January 20, 2014

Healthcare and the Impact on the Federal Budget

By Melvin J. Howard

There appears to be at least as many permutations and combinations available for presenting the US Federal Budget and Government Spending data as there are years that it would take you to count to $2 Trillion dollars, which is about 60,000. Note that in the US the number One Trillion is One Million times by One Million, or 10 to the power of 12. For the mathematically inclined, the correct mathematical definition of One Trillion is One Million to the power of 3, and the correct mathematical definition of One Billion is One Million to the power of 2. But in America numbers work differently, so it came to be that One Billion got redefined as One Million to the power of 1.5, and One Trillion is redefined as One Million to the power of 2. The effect and advantage of being the Imperial Superpower is that everybody else in the world now had to adopt this number conversion.

Rome is Burning

The U.S. Federal Budget has been in the news a lot lately both Republicans and Democrats both showcasing their version of the numbers. How you present the Federal Budget depends entirely on the bias you start with and the point you are trying to make. Therefore I decided to admit the bias up-front and then you can better decide what to do with the data. My bias in looking at U.S. federal spending was the thought that maybe we might be on fire just like the Roman Empire was over 1,000 +-years ago. To be sure, the Roman Empire had many similarities with the modern U.S. Empire - both being Empires built on a combination of clever legal systems, hard-work, confidence, much brutality in military conquest and extensive use of slave labor, coupled with a system of desirable, tempting, and free entertainment to warm the masses to the Empire (think Roman Idol), as well as erratic spouts of helpful assistance to the poor. Certainly also, a widespread Roman currency and trade system, and an extensive taxation and government spending program were just as critical to the success of the Roman Empire, as they are now in today's American Society.

The comparisons of Budgets started with finding a Roman budget at a time around when their leaders stopped being elected and instead were "appointed" and when ancestral lines of Emperors became very popular. So I started with the early Empire days of the 1st - 2nd Centuries AD. The approach I have taken is based on historical data from those days, to calculating the Roman budget in this period. The total Roman budget was about $1 billion sesterces, a common Roman currency that started in the BC years as about 1/4 of the Moneta denarius. These are estimates for the Roman budget in 150 AD broken down into the following expenditure categories. Roman Empire Budget Distribution Source of Roman Data Expense Item Percent Outgo:

Military 70%
Civil Service - Judiciary, Police, Government Departments 10%
Social Spending 5%
Economic Infrastructure 5%
Other - Mostly Foreign Affairs 10%

Now compared to U.S. Actual Government Spending in earlier years subtracting both Social Security and Medicare, which have been fully self-funded by separate taxes (the FICA taxes) since the early 1980s. Then you subtract interest on public debt for comparison purposes since the Roman Empire did not have a consistent, well-developed system of Sovereign debt issuance like America does today.
Some other adjustments to be made to U.S. Spending were to include Veterans Benefits, Military Retiree benefits and Military Assistance to the Provinces (Countries) of Judaea and Egypt (Israel and Egypt) with Military Spending. The inclusion of benefits to ex-military employees is consistent with the way the Roman data was derived, and the inclusion of military aid to Israel and Egypt was done because these were the two most expensive outer-Provinces to maintain under both Regimes. The following distribution of expenses on a comparable basis can be derived from the full current Budget of the U.S. Government. We are focusing on the demands on the Budget coming from the aging of the population and society's increasing medical expenses. America’s Budget Distribution Expense Item Percent Outgo breaks down to something like this:

Military 40%
Civil Service Admin, Justice, Treasury, Fed Civil Retirees 10%
Social Spending - Medicaid, Food, TANF, Unemployment, Housing, SI 30%
Physical and Economic Infrastructure 10%
Other - Education/Training, Research, Foreign Affairs 10%

Clearly the data indicates that social spending in the Roman Empire was generally at a very low level. However social spending tended to happen erratically in much larger amounts, depending on the Emperor of the day, and the need to win over public opinion. What is clear from looking at the two budgets is that the current U.S. budget has more regular proportions of social spending, especially in comparison to military spending. However, it should be noted that the U.S. budget looked much more Romanesque in earlier decades of the last century, notably during the 40s for WW2 and during the 50s in gearing up for the Cold War, where military expenditures were close to, and sometimes even exceeded, the Roman proportion.

