the clear stream of reason has not lost its way into the dreary desert sand of dead habit;
Where the mind is led forward by thee into ever-widening thought and action ...
Into that heaven of freedom, my father, let my country awake.
Friday, August 14, 2009
Friday, July 31, 2009
America’s healthcare dilemma
There is no question that America’s healthcare system needs a massive overhaul. The current system does not cover everybody, is too expensive and in spite of that Americans are not the healthiest people in the world.
In this blog I will discuss two issues: universal coverage and cost of healthcare.
In the USA, 15% of the population does not have health insurance. But that indicates that a huge majority of 85% is covered. Most working people get group health insurance as a benefit from the employer. Since it has become a tradition, every big and medium employer provides group health insurance to all its employees. The employer’s incentive is to get tax break for paying employee’s insurance premium. Senior citizens are covered by the government program of Medicare.
The idea of health insurance like any other insurance is noble. Among the insured people, only a small number fall seriously sick and incur huge costs for cure. The insurance in effect distributes this cost among every insured including those that are healthy. The underlying promise is that you, the healthy person are paying a part of the cost of cure of a sick person today through your premium with the expectation that if you fall ill, other insured persons will similarly pay your cost.
Unfortunately the insurance companies do not work this way. First, since most expensive health problems occur at old age and the elderly are covered by the government’s Medicare program, it is the government that pays for most of the expensive treatments. This largely reduces the burden of the insurance companies. Second, in spite of this the insurance companies try to get as many healthy people and as few sick people as possible in their group health plans in order to increase profitability. For individual plans, the premium for people with pre-existing conditions is extremely high.
On the customer’s side there are two problems with employer-paid health insurance. First, we the customers of healthcare market do not care about the cost whether it is physician’s fee, hospital bed charges, charges for a surgery or medicines and cost of insurance premium. This is because we the employees in effect get health insurance as a subsidy. When we decide to buy a TV or a car, we generally tend to buy a model that suits our income and budget. A low paid employee does not buy a Ferrari or a 50 inch LCD HDTV. The average person tries to cut cost by going to discount stores, buying things on sale. Even if they do not haggle, the manufacturers try to reduce product price to gain huge volume of customers. But unfortunately, since for most of us the insurance is already paid by the employer, when it comes to visiting a doctor or going to hospital or buying medicines, we do not care about the cost. Since a massive majority of customers do not care about the cost, the free market system cannot work in healthcare industry. Not only that, in most cases the end user does not know up front what the total cost will be. Months after the treatment, a bill comes from the doctor or the hospitals indicating what portion was paid by insurance company and what portion, if any, will have to be paid by the patient’s family.
The second problem is that healthcare for most comes as a right and not a privilege. It is highly egalitarian in the sense that in a company, usually all permanent employees from the CEO to the janitor or driver get the same insurance plan. It is a subject of argument whether everyone should get the best healthcare. This is also true for Medicare since every senior citizen irrespective of financial condition, gets the same treatment. I think that it is a subject of a public debate whether everyone should get the same, top quality, expensive healthcare.
Our hospitals and doctors face little competition. The hospitals are huge and expensive. The bed charge exceeds the daily cost of the best five-star hotel in New York City. The charges for ICU are even higher. The hospital administration charges exorbitantly high price even for over-the-counter medicines. I do not believe in telling the hospitals or doctors that they cannot charge beyond certain limits. That brings in infinite regulations which defeat the purpose.
Instead, I propose that smaller health centers be allowed to develop. It is a miniature hospital with, may be 10 beds, few doctors, nurses and other staff. Sometimes, it is possible to start such a health center by a group of doctors. The administrative overhead will be small. Usually in some countries such health centers, often called Nursing Homes, provide treatment and surgery for certain diseases only. So, if you have a heart attack or need heart bypass surgery, you may get admitted to a Cardiac health center. If the patient has lung disease, he may choose a specialty center for lung diseases. Competition from health centers will force hospitals to reduce costs that no amount of congressional regulation can achieve.
In the USA, doctors make huge amount of money due to lack of competition. After residency and optionally after fellowship, when a doctor starts practicing or gets employed, she usually starts her career with an income that is double the median household income of the USA. With experience, it goes higher. In certain specialty areas such as Cardiac surgery or Anesthesiology, sky is the limit. Doctors often complain that they are burdened by huge loan incurred for medical education as well as massive malpractice insurance premiums. But, in general their luxury cars and large homes indicate that the patients are not getting a good deal.
