Tidbits Quotations
To Accompany the September 10, 2012 edition of Tidbits
Bob Jensen at Trinity University

Government by Organized Money is Just as Dangerous as Government by Organized Mob
Franklin D. Roosevelt in 1936 --- Click Here

Video: 'My Two Predecessors Are in Jail'
Gov. Pat Quinn explains the Illinois taxpayer disaster ---
The Wall Street Journal, September 7, 2012 ---

Regardless of who wins the election, the yawning federal budget deficit cries out for tough medicine. The questions are what kinds and who will bear the burden.
Professor Alan Blinder, close Princeton University colleague of Paul Krugman

"A Republican Ticket From Far Right Field With Romney and Ryan, it's out with FDR and in with Ayn Rand," by Alan S. Blinder, The Wall Street Journal, September 5, 2012 ---

It is by now a commonplace that this looks like a watershed election. By choosing Paul Ryan as his running mate, instead of shaking the Etch A Sketch toward the center, Mitt Romney embraced an economic vision that differs radically from the rough politico-economic consensus in the United States since Franklin Roosevelt. Barack Obama accepts that broad consensus and, like many other presidents, has sought to deepen it.

The Rooseveltian consensus embodied three main elements: a modest social safety net to protect vulnerable Americans from some of the downsides of unfettered markets, Keynesian-style policies to shorten recessions, and a progressive tax-transfer system to mitigate income inequality (albeit only slightly).

The two political parties certainly had their differences between the 1930s and the 2000s, but the broad consensus often had bipartisan support. Thus Eisenhower built public infrastructure; Nixon declared himself a Keynesian and established the Environmental Protection Agency; both Reagan and Bush II acted like Keynesians; Bush I promised a "kinder, gentler nation" and Bush II expanded Medicare—unfortunately, without a way to pay for it.

But with Messrs. Romney and Ryan, it's out with Franklin Roosevelt and in with Ayn Rand. As many observers have noticed, even Ronald Reagan would be considered a bit too lefty for the current Republican Party. After all, he signed several tax increases to shrink the budget deficit and barked at but never seriously bit the safety net.

A government's budget is more than a mass of numbers; it reveals a nation's priorities and aspirations. The Obama and Romney budget proposals offer two starkly different visions of America's future, making this election the sharpest contrast between competing economic philosophies since Lyndon Johnson routed Barry Goldwater in 1964.

The Romney-Ryan budget would shred the safety net; President Obama thickened it with near-universal health insurance. Mr. Obama wants a more progressive tax code; Mr. Romney would pile on yet more income tax cuts for the most prosperous Americans. Leading Republicans claim, against both evidence and logic, that the 2009 fiscal stimulus failed to create any jobs. They even oppose the Federal Reserve's efforts to boost economic growth.

Regardless of who wins the election, the yawning federal budget deficit cries out for tough medicine. The questions are what kinds and who will bear the burden.

Mr. Obama's 10-year deficit-reduction plan offers a balanced approach that shares the castor oil widely—it is similar (but not identical) to that of the Simpson-Bowles fiscal commission. His budget would end the Bush tax cuts for upper-income taxpayers, raise additional revenue by limiting various deductions and exemptions, shrink nondefense discretionary spending to the lowest share of GDP in 50 years, trim the defense budget, and make selective cuts in entitlement programs including Medicare and Medicaid. While doing so, it seeks higher spending on education, infrastructure and basic research.

The nonpartisan Congressional Budget Office estimates that the president's proposals would reduce the federal budget deficit to about 3% of GDP by 2015. That's a sensible interim target which would roughly stabilize the ratio of debt to GDP. But, as I have argued on this page, more will have to be done about health-care costs in the long run.

Continued in article

Jensen Comment
The problem for 2013-2016 may not so much be the presidency as it is with a politically paralyzed House and Senate. I anticipate that President Obama will be elected, but the victory will be bitter sweet with a Congress that blocks his bigger-government progressive initiatives and a President who blocks smaller-government initiatives conceived in Congress. It will not be pretty surviving four years of stalemate with no checkmate.

There's no end of trillion dollar annual deficits and greenback printing machines in sight.

And who will bail out California and Illinois unfunded pension fund blockbusters?