The move from a Romanesque budget of the 1950s to current U.S. spending distribution has a lot to do with increased healthcare expenditures such as Medicaid, and the introduction of things like the Earned Income Tax Credit, and changes to Unemployment, Housing and Food Assistance Programs. Note that most of these social spending items included in the 30% fall under the grouping of "Means Tested Entitlements" which means that they make up the social safety net for people whose income and assets fall below a certain threshold.

The other primary social spending benefits or social safety net items are Social Security and Medicare, which apply to Retired and Disabled Persons and are not means tested. As noted earlier these benefits have been self-funded through separate employer and employee contributions (known as the "FICA taxes") for the past two decades and half. In general, rising medical costs affect both Medicare and the means tested healthcare entitlements such as Medicaid. In fact, one of the Historical Data Tables in the Budget shows total government spending on all health programs to have increased from about 2% of the Budget in 1962 to just over 10% by 1980, to almost 25% or one quarter of the Budget by the year 2001.

The USS Ark of Healthcare Reform

As anyone with a health insurance policy will tell you, healthcare costs under private sector coverage continues to rise. Overall, an increasing amount of America's total Gross Domestic Product (GDP - a measure of the total economy) is spent on healthcare. To keep score of the size of an economy and the size of national income people often talk about GDP . This measure of national income is also equivalent to Annual Consumption Expenditure plus Government Spending plus Investment - which are the only three places your money can go. That is, any income you get either goes to taxes, you spend it or you invest it. U.S. GDP is about $14.6 Trillion US dollars. Consumption Expenditure makes a Trillion dollars a year. Today healthcare expenditure makes up about 16.5% of U.S. GDP. About 30% of this is picked up in Government Spending; the rest is in private spending. At the current rate of growth, healthcare costs are predicted to nearly double to $4.5 trillion in the year 2019. At that point, those costs will account for 19.3 percent-almost a fifth-of our GDP. America spends more on healthcare as a percent of its GDP than any other developed nation, but has less public coverage for this cost and a large uninsured population. So, the high spending on healthcare in the U.S. must be explained by something other than a general concern that everyone has adequate care.

To a very large extent the high level of American healthcare spending is a result of America becoming victim of its own technological success, its sedentary lifestyle and a culture obsessed with longevity, overcoming natural cycles and the desire to "stay young". The latter appears to be common to inhabitants of Great Empires of the past. This cultural obsession, fed by medical technologies far superior to those of any other country, may suck up so much of the US economy that it won’t be able to sustain its global super power status. Indeed it is perhaps the very fear of this that is really driving the attempt to reform and redefine Healthcare, Social Security, Medicare and Medicaid.

Now moving on to some of these other expense items, it should be noted that "Other Spending" includes Foreign Affairs expenditure other than the expenses of maintaining the outer provinces of Israel and Egypt, which are included in the Military item. Under both Empires so-called "foreign aid" is or was an important part of keeping peace with peripheral provinces or countries. Unlike Rome, the U.S. also successfully uses loans through various multi-lateral institutions such as the IMF, World Bank and Inter-American Development Bank to maintain optimal relations with peripheral sovereigns.

This use of loans gets to one of the fundamental differences between Rome and America - the role and leverage of the financial system. The U.S. success is largely due to the success and complete faith in its monetary system. In contrast, the Roman Empire's monetary system was almost entirely metal based and while there was easy access to credit for the ruling classes this was not true for other classes. There appears to be much debate among historians about what stopped the Roman Empire from having an industrial revolution. But whatever one's opinion, surely a pre-requisite is a highly leveraged, monetary system with sophisticated, widespread access to credit. But Rome never got to such sophistication with its financial system.