A quick solution will be to make changes similar to the field of computer software. Every year, tens of thousands of temporary workers come to USA on H1-B visa to work in the areas of software development, maintenance, administration etc. This allows US corporations to get computer related services economically thus helping them to increase productivity. It certainly puts a downward pressure on the salaries of US computer professionals. Yet, a fresh graduate in Computer Science usually starts at $50000 which is about the same as median household income in the USA. A Computer Science graduate and a physician are both highly skilled and qualified. But the starting salary of the former is usually half of the latter.
Thanks to massive lobbying by the American Medical Association (AMA), the US government does not allow foreign medical graduates to come to USA. Young graduates are denied even tourist visa in most cases. The only foreign medical graduates that can come in are those who have obtained immigration (Green Card) through family sponsorship. No foreign doctor is given H1-B visa in order to practice in the USA. Yet, we find that those who are already here because they obtained the green card are excellent doctors. Therefore the argument that the foreign medical graduates are not as competent as US doctors does not cut ice. If, say 50000 foreign doctors are allowed in the USA every year for the next 3 years, the massive competition will reduce doctor’s fees drastically. At the same time, efforts must be made to increase enrollment in medical schools.
But the biggest reform has to come from us, the consumers. A person needs healthcare services in three conditions. First and in most cases, it is a simple and routine, short term problem like fever, influenza, diarrhea, stomach trouble etc. Second is the case of catastrophic health problems like cancer, heart problems, lung problems, broken bones etc. Lastly, there is the unpredictable health problem due to accidents.
I propose that the government provide health centers in every town and city to treat the minor, routine problems for free. In many cases, even trained nurses can diagnose and treat the minor ailments. In addition, the government must make it mandatory for everyone to visit the health center once every 6 months to get free and thorough medical checkup. Regular checkup can reduce chances of serious disease at advanced stage drastically.
For the catastrophic health problems and accidents, the patient can and should go to private hospitals or other medical facility. For this, everyone must have health insurance that an individual or a family will be able to buy. A person or a family who gets regular, free checkup from government health center will get heavy discount on insurance premium. Employer provided group health insurance should be banned. Like auto insurance, health insurance also will be for an individual or a family. No group health insurance should be permitted. In this way, the whole nation will be forced to share the risk and cost of the ill persons.
Only when you and I look for cheap and good quality health insurance for catastrophic conditions, the way we decide and buy auto insurance, will the cost of insurance come down. People will opt for royal quality insurance or basic, no-frills insurance based on their ability to pay premium. Since routine medical checkup will be almost mandatory and treatment for minor ailments will be free, the insurance cost will be much lower.
To be fair with hospitals, the law that forces the hospitals to admit even uninsured persons should be repealed. If a sick person comes without adequate insurance, a private hospital should have the right to deny the person admission. On the government’s part, it should buy basic, no-frills catastrophic insurance coverage for families below poverty level.
To summarize, here are the steps needed in my proposal.
1. Open up government medical centers in every town for free, routine medical checkup and treatment of routine, minor diseases
2. Ban employer based group health insurance. Health insurance should not benefit any group. It should either be individual or family insurance.
3. Allow foreign doctors to come in the USA to practice. A written test must be conducted to ensure the doctor’s competence.
4. Health insurance will only need to cover accidents and catastrophic as well as chronic illnesses.
5. No insurance company will be allowed to deny insurance to an individual because of pre-existing conditions. Also, premium can be increased only if the conditions could have been controlled by the individual. For example, if a person is smoker, alcoholic or drug user, his/her premium can be increased. But premium cannot be increased because a person has high blood pressure or diabetes.
6. Allow doctors or other investors to start small specialty clinics that will provide most hospital facilities only for certain diseases.
7. Government will directly buy basic catastrophic health insurance for families below poverty level.
8. A hospital or clinic will be able to deny a patient admission if the patient does not have adequate insurance.
In this blog I will discuss two issues: universal coverage and cost of healthcare.
In the USA, 15% of the population does not have health insurance. But that indicates that a huge majority of 85% is covered. Most working people get group health insurance as a benefit from the employer. Since it has become a tradition, every big and medium employer provides group health insurance to all its employees. The employer’s incentive is to get tax break for paying employee’s insurance premium. Senior citizens are covered by the government program of Medicare.
The idea of health insurance like any other insurance is noble. Among the insured people, only a small number fall seriously sick and incur huge costs for cure. The insurance in effect distributes this cost among every insured including those that are healthy. The underlying promise is that you, the healthy person are paying a part of the cost of cure of a sick person today through your premium with the expectation that if you fall ill, other insured persons will similarly pay your cost.