Selling the debt in the left pocket to the right pocket:  The Fed is all smoke and mirrors
"Fed Is Buying 61 Percent of U.S. Government Debt," by Bob Adelmann, The New American, March 29, 2012

In his attempt to explode the myth that there is unlimited demand for U.S. government debt, former Treasury official Lawrence Goodman explained that there is high perceived demand because the Federal Reserve is doing most of the buying.

Wrote Goodman,

Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.

This not only creates the false impression of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

What about Japan and China? Aren’t they the major purchasers of U.S. debt? Not any more, notes Goodman. Foreign purchases of U.S. debt dropped to less than 2 percent  of GDP (Gross Domestic Product) from almost 6 percent just three years ago. And private sector investors — banks, money market and bond mutual funds, individuals and corporations — have cut their buying way back as well, to less than 1 percent of GDP, down from 6 percent. This serves to hide the fact that the government can’t find outside buyers willing to accept rates of return that are below the inflation rate (“negative interest”) given the precarious financial condition of the government. It also hides the impact of $1.3 trillion deficits from the public who would likely get much more concerned if real, true market rates of interest were being demanded for purchasing U.S. debt, as such higher rates would increase the deficit even further. Finally it takes pressure off Congress to “do something” because there is no public clamor over the matter, at least for the moment. 

One of those promoting the myth that buyers of U.S. debt must exist because interest rates are so low is none other than one of those recently seated at the Federal Reserve’s Open Market Committee table, Alan BlinderNow a professor of economics at Princeton University, Blinder was vice chairman of the Fed in the mid-nineties and should know all about the Fed’s manipulations and machinations in the money markets. Apparently not. 

On January 19 Blinder wrote in the Wall Street Journal that

Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates.

In purchasing power terms, they are paying the U.S. government to borrow their money!

Blinder repeated the error in front of the Senate Banking Committee just one week later: "In fact, world financial markets are eager to lend the United States government vast amounts at negative real interest rates. That means that, in purchasing power terms, they are paying us to borrow their money!"

Aggressive promotion of a myth never makes it a fact. All it does is hide, for a period, the reality that the world isn’t willing to lend to the United States at negative interest rates. This places the burden on the Fed to make the myth appear real by expanding its own balance sheet and gobbling up U.S. debt. 

There are going to be consequences. As Goodman put it,

The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction…. [Emphasis added.]

In other words, budget deficits often take years to build or reduce, while financial markets react rapidly and often unexpectedly to deficit spending and debt.

The recent release by the Congressional Budget Office (CBO) of future inflation expectations provides little assurance either as it mimics the line that inflation will stay low for the foreseeable future: "In CBO’s forecast, the price index for personal consumption expenditures increases by just 1.2 percent in 2012 and 1.3 percent in 2013."

With the Fed continuing to buy U.S. government debt, which keeps interest rates artificially low, when will reality set in? Amity Shlaes has the answer. Writing in Bloomberg last week, Shlaes explains:

The thing about [price] inflation is that it comes out of nowhere and hits you….

[It] has happened to us before. In World War I … the CPI [Consumer Price Index] went from 1 percent for 1915 to 7 percent in 1916 and 17 percent in 1917….

In 1945, all seemed well. Inflation was at 2 percent, at least officially. Within two years that level hit 14 percent.

All appeared calm in 1972, too, before inflation jumped to 11 percent by 1974 and stayed high for the rest of the decade….

One thing is clear: pretty soon, we’ll all be in deep water.

Doug Casey agrees: “Don’t think there are no consequences to our unwise fiscal and monetary course; a potentially ugly tipping point is more likely than not at some point.”

Coninued in article

The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---

The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---


"The endangered public company:  The rise and fall of a great invention, and why it matters," The Economist, May 19, 2012 ---

AS THIS newspaper went to press, Facebook was about to become a public company. It will be one of the biggest stockmarket flotations ever: the social-networking giant expects investors to value it at $100 billion or so. The news raises several questions, from “Is it worth that much?” to “What will it do next?” But the most intriguing question is what Facebook’s flotation tells us about the state of the public company itself.

At first glance, all is well. The public company was invented in the mid-19th century to provide the giants of the industrial age with capital. That Facebook is joining Microsoft and Google on the stockmarket suggests that public listings are performing the same miracle for the internet age. Not every 19th-century invention has weathered so well.

But look closer and the picture changes (see article). Mark Zuckerberg, Facebook’s young founder, resisted going public for as long as he could, not least because so many heads of listed companies advised him to. He is taking the plunge only because American law requires any firm with more than a certain number of shareholders to publish quarterly accounts just as if it were listed. Like Google before it, Facebook has structured itself more like a private firm than a public one: Mr Zuckerberg will keep most of the voting rights, for example.