This provides us with another reason why its success was always more driven by military conquest than anything else. In contrast, for the modern American superpower, financial influence is on a par with military power, and both feed off each other. The financial success of the American Empire has also made its tax collection process far more efficient than any previous Empire before. In Roman time the tax collector had to go door to door to collect heavy coins, cattle, feed etc. But still just like then the biggest problem being with collecting from the rich. Remember the biblical character of Noah and the Ark warned of an impending storm like no other storm in history. Well our storm has arrived in the form of healthcare spending. And if we don’t take swift action the USS Ark of Healthcare Reform will close its doors and sail off leaving the bulk of its people medically stranded and unprotected. And just like Noah’s Ark the USS Ark of Healthcare Reform will not have any place to dock instead it will continually drift in a sea of red ink! 


November 11, 2013

International Countertrade With A Social Purpose


Global trader with a social cause in the making
By Melvin J. Howard

Circumstance has away of preparing you for life without you knowing it. For example when I was in College I got a job that was arranged by my alumni department head. It was working for a major defense contractor in their countertrade division. Little did I know at the time it would play a major roll in my life now? Countertrade is a term used for parallel business transactions, linking sellers and buyers in reciprocal commitments, which usually lie outside the realm of typical monetary trade. Some of the common forms of countertrade transactions include barter, counterpurchase, compensation, buyback, clearing arrangements, offset and switch trading. More than 10% of world trade today involves some form of countertrade.The World Trade Organization estimates that 15% or $8.43 billion  of the $5.62 trillion in international trade is conducted on a non-cash basis.

My mentor was a great teacher he was a Vice President of the defence firm I was working for. I was learning first hand how to do world trade not in the classroom but on the front lines. He took me under his wings and taught me the most basic and the most complicated forms of Trade.  Offsets–an umbrella term for a broad range of industrial and commercial compensation practices required of foreign suppliers under primarily government agency of state-owned enterprise acquisitions–were made a common requirement for the procurement of either military (e.g., fighter aircraft) or high-cost civilian hardware (e.g., commercial aircraft). Both defense and non-military offsets may entail overseas co-production of the procured item, as well as other economically beneficial transfers to the importing country that are not related to the original export. To assist their exporters some industrialized country governments also promoted countertrade under government agreements. For example, the French Ministry of Agriculture signed in 1989 an agreement with the USSR Council of Ministers which provided for exchanges of Soviet commodities for French agricultural and food processing equipment and technologies. Other Western governments, such as those of the United States, Canada, Belgium, Holland, the United Kingdom, and Italy, established special countertrade service units within public agencies to provide countertrade-related advisory assistance to their exporters. The French Government has supported instead the formation of a separate countertrade assistance entity in the private sector. The Swedish Government was until 1990 a major stockholder, through interests by the Swedish Investment Bank, in a private sector company involved in countertrade. Now with trade agreements like NAFTA in 1994, which integrate regional trade, based on free market principles some countertrade has abated somewhat.

International countertrade practices are now increasingly associated with bidding on major defense and non-military government procurement contracts and with project financing–a contract-based, off-balance-sheet finance technique whereby revenues generated from the output of the financed project are directly allocated to service outstanding debt and principal. A variation of the countertrade buy-back contract which links foreign contractors’ repayments to the output products of the production capacity they supplied, project financing relies instead mainly on contractual recourse to the project’s revenue streams. (According to the World Bank, developing countries are now spending around $200 billion a year on new infrastructure investment, one-fifth of their total investment.) High procurement costs and tighter budgets have prompted many emerging country governments in the 1990s to issue new civilian offset regulations (e.g., United Arab Emirates, Kuwait). Civil offset requirements, therefore, are increasingly acquiring a financing rationale in these markets. In a global environment of budgetary constraints, the ability of suppliers to meet offset requirements and/or to provide their clients with financial packages that can best those of competing bidders is a major competitive edge.