Unfortunately the insurance companies do not work this way. First, since most expensive health problems occur at old age and the elderly are covered by the government’s Medicare program, it is the government that pays for most of the expensive treatments. This largely reduces the burden of the insurance companies. Second, in spite of this the insurance companies try to get as many healthy people and as few sick people as possible in their group health plans in order to increase profitability. For individual plans, the premium for people with pre-existing conditions is extremely high.
On the customer’s side there are two problems with employer-paid health insurance. First, we the customers of healthcare market do not care about the cost whether it is physician’s fee, hospital bed charges, charges for a surgery or medicines and cost of insurance premium. This is because we the employees in effect get health insurance as a subsidy. When we decide to buy a TV or a car, we generally tend to buy a model that suits our income and budget. A low paid employee does not buy a Ferrari or a 50 inch LCD HDTV. The average person tries to cut cost by going to discount stores, buying things on sale. Even if they do not haggle, the manufacturers try to reduce product price to gain huge volume of customers. But unfortunately, since for most of us the insurance is already paid by the employer, when it comes to visiting a doctor or going to hospital or buying medicines, we do not care about the cost. Since a massive majority of customers do not care about the cost, the free market system cannot work in healthcare industry. Not only that, in most cases the end user does not know up front what the total cost will be. Months after the treatment, a bill comes from the doctor or the hospitals indicating what portion was paid by insurance company and what portion, if any, will have to be paid by the patient’s family.
The second problem is that healthcare for most comes as a right and not a privilege. It is highly egalitarian in the sense that in a company, usually all permanent employees from the CEO to the janitor or driver get the same insurance plan. It is a subject of argument whether everyone should get the best healthcare. This is also true for Medicare since every senior citizen irrespective of financial condition, gets the same treatment. I think that it is a subject of a public debate whether everyone should get the same, top quality, expensive healthcare.
Our hospitals and doctors face little competition. The hospitals are huge and expensive. The bed charge exceeds the daily cost of the best five-star hotel in New York City. The charges for ICU are even higher. The hospital administration charges exorbitantly high price even for over-the-counter medicines. I do not believe in telling the hospitals or doctors that they cannot charge beyond certain limits. That brings in infinite regulations which defeat the purpose.
Instead, I propose that smaller health centers be allowed to develop. It is a miniature hospital with, may be 10 beds, few doctors, nurses and other staff. Sometimes, it is possible to start such a health center by a group of doctors. The administrative overhead will be small. Usually in some countries such health centers, often called Nursing Homes, provide treatment and surgery for certain diseases only. So, if you have a heart attack or need heart bypass surgery, you may get admitted to a Cardiac health center. If the patient has lung disease, he may choose a specialty center for lung diseases. Competition from health centers will force hospitals to reduce costs that no amount of congressional regulation can achieve.
In the USA, doctors make huge amount of money due to lack of competition. After residency and optionally after fellowship, when a doctor starts practicing or gets employed, she usually starts her career with an income that is double the median household income of the USA. With experience, it goes higher. In certain specialty areas such as Cardiac surgery or Anesthesiology, sky is the limit. Doctors often complain that they are burdened by huge loan incurred for medical education as well as massive malpractice insurance premiums. But, in general their luxury cars and large homes indicate that the patients are not getting a good deal.
A quick solution will be to make changes similar to the field of computer software. Every year, tens of thousands of temporary workers come to USA on H1-B visa to work in the areas of software development, maintenance, administration etc. This allows US corporations to get computer related services economically thus helping them to increase productivity. It certainly puts a downward pressure on the salaries of US computer professionals. Yet, a fresh graduate in Computer Science usually starts at $50000 which is about the same as median household income in the USA. A Computer Science graduate and a physician are both highly skilled and qualified. But the starting salary of the former is usually half of the latter.
Thanks to massive lobbying by the American Medical Association (AMA), the US government does not allow foreign medical graduates to come to USA. Young graduates are denied even tourist visa in most cases. The only foreign medical graduates that can come in are those who have obtained immigration (Green Card) through family sponsorship. No foreign doctor is given H1-B visa in order to practice in the USA. Yet, we find that those who are already here because they obtained the green card are excellent doctors. Therefore the argument that the foreign medical graduates are not as competent as US doctors does not cut ice. If, say 50000 foreign doctors are allowed in the USA every year for the next 3 years, the massive competition will reduce doctor’s fees drastically. At the same time, efforts must be made to increase enrollment in medical schools.
But the biggest reform has to come from us, the consumers. A person needs healthcare services in three conditions. First and in most cases, it is a simple and routine, short term problem like fever, influenza, diarrhea, stomach trouble etc. Second is the case of catastrophic health problems like cancer, heart problems, lung problems, broken bones etc. Lastly, there is the unpredictable health problem due to accidents.