The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in America each year. In 2001-09 that number fell to 30. Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do little to offset the long-term decline.

Companies are like jets; the elite go private

Mr Zuckerberg will be joining a troubled club. The burden of regulation has grown heavier for public companies since the collapse of Enron in 2001. Corporate chiefs complain that the combination of fussy regulators and demanding money managers makes it impossible to focus on long-term growth. Shareholders are also angry. Their interests seldom seem to be properly aligned at public companies with those of the managers, who often waste squillions on empire-building and sumptuous perks. Shareholders are typically too dispersed to monitor the men on the spot. Attempts to solve the problem by giving managers shares have largely failed.

At the same time, alternative corporate forms are flourishing. Once “going public” was every CEO’s dream; now it is perfectly respectable to “go private”, like Burger King, Boots and countless other famous names. State-run enterprises have recovered from the wreck of communism and now include the world’s biggest mobile-phone company (China Mobile), its most successful port operator (Dubai World), its fastest-growing big airline (Emirates) and its 13 biggest oil companies.

No doubt the sluggish public equity markets have played a role in this. But these alternative corporate forms have addressed some of the structural weaknesses that once held them back. Access to capital? Private-equity firms, helped by tax breaks, and venture capitalists both have cash to spare, and there are private markets such as SecondMarket (where $1 billion-worth of shares has changed hands since 2008). Limited liability? Partners need no longer be fully liable, and firms can have as many partners as they want. Professional managers? Family firms employ them by the HBS-load and state-owned ones are no longer just sinecures for the well-connected.

Make capitalism popular again

Does all this matter? The increase in the number of corporate forms is a good thing: a varied ecosystem is more robust. But there are reasons to worry about the decline of an organisation that has spread prosperity for 150 years.

First, public companies have been central to innovation and job creation. One reason why entrepreneurs work so hard, and why venture capitalists place so many risky bets, is because they hope to make a fortune by going public. IPOs provide young firms with cash to hire new hands and disrupt established markets. The alternative is to sell themselves to established firms—hardly a recipe for creative destruction. Imagine if the fledgling Apple and Google had been bought by IBM.

Second, public companies let in daylight. They have to publish quarterly reports, hold shareholder meetings (which have grown acrimonious of late), deal with analysts and generally conduct themselves in an open manner. By contrast, private companies and family firms operate in a fog of secrecy.

Third, public companies give ordinary people a chance to invest directly in capitalism’s most important wealth-creating machines. The 20th century saw shareholding broadened, as state firms were privatised and mutual funds proliferated. But today popular capitalism is in retreat. Fewer IPOs mean fewer chances for ordinary people to put their money into a future Google. The rise of private equity and the spread of private markets are returning power to a club of privileged investors.

All this argues for a change in thinking—especially among the politicians who have heaped regulations onto Western public companies, blithely assuming that businessfolk have no choice but to go public in the long run. Many firms now go (or stay) private to avoid red tape. The result is that ever more business is conducted in the dark, with rich insiders playing a more powerful role.

Public companies built the railroads of the 19th century. They filled the world with cars and televisions and computers. They brought transparency to business life and opportunities to small investors. Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation. But not so tightly that entrepreneurs start to dread the prospect of a public listing. The public company has long been the locomotive of capitalism. Governments should not derail it.


Another state should withdraw from the Dollar Zone so it can print its own currency
"A Downgrade for Illinois The worst credit rating aside from California," The Wall Street Journal, August 29, 2012 ---

"Illinois Debt Cut by S&P After No Action on Pension Funding," by Michelle Kaske, Bloomberg News, August 29, 2012 ---

Illinois, the U.S. state with the worst-funded pension system, had the rating on its general- obligation debt cut one level by Standard & Poor’s and may face more downgrades.

The change to an A rating followed state lawmakers’ failure to agree to reduce retirement costs during a special session Aug. 17. The outlook for the state’s debt, which now has S&P’s sixth-highest grade, is negative. California, with an A-ranking, one level below Illinois, remains S&P’s lowest-rated state.

Illinois has an unfunded pension liability of at least $83 billion, according to state figures. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states, data compiled by Bloomberg show.