International trade in medical services will become increasingly more important. For ensuring quality, well-known medical facilities are likely to invest (commercial presence) in countries. Likely to be the destination of “consumption abroad” mode. Likely to be the supplier of patients mainly due to “poor quality” of medical care rather than the cost of care. International migration of foreign medical graduates will likely to be associated with commercial presence rather than traditional migration. New migration pattern will further encourage adoption of consumption abroad approach for reducing overall healthcare cost in both developed and low-income developing countries. Further expansion of consumption abroad will discourage purchase of expensive health insurance plans. In high medical care cost countries; international trade in health services will encourage purchase of catastrophic insurance plans. Health expenditure in the world in 2005 was about $4.8 trillion ($60 trillion was the global income) $4.0 trillion in OECD countries,  $800 billion in the remaining 160 countries of the world. Globalization has increased trading in health care services. Cost of international communication, travel has declined. Time lag has declined significantly and for electronic transfer of information, it has become almost zero (origin to destination). Cost of obtaining services of similar quality varies significantly among developing countries as well as between developing and developed countries of the world. There are types of medical care services that are extremely time sensitive. Waiting will rapidly reduce the benefit of treatment.

 The benefit function declines rapidly. If the time lag between the onset of the condition and reservation benefit level is shorter than the time needed to travel to a country, the service will be demanded locally. Worldwide, 1.3 billion people do not have access to effective and affordable health care. Low- and middle-income countries bear 93% of the world's disease burden, yet account for only 18% of world income and 11% of global health spending. What governance structures are necessary to encourage the right mix of public and private health care provision? What regulatory framework is needed to induce businesses to provide insurance, provision and finance for health in poor countries? How can the fruits of medical knowledge and technologies be shared among rich and poor countries without destroying incentives to generate more knowledge? What forms of international cooperation are conducive to the finance of health systems in developing countries? What international institutions are required to make health care for the poor an attractive opportunity for business? One thing is clear groups or individuals who think health care is static or promote the status-quo are sticking their heads in the sand. Recent economic conditions highlight the need for new sources of capital to be brought to bear on social problems.

At the heart of the social enterprise movement is the ongoing challenge of accessing investment capital for socially responsible purposes.  Acquiring start-up capital is a common issue for many nonprofits. It's exacerbated by federal tax laws that restrict nonprofits from accessing traditional forms of equity, such as venture capital and, sometimes, commercial debt. For the most part, nonprofits must rely on private foundation grants, government support, and, for some, earned income such as fees for services. To subsidize their earned income, some nonprofits have set up separate social enterprise business sidelines. The for-profit sector faces its own challenges in funding charitable activities because federal tax laws generally restrict private business entities from accessing foundation grants and government assistance. In addition, for-profit investors expect market-rate returns and maximized profits. Their expectations don't align well with social mission-focused entities, which need "patient capital" and typically have slower, more modest growth.

There is a growing body of thought that new business models and possibly new tax incentives or structures are needed to effectively bridge the "sector" gap. These new models would eliminate the need for social entrepreneurs to either choose between the for-profit and nonprofit business models or create and manage both. One such model, could be a form of business that blends attributes of nonprofit and for-profit organizations in order to promote investment in socially responsible objectives. “It’s time we utilize innovative ways to stimulate the economy and create jobs we need to spur the growth of socially responsible business by simplifying partnerships between nonprofit foundations and for-profit investors. Hybrid financial tools can generate a vast pool of investment funds needed to develop companies dedicated to the public good.

There are major lessons learned from the global greed era we are leaving behind to a new era which creates an opportunity for the investment of private capital to further social purposes.

November 04, 2013


The Washington Award Program has chosen Melvin J Howard Foundation, Inc for the 2013 Washington Awards in the Non-Profit Organizations classification.