I propose that the government provide health centers in every town and city to treat the minor, routine problems for free. In many cases, even trained nurses can diagnose and treat the minor ailments. In addition, the government must make it mandatory for everyone to visit the health center once every 6 months to get free and thorough medical checkup. Regular checkup can reduce chances of serious disease at advanced stage drastically.
For the catastrophic health problems and accidents, the patient can and should go to private hospitals or other medical facility. For this, everyone must have health insurance that an individual or a family will be able to buy. A person or a family who gets regular, free checkup from government health center will get heavy discount on insurance premium. Employer provided group health insurance should be banned. Like auto insurance, health insurance also will be for an individual or a family. No group health insurance should be permitted. In this way, the whole nation will be forced to share the risk and cost of the ill persons.
Only when you and I look for cheap and good quality health insurance for catastrophic conditions, the way we decide and buy auto insurance, will the cost of insurance come down. People will opt for royal quality insurance or basic, no-frills insurance based on their ability to pay premium. Since routine medical checkup will be almost mandatory and treatment for minor ailments will be free, the insurance cost will be much lower.
To be fair with hospitals, the law that forces the hospitals to admit even uninsured persons should be repealed. If a sick person comes without adequate insurance, a private hospital should have the right to deny the person admission. On the government’s part, it should buy basic, no-frills catastrophic insurance coverage for families below poverty level.
To summarize, here are the steps needed in my proposal.
1. Open up government medical centers in every town for free, routine medical checkup and treatment of routine, minor diseases
2. Ban employer based group health insurance. Health insurance should not benefit any group. It should either be individual or family insurance.
3. Allow foreign doctors to come in the USA to practice. A written test must be conducted to ensure the doctor’s competence.
4. Health insurance will only need to cover accidents and catastrophic as well as chronic illnesses.
5. No insurance company will be allowed to deny insurance to an individual because of pre-existing conditions. Also, premium can be increased only if the conditions could have been controlled by the individual. For example, if a person is smoker, alcoholic or drug user, his/her premium can be increased. But premium cannot be increased because a person has high blood pressure or diabetes.
6. Allow doctors or other investors to start small specialty clinics that will provide most hospital facilities only for certain diseases.
7. Government will directly buy basic catastrophic health insurance for families below poverty level.
8. A hospital or clinic will be able to deny a patient admission if the patient does not have adequate insurance.
Sunday, May 31, 2009
Slow Decline of the American Empire
This is the third recession I am witnessing in the USA. The first one started in late 1990 when Saddam Hussein had attacked and captured Kuwait. Each time, the recession has ended and growth has resumed. But what remained unnoticed is that each recession permanently reduced the standard of living of a huge section of Americans. The American Empire has been declining slowly but surely for some time now. The USA is not alone but is accompanied by most western nations and Japan.
After World War II, Europe was shattered. Asia, Africa as well as Latin America remained poor and low skilled. The USA was the shining beacon of the world. The 1950s and 60s were perhaps best times for Americans. Usually the husband, who probably started working right after high school, worked in a company while the wife looked after the house and children.
As Europe came out of the disastrous condition partly using America’s help and Japan started exporting many consumer products to the USA, competition increased. As a result, the wife had to take up a full time job more often than not. High school education was not sufficient to guarantee a decent job in a good company. College degree became essential for a decent job.
Little gain in real income in last three decades
While there were very few 2-income households in the USA in the 1970’s, today almost all households with parents and small children have both parents working. In spite of doubling the number of persons working in the household, the real income did not increase significantly. In 1975, the median household income was little over $41348, measured in 2007 dollars. In 2007, it has gone up to $50233. In 32 years, the household income has increased only 22%. If the wife did not join the workforce, the income today would actually have been lower than in 1975.
The second bad news is that in 1999, the median household income measured in 2007 dollars was $50641. In each subsequent year, it has fallen slightly every year until 2004. In 2004, the income was $48665. After that it started rising again. But still the income in 2007 is less than in 1999. This shows that America’s households faced economic stagnation over the last 8 years.
Declining share of world GDP
Still America is one of the richest nations in the world. Based on United Nations Human Development Indicators (HDI), it was ranked 12th among more than 170 nations of the world. Its GDP of $14 Trillion is by far the highest in the world. But in relative terms, USA’s economic influence in the world is decreasing steadily. In 1960, USA had 30% of world GDP. In 1970, it declined to 24.2% and since then it has been declining slowly. In 2009, this share has come down to about 20%. By 2025, its share will decline further to about 17% while China’s GDP will be higher than America’s.