“The downgrade reflects the state’s weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Robin Prunty, an S&P analyst, in a report today.

Governor Pat Quinn said today he is inviting legislative leaders to meet in early September to work on pension changes. Lawmakers have considered boosting employee contributions, passing some costs to local school districts and forcing workers to choose between the current system and receiving free retirement health care. No Surprise

Quinn, a Democrat, said the rating cut wasn’t a surprise.

Erasing the fifth-most populous state’s unfunded pension liability “is vital to getting our financial house in order,” Quinn said in a statement. “Today’s action by Standard & Poor’ is more evidence that we must act.”

Illinois had about $28 billion of general-obligation debt as of May 8, according to bond documents. The state of about 13 million people plans to sell $50 million of debt next month for technology projects, John Sinsheimer, the state’s director of capital markets, said in an interview.

Taxpayers will pay more to issue debt because of the lower rating, state Treasurer Dan Rutherford said in a statement.

“I urge the legislature to act decisively towards comprehensive, constitutional and fair pension reforms that will reverse this situation,” he said.

Jensen Comment
Unlike California, Illinois significantly increased corporate tax rates to deal with its deficit. But this turned into a sham when Gov. Quinn commenced to grant tax waivers to business firms (like Caterpillar) that threatened to relocate in other states.

In my opinion, however, Illinois stands a much better chance than California --- which by most accounts is a basket case.

"Pension Accounting for Dummies New government reporting rules are no better than the old ones," The Wall Street Journal, July 9, 2012 ---

The Government Accounting Standards Board has issued new rules that aim to crystallize government pension liabilities. It failed on that count, but it did succeed, albeit inadvertently, in making the case for defined-contribution plans.

GASB, as it's known in the trade, sets accounting guidelines for local governments. Since the board is run mainly by former public officials, its standards are often low. The board also usually takes several years to finalize rules, so it's often behind the times. Their new rules concerning how governments discount their pension liabilities are a case in point.

Financial economists have recommended for decades that governments calculate pension liabilities using so-called "risk-free" rates pegged to high-grade municipal bonds or long-term Treasurys. The argument goes that since pensioners are de facto secured creditors—even bankruptcy judges have been reluctant to slash retirement benefits—pensions are riskless and therefore the liabilities should be discounted at risk-free rates.

GASB's private cousin, the Financial Accounting Standards Board (FASB), began requiring corporations to discount their pension liabilities with high-quality fixed income assets in the 1980s. However, GASB let governments stick with their desired, er, expected rate of return, which is typically about 8%. Public pension funds have returned 5.7% on average since 2000. Achieving much higher returns over the long run would require markets to perform as well as they did in the 1980s and '90s. Would that be true.

Governments have resisted climbing down from Fantasyland because using lower discount rates would explode their liabilities. When the Financial Accounting Standards Board introduced its risk-free rate guidelines, many companies shifted workers to 401(k)s because they didn't want to report larger liabilities. Such defined-contribution plans are by definition 100% pre-funded.

Prodded by economists and investors, GASB began considering modifying its discount rate rules a few years ago. Public pension funds, lawmakers and unions, however, pushed back hard against suggestions that governments use risk-free rates, which could more than double their liabilities. No surprise, the government troika won.

GASB's new rules allow governments to continue discounting their liabilities at their anticipated rate of return so long as they project enough future assets to cover their obligations. At the time they forecast they'll run out of assets, they must begin discounting their liabilities with a high-grade municipal bond rate. The idea is that governments would have to issue bonds to pay retirees when their pension funds go broke.

But few pension funds project that they'll run dry since they're hooked up to a taxpayer IV. Those in really bad shape like Chicago's will likely rig their investment and actuarial assumptions to circumvent the new rules. FASB rejected similar guidelines in the 1980s because they were too easy to dodge. The point here is that it's impossible to get governments to come clean about their pension debt, and not just because the union allies controlling pension funds have a vested interest in obfuscating the liabilities.

In reality, nobody knows how much taxpayers will owe because so much depends on inscrutable actuarial and economic factors like interest rates 30 years from now (not even the Federal Reserve purports to be that omniscient). Slight discrepancies in assumptions can yield huge variations in estimated liabilities. One advantage of defined-contribution plans is that they don't require governments to calculate their liabilities. There are none.