September 05, 2013

Mental Health Of Success On The Couch

Paying That Price For Success

By Melvin J. Howard

The first rule of paying the price is a very important rule, and, indeed, possibly covers most of the subject matter. Before you make any formal resolutions whatsoever, make certain that you genuinely desire to carry it out. Let there be no doubt that the end you have in view is so desirable or advantageous that it will outweigh all desires and advantages or all other ends that are likely to have to be foregone or abandoned in order to attain it. In short, be sure you are willing to pay the price. This rule is the corner-stone this is of great importance. There is a price for everything for doing and not doing. Paying the price is characteristic and a passionate desire to succeed, a desire so strong and overbearing that it amounts to a demand, and that, in the strictly economic sense to which I means willingness to pay the price

The price is first of all singleness of purpose and concentration of effort. Nearly all of us, at school, have thought that we should someday like to be President of the United States. But not all of us have made it a point to study the lives of past presidents to see how they did it. Not all of us have taken a law course with that special insight like constitutional law. Not all of us have refused tempting commercial opportunities for certain poverty and struggle for a time to gain an end in which the mathematical chances were ridiculously and overwhelmingly against us. Not all of us have kept desperately fanning the embers of dissatisfaction, fanning them into a constant white-hot flame. With most of us the early fire dies; the embers fade and grow cool. We reach as high a level as we ever seriously hope to reach. We have spasms of dissatisfaction with our position in the world, but not sufficient dissatisfaction to make us work our way out of the rut to a higher position. We have moments of longing for the mountain tops, but not enough longing to make us willing to give up something for them. Strolling in the valleys is so much more pleasant than climbing.

And singleness of purpose demands more sacrifices than mere industry. It involves giving up all pleasures that interfere with it. They may be quite innocent pleasures, their sole offense being that they occupy time. It involves making oneself narrow; one cannot be a success in any one line if one dissipates one’s energies in a number of activities—unless, of course, one be a versatile genius whose energies overflow, like Benjamin Franklin, Leonardo da Vinci, or Goethe—and such instances are so rare that they may be ignored. Let there be no mistake. I do not mean to discourage efforts to become a Success. I mean merely to indicate that the goal has a price. I want you merely to ask yourself whether you are willing to pay that price; to ask yourself candidly how far you want to go and how much you are willing to pay; for if you do not ask yourself now, before you make your Success resolutions, you are likely to ask yourself later on. 

As you see obstacles and disappointments pile up, you are apt to begin wondering whether the game is worth the pain. And if you decide to give up then, you will have broken your early resolution, with all the undermining of self-confidence and faith in your will which that involves. 

Once you have made your decision, having coldly decided that is what you want and that you are willing to pay the price, your decision is forever beyond dispute. You should never ask yourself again whether the other course is possible; whether it is really worth while staying home to study for a specified number of evenings each week; whether a man who has resolved to stop drinking can really do so suddenly without blowing to pieces; whether a man in a moderate position, without so many responsibilities and burdens on his shoulders, doesn’t really get just as much enjoyment out of life as the Success. Can I do it a person that comes from Hoboken anywhere can actually accomplish what he sets out to do. Those questions are forever closed; you have asked them before and have decided them. You will know that thoughts determine action, and to control your actions you will begin by controlling your thoughts. You will vivify all the advantages that will come from carrying out your resolution. You will paint them in glowing colors.

You will dwell on them constantly. The disadvantages you will ignore. They are disadvantages only to fools; a wise man does not think them so. Concentrate on the positive side; avoid the negative at all costs friends, family anyone that would dampen your spirit. Picture yourself already a success. I have come across many people in my life that want the easy life the glamorous life the rich life. But they are never willing to pay the price. Each successful person knows what I am talking about they have paid the price. What looks to the outside world of easy success is an illusion the price these individuals paid could be number of things that we will never know about.