Reduced savings, reduced investment
America’s household savings rate was about 8 to 10% of GDP in early 1980’s. Since then it has steadily declined and went negative in 2005. It remained between 0 and 1% until 2008 when it showed some improvement. In the current year it might be 3 to 4% of GDP although we do not know if it is an anomaly or a long term trend. In contrast, India’s household savings stayed at about 22% of GDP from 2000 to 2008. China has an even higher rate. The total savings in a country is utilized for new investment which provides economic growth.
The steady reduction in savings has a direct correlation with income stagnation. Americans grow up hearing two myths. First, in the USA every person is expected to have a standard of living better than his/her parents. Second, Americans earn more than people of most other nations because of the unique American ingenuity.
In reality, most people found out that their family income was either decreasing or remaining stagnant. In such circumstances, the logical thing to do would be to cut back on expenses. In other words, families needed to reduce standard of living. But in order to maintain myth 1, most families did not cut back. Where would they get the extra money? They cut back on savings until it became zero. In coming years, when these people retire, they will face substantial poverty because of lack of savings. It is questionable how much they would be able to depend on Social Security benefits alone.
Cost of college education
In the 1950’s and 60’s most people would get a job right after high school graduation. A high school graduate would then join a company, learn skills and continue to grow within the company. As America became richer, the requirement of highly educated people increased. There was a significant shift toward college and graduate level education. A person with more education generally had higher income. Whereas in 1970, barely 11% of the people above the age of 25 had a bachelor’s degree, in 2005 the number has gone up to 28%. The positive correlation between higher education and higher income still persists.
The nearly mandatory requirement for at least a bachelor’s degree in order to attain middle class life has other repercussions. In 1950’s and 60’s since very few children went to college and public school education was free, cost of education was quite low in the parent’s annual budget. Today every family has to allocate significant amount of money to fund children’s college education. The cost of college education has been increasing at a rate much higher than the average inflation. This has become a burden on families. In addition, although public school education is free, it is financed primarily by property tax. As cost of education increases, property tax is also rising rapidly.
Ballooning Healthcare costs
It is well known that healthcare in America is expensive. In fact, from 1970 the healthcare cost has more than doubled. Most people depend on health insurance coverage paid by the employer. When the health insurance premium goes up, the employer is forced to effectively reduce the salary by that much.
Competition from developing nations
Since western European nations have income comparable to the USA’s, the American companies did not find it worthwhile to move large number of jobs to Europe. But, as India and China progressed and a small percentage of people in these two countries became highly educated, companies in the USA, Europe and Japan found it economical to start factories and offices in these two countries. China became the center of sophisticated manufacturing while India provided high tech knowledge workers. This caused severe movement of well paying jobs from the USA, Europe and Japan to China and India. The huge difference in wage between developed nations and China-India for same skill became the key factor.
Housing bubble
In early part of this decade, house prices were going up. Interest rate was low and banks became much less stringent about checking the eligibility of debtors. Some people saw an opportunity in making large amount of money quickly. They decided to “flip” house. A person would buy a very expensive house that he cannot afford. Suppose that the home costs $500000. Since house price is always supposed to go up, he would sell the house in 6 months to a year at, say $650000 and make a cool $150000 in profit. In an environment where jobs are uncertain and savings were dwindling, this highly risky procedure seemed a logical way to make money. However, the bubble popped when home price started going down. Even in 2009, it is still falling. We have seen the repercussions.
Tiny, 200 year spike
From the beginning of human civilization until around 1750, the standard of living of common people in almost all nations of the world was pretty much the same. Then came the industrial revolution in England and that changed everything. Soon it spread to other European countries and the USA. These nations became very rich compared to the rest of the world over the next 200 years. The difference in standard of living became so huge between the USA and China or between Sweden and India that people all over the world started believing in a myth that people in America and Europe were destined to live much better than the others. But the reality is that this is just a short spike spanning 200 years in the 10000 year human history. The current decline of western nations is a process that is removing the spike and bringing back economic equilibrium among nations slowly. It will take few more decades to complete.
Once it is completed, the standard of living of common people in every nation will be pretty much the same. Unfortunately, this equalizing process will cause pain to America, Western Europe and Japan.
After World War II, Europe was shattered. Asia, Africa as well as Latin America remained poor and low skilled. The USA was the shining beacon of the world. The 1950s and 60s were perhaps best times for Americans. Usually the husband, who probably started working right after high school, worked in a company while the wife looked after the house and children.
As Europe came out of the disastrous condition partly using America’s help and Japan started exporting many consumer products to the USA, competition increased. As a result, the wife had to take up a full time job more often than not. High school education was not sufficient to guarantee a decent job in a good company. College degree became essential for a decent job.