GASB Statement No. 68
Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27
--- Click Here
http://www.gasb.org/cs/ContentServer?site=GASB&c=Page&pagename=GASB%2FPage%2FGASBSectionPage&cid=1176160042391 Bob Jensen's threads on the sad state of governmental accounting ---

Bob Jensen's threads on pension accounting ---

Can You Train Business School Students To Be Ethical?
The way we’re doing it now doesn’t work. We need a new way

What is the main temptation of white collar criminals?

Answer from http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#01
Jane Bryant Quinn once said something to the effect that, when corporate executives and bankers see billions of loose dollars swirling above there heads, it's just too tempting to hold up both hands and pocket a few millions, especially when colleagues around them have their hands in the air.  I tell my students that it's possible to buy an "A" grade in my courses but none of them can possibly afford it.  The point is that, being human, most of us are vulnerable to some temptations in a weak moment.  Fortunately, none of you reading this have oak barrels of highly-aged whiskey in your cellars, the world's most beautiful women/men lined up outside your bedroom door, and billions of loose dollars swirling about like autumn leaves in a tornado.  Most corporate criminals that regret their actions later confess that the temptations went beyond what they could resist.  What amazes me in this era, however, is how they want to steal more and more after they already have $100 million stashed.  Why do they want more than they could possibly need?

"Can You Train Business School Students To Be Ethical? The way we’re doing it now doesn’t work. We need a new way," by Ray Fisman and Adam Galinsky, Slate, September 4, 2012 ---

A few years ago, Israeli game theorist Ariel Rubinstein got the idea of examining how the tools of economic science affected the judgment and empathy of his undergraduate students at Tel Aviv University. He made each student the CEO of a struggling hypothetical company, and tasked them with deciding how many employees to lay off. Some students were given an algebraic equation that expressed profits as a function of the number of employees on the payroll. Others were given a table listing the number of employees in one column and corresponding profits in the other. Simply presenting the layoff/profits data in a different format had a surprisingly strong effect on students’ choices—fewer than half of the “table” students chose to fire as many workers as was necessary to maximize profits, whereas three quarters of the “equation” students chose the profit-maximizing level of pink slips. Why? The “equation” group simply “solved” the company’s problem of profit maximization, without thinking about the consequences for the employees they were firing.


Rubinstein’s classroom experiment serves as one lesson in the pitfalls of the scientific method: It often seems to distract us from considering the full implications of our calculations. The point isn’t that it’s necessarily immoral to fire an employee—Milton Friedman famously claimed that the sole purpose of a company is indeed to maximize profits—but rather that the students who were encouraged to think of the decision to fire someone as an algebra problem didn’t seem to think about the employees at all.


The experiment is indicative of the challenge faced by business schools, which devote themselves to teaching management as a science, without always acknowledging that every business decision has societal repercussions. A new generation of psychologists is now thinking about how to create ethical leaders in business and in other professions, based on the notion that good people often do bad things unconsciously. It may transform not just education in the professions, but the way we think about encouraging people to do the right thing in general.


At present, the ethics curriculum at business schools can best be described as an unsuccessful work-in-progress. It’s not that business schools are turning Mother Teresas into Jeffrey Skillings (Harvard Business School, class of ’79), despite some claims to that effect. It’s easy to come up with examples of rogue MBA graduates who have lied, cheated, and stolen their ways to fortunes (recently convicted Raj Rajaratnam is a graduate of the University of Pennsylvania’s Wharton School of Business; his partner in crime, Rajat Gupta, is a Harvard Business School alum). But a huge number of companies are run by business school grads, and for every Gupta and Rajaratnam there are scores of others who run their companies in perfectly legal anonymity. And of course, there are the many ethical missteps by non-MBA business leaders—Bernie Madoff was educated as a lawyer; Enron’s Ken Lay had a Ph.D. in economics.


In actuality, the picture suggested by the data is that business schools have no impact whatsoever on the likelihood that someone will cook the books or otherwise commit fraud. MBA programs are thus damned by faint praise: “We do not turn our students into criminals,” would hardly make for an effective recruiting slogan.