Little gain in real income in last three decades
While there were very few 2-income households in the USA in the 1970’s, today almost all households with parents and small children have both parents working. In spite of doubling the number of persons working in the household, the real income did not increase significantly. In 1975, the median household income was little over $41348, measured in 2007 dollars. In 2007, it has gone up to $50233. In 32 years, the household income has increased only 22%. If the wife did not join the workforce, the income today would actually have been lower than in 1975.
The second bad news is that in 1999, the median household income measured in 2007 dollars was $50641. In each subsequent year, it has fallen slightly every year until 2004. In 2004, the income was $48665. After that it started rising again. But still the income in 2007 is less than in 1999. This shows that America’s households faced economic stagnation over the last 8 years.
Declining share of world GDP
Still America is one of the richest nations in the world. Based on United Nations Human Development Indicators (HDI), it was ranked 12th among more than 170 nations of the world. Its GDP of $14 Trillion is by far the highest in the world. But in relative terms, USA’s economic influence in the world is decreasing steadily. In 1960, USA had 30% of world GDP. In 1970, it declined to 24.2% and since then it has been declining slowly. In 2009, this share has come down to about 20%. By 2025, its share will decline further to about 17% while China’s GDP will be higher than America’s.
Reduced savings, reduced investment
America’s household savings rate was about 8 to 10% of GDP in early 1980’s. Since then it has steadily declined and went negative in 2005. It remained between 0 and 1% until 2008 when it showed some improvement. In the current year it might be 3 to 4% of GDP although we do not know if it is an anomaly or a long term trend. In contrast, India’s household savings stayed at about 22% of GDP from 2000 to 2008. China has an even higher rate. The total savings in a country is utilized for new investment which provides economic growth.
The steady reduction in savings has a direct correlation with income stagnation. Americans grow up hearing two myths. First, in the USA every person is expected to have a standard of living better than his/her parents. Second, Americans earn more than people of most other nations because of the unique American ingenuity.
In reality, most people found out that their family income was either decreasing or remaining stagnant. In such circumstances, the logical thing to do would be to cut back on expenses. In other words, families needed to reduce standard of living. But in order to maintain myth 1, most families did not cut back. Where would they get the extra money? They cut back on savings until it became zero. In coming years, when these people retire, they will face substantial poverty because of lack of savings. It is questionable how much they would be able to depend on Social Security benefits alone.
Cost of college education
In the 1950’s and 60’s most people would get a job right after high school graduation. A high school graduate would then join a company, learn skills and continue to grow within the company. As America became richer, the requirement of highly educated people increased. There was a significant shift toward college and graduate level education. A person with more education generally had higher income. Whereas in 1970, barely 11% of the people above the age of 25 had a bachelor’s degree, in 2005 the number has gone up to 28%. The positive correlation between higher education and higher income still persists.
The nearly mandatory requirement for at least a bachelor’s degree in order to attain middle class life has other repercussions. In 1950’s and 60’s since very few children went to college and public school education was free, cost of education was quite low in the parent’s annual budget. Today every family has to allocate significant amount of money to fund children’s college education. The cost of college education has been increasing at a rate much higher than the average inflation. This has become a burden on families. In addition, although public school education is free, it is financed primarily by property tax. As cost of education increases, property tax is also rising rapidly.
Ballooning Healthcare costs
It is well known that healthcare in America is expensive. In fact, from 1970 the healthcare cost has more than doubled. Most people depend on health insurance coverage paid by the employer. When the health insurance premium goes up, the employer is forced to effectively reduce the salary by that much.
Competition from developing nations
Since western European nations have income comparable to the USA’s, the American companies did not find it worthwhile to move large number of jobs to Europe. But, as India and China progressed and a small percentage of people in these two countries became highly educated, companies in the USA, Europe and Japan found it economical to start factories and offices in these two countries. China became the center of sophisticated manufacturing while India provided high tech knowledge workers. This caused severe movement of well paying jobs from the USA, Europe and Japan to China and India. The huge difference in wage between developed nations and China-India for same skill became the key factor.
Housing bubble
In early part of this decade, house prices were going up. Interest rate was low and banks became much less stringent about checking the eligibility of debtors. Some people saw an opportunity in making large amount of money quickly. They decided to “flip” house. A person would buy a very expensive house that he cannot afford. Suppose that the home costs $500000. Since house price is always supposed to go up, he would sell the house in 6 months to a year at, say $650000 and make a cool $150000 in profit. In an environment where jobs are uncertain and savings were dwindling, this highly risky procedure seemed a logical way to make money. However, the bubble popped when home price started going down. Even in 2009, it is still falling. We have seen the repercussions.
Tiny, 200 year spike
From the beginning of human civilization until around 1750, the standard of living of common people in almost all nations of the world was pretty much the same. Then came the industrial revolution in England and that changed everything. Soon it spread to other European countries and the USA. These nations became very rich compared to the rest of the world over the next 200 years. The difference in standard of living became so huge between the USA and China or between Sweden and India that people all over the world started believing in a myth that people in America and Europe were destined to live much better than the others. But the reality is that this is just a short spike spanning 200 years in the 10000 year human history. The current decline of western nations is a process that is removing the spike and bringing back economic equilibrium among nations slowly. It will take few more decades to complete.
Once it is completed, the standard of living of common people in every nation will be pretty much the same. Unfortunately, this equalizing process will cause pain to America, Western Europe and Japan.
Wednesday, May 6, 2009
It's a small, small world
Today, there is a financial crisis in the world which is particularly affecting the western nations and Japan – the first world. The recession is forcing nations like the USA to think about protectionist measures to save domestic jobs. If you read newspapers like The New York Times, you will notice that readers from across the nation have questioned the efficacy of sending manufacturing jobs to China and service and knowledge jobs to India.
Why did these American jobs go to India and China? It actually started with Japan, followed by South Korea, Singapore and Taiwan which absorbed many well paid jobs from USA and Europe as these countries developed. That was followed by another group of nations such as Malaysia, Indonesia, Mexico, Thailand and Brazil. But the impact was severe when big nations like India and China, which together represent a third of world’s population, started to develop and became competent enough to attract middle class jobs from the USA and Europe.
Now, even the upper middle class of the USA is feeling the pinch as high paying jobs in software development, financial research, technological research and innovation, drug research are going to India and other nations. The discrepancy in salary for the same skill is so noticeable that American corporations have no option other than to ship these jobs to poorer nations in order to remain globally competitive. For example, a Computer Science graduate in the USA starts her first job at about $45000 per year. In contrast, her peer in India with same education and skill starts at $7000 per year if he graduated from a top school and got the job in a top company. Many CS graduates in India, in fact start out at much less than $7000 per year.
In view of such difference, how can an American company create software jobs only in the USA and not in India? The same goes for manufacturing jobs in China. This is globalization, baby.
But wait a minute. Wasn’t globalization a virtuous idea that was to ensure good standard of living for all in the world? Sure. But what happened in the last 50 years is that developing countries did not develop uniformly. A tiny middle class in these countries went against all odds to educate itself so as to get the few white collar jobs in the country. In the process, they became so good that they could work for Multi National Companies (MNC) as well. That started the flow of jobs.
Since the huge majority of nations like India, China, Vietnam remained impoverished and continued with low-productivity jobs, the structure of these economies became such that parity in salary with western nations in any kind of job was impossible. It is because most people are so poor in India that a Computer Science graduate with $7000 annual income can afford to hire domestic helps at home and a full time driver to drive his car. The corporation gets a happy, productive employee at a cost that is less than a sixth of the salary of an American Software Engineer with same skills.
Why did such lopsided development happen where some people in India and China are as productive as their counterparts in the USA and are stealing US jobs while most of the people in these nations have low productivity, education and income? This is because the governments of these nations did not focus on uniform development over the last few decades. They did not attempt to provide high school education to all of their children. They did not open the economy to create jobs. Often, they did not have money to provide decent education, healthcare and housing to all their citizens.
It was precisely in these areas where the USA and Europe could help. Over the last 50 years, the USA and other developed nations could have shown leadership and spent money to improve the lots of the people in India, China, Africa and Latin America. They did not. The Americans love to imagine that the USA is the leader of the free world. But did the USA sacrifice its well being like great leaders of the world such as Gandhi, Martin Luther King and Nelson Mandela? Instead it behaved like a selfish, first boy in the class. The average annual US aid to all developing nations was a meager 0.17% of its GDP. The Americans saw the pictures of impoverished, hungry children in Africa, Asia and Latin America but did not do much more than paying lip service. If in the 1950’s, 60’s and 70’s, the USA had led the developed world and contributed 5% of its GDP annually (that would be $700 Billion in 2008) to improve the lots of developing nations through the UNO, things would have been different today.
I admit that it would not have been easy because many developing nations would consider this an attempt to buy their sovereignty. There were corrupt dictators running many such nations who did not care about national development. But, had it been done through the UNO most nations would have accepted and utilized such aid properly. Even if a fraction of these aids went to help the poor, there would not be millions low-productivity, low-income people in the world today.