If it’s too much to expect MBA programs to turn out Mother Teresas, is there anything that business schools can do to make tomorrow’s business leaders more likely to do the right thing? If so, it’s probably not by trying to teach them right from wrong—moral epiphanies are a scarce commodity by age 25, when most students start enrolling in MBA programs. Yet this is how business schools have taught ethics for most of their histories. They’ve often quarantined ethics into the beginning or end of the MBA education. When Ray began his MBA classes at Harvard Business School in 1994, the ethics course took place before the instruction in the “science of management” in disciplines like statistics, accounting, and marketing. The idea was to provide an ethical foundation that would allow students to integrate the information and lessons from the practical courses with a broader societal perspective. Students in these classes read philosophical treatises, tackle moral dilemmas, and study moral exemplars such as Johnson & Johnson CEO James Burke, who took responsibility for and provided a quick response to the series of deaths from tampered Tylenol pills in the 1980s.
It’s a mistake to assume that MBA students only seek to maximize profits—there may be eye-rolling at some of the content of ethics curricula, but not at the idea that ethics has a place in business. Yet once the pre-term ethics instruction is out of the way, it is forgotten, replaced by more tangible and easier to grasp matters like balance sheets and factory design.  Students get too distracted by the numbers to think very much about the social reverberations—and in some cases legal consequences—of employing accounting conventions to minimize tax burden or firing workers in the process of reorganizing the factory floor.


Business schools are starting to recognize that ethics can’t be cordoned off from the rest of a business student’s education. The most promising approach, in our view, doesn’t even try to give students a deeper personal sense of mission or social purpose – it’s likely that no amount of indoctrination could have kept Jeff Skilling from blowing up Enron. Instead, it helps students to appreciate the unconscious ethical lapses that we commit every day without even realizing it and to think about how to minimize them.  If finance and marketing can be taught as a science, then perhaps so too can ethics.


These ethical failures don’t occur at random – countless experiments in psychology and economics labs and out in the world have documented the circumstances that make us most likely to ignore moral concerns – what social psychologists Max Bazerman and Ann Tenbrusel call our moral blind spots.  These result from numerous biases that exacerbate the sort of distraction from ethical consequences illustrated by the Rubinstein experiment. A classic sequence of studies illustrate how readily these blind spots can occur in something as seemingly straightforward as flipping a fair coin to determine rewards. Imagine that you are in charge of splitting a pair of tasks between yourself and another person. One job is fun and with a potential payoff of $30; the other tedious and without financial reward. Presumably, you’d agree that flipping a coin is a fair way of deciding—most subjects do. However, when sent off to flip the coin in private, about 90 percent of subjects come back claiming that their coin flip came up assigning them to the fun task, rather than the 50 percent that one would expect with a fair coin. Some people end up ignoring the coin; more interestingly, others respond to an unfavorable first flip by seeing it as “just practice” or deciding to make it two out of three. That is, they find a way of temporarily adjusting their sense of fairness to obtain a favorable outcome.


Jensen Comment
I've always thought that the most important factors affecting ethics were early home life (past) and behavior others in the work place (current). I'm a believer in relative ethics where bad behavior is affected by need (such as being swamped in debt) and opportunity (weak internal controls at work).  I've never been a believer in the effectiveness of teaching ethics in college, although this is no reason not to teach ethics in college. It's just that the ethics mindset was deeply affected before coming to college (e.g. being street smart in high school) and after coming to college (where pressures and temptations to cheat become realities).

An example of the follow-the-herd ethics mentality.
If Coach C of the New Orleans Saints NFL football team offered Player X serious money to intentionally and permanently injure Quarterback Q of an opposing team, Player X might've refused until he witnessed Players W, Y, and Z being paid to do the same thing.  I think this is exactly what happened when several players on the defensive team of the New Orleans Saints intentionally injured quarterbacks for money.

New Orleans Saints bounty scandal --- http://en.wikipedia.org/wiki/New_Orleans_Saints_bounty_scandal


What is the main temptation of white collar criminals?

Answer from http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#01
Jane Bryant Quinn once said something to the effect that, when corporate executives and bankers see billions of loose dollars swirling above there heads, it's just too tempting to hold up both hands and pocket a few millions, especially when colleagues around them have their hands in the air.  I tell my students that it's possible to buy an "A" grade in my courses but none of them can possibly afford it.  The point is that, being human, most of us are vulnerable to some temptations in a weak moment.  Fortunately, none of you reading this have oak barrels of highly-aged whiskey in your cellars, the world's most beautiful women/men lined up outside your bedroom door, and billions of loose dollars swirling about like autumn leaves in a tornado.  Most corporate criminals that regret their actions later confess that the temptations went beyond what they could resist.  What amazes me in this era, however, is how they want to steal more and more after they already have $100 million stashed