Instead, every nation was patriotic and helped only their own nations, ignoring a huge, poor world out there. The USA, the UK, France, Germany, Italy, Japan – none of them truly cared to improve the life of the poor in the developing world. It was not their problem. It was the domestic problem of India, China, Mexico, Bangladesh, Nigeria, Kenya or Uganda.
This form of shallow patriotism has contributed to lopsided development in these nations which is biting the USA and other developed nations today. As you sow, so you reap. The failure of the USA, Europe and Japan to develop and invest in Asia, Africa and Latin America as though it were Chicago, New York, Glasgow, Dresden or Milan was the root cause. They did not realize that it’s a small, small world.
Why did these American jobs go to India and China? It actually started with Japan, followed by South Korea, Singapore and Taiwan which absorbed many well paid jobs from USA and Europe as these countries developed. That was followed by another group of nations such as Malaysia, Indonesia, Mexico, Thailand and Brazil. But the impact was severe when big nations like India and China, which together represent a third of world’s population, started to develop and became competent enough to attract middle class jobs from the USA and Europe.
Now, even the upper middle class of the USA is feeling the pinch as high paying jobs in software development, financial research, technological research and innovation, drug research are going to India and other nations. The discrepancy in salary for the same skill is so noticeable that American corporations have no option other than to ship these jobs to poorer nations in order to remain globally competitive. For example, a Computer Science graduate in the USA starts her first job at about $45000 per year. In contrast, her peer in India with same education and skill starts at $7000 per year if he graduated from a top school and got the job in a top company. Many CS graduates in India, in fact start out at much less than $7000 per year.
In view of such difference, how can an American company create software jobs only in the USA and not in India? The same goes for manufacturing jobs in China. This is globalization, baby.
But wait a minute. Wasn’t globalization a virtuous idea that was to ensure good standard of living for all in the world? Sure. But what happened in the last 50 years is that developing countries did not develop uniformly. A tiny middle class in these countries went against all odds to educate itself so as to get the few white collar jobs in the country. In the process, they became so good that they could work for Multi National Companies (MNC) as well. That started the flow of jobs.
Since the huge majority of nations like India, China, Vietnam remained impoverished and continued with low-productivity jobs, the structure of these economies became such that parity in salary with western nations in any kind of job was impossible. It is because most people are so poor in India that a Computer Science graduate with $7000 annual income can afford to hire domestic helps at home and a full time driver to drive his car. The corporation gets a happy, productive employee at a cost that is less than a sixth of the salary of an American Software Engineer with same skills.
Why did such lopsided development happen where some people in India and China are as productive as their counterparts in the USA and are stealing US jobs while most of the people in these nations have low productivity, education and income? This is because the governments of these nations did not focus on uniform development over the last few decades. They did not attempt to provide high school education to all of their children. They did not open the economy to create jobs. Often, they did not have money to provide decent education, healthcare and housing to all their citizens.
It was precisely in these areas where the USA and Europe could help. Over the last 50 years, the USA and other developed nations could have shown leadership and spent money to improve the lots of the people in India, China, Africa and Latin America. They did not. The Americans love to imagine that the USA is the leader of the free world. But did the USA sacrifice its well being like great leaders of the world such as Gandhi, Martin Luther King and Nelson Mandela? Instead it behaved like a selfish, first boy in the class. The average annual US aid to all developing nations was a meager 0.17% of its GDP. The Americans saw the pictures of impoverished, hungry children in Africa, Asia and Latin America but did not do much more than paying lip service. If in the 1950’s, 60’s and 70’s, the USA had led the developed world and contributed 5% of its GDP annually (that would be $700 Billion in 2008) to improve the lots of developing nations through the UNO, things would have been different today.
I admit that it would not have been easy because many developing nations would consider this an attempt to buy their sovereignty. There were corrupt dictators running many such nations who did not care about national development. But, had it been done through the UNO most nations would have accepted and utilized such aid properly. Even if a fraction of these aids went to help the poor, there would not be millions low-productivity, low-income people in the world today.
Instead, every nation was patriotic and helped only their own nations, ignoring a huge, poor world out there. The USA, the UK, France, Germany, Italy, Japan – none of them truly cared to improve the life of the poor in the developing world. It was not their problem. It was the domestic problem of India, China, Mexico, Bangladesh, Nigeria, Kenya or Uganda.
This form of shallow patriotism has contributed to lopsided development in these nations which is biting the USA and other developed nations today. As you sow, so you reap. The failure of the USA, Europe and Japan to develop and invest in Asia, Africa and Latin America as though it were Chicago, New York, Glasgow, Dresden or Milan was the root cause. They did not realize that it’s a small, small world.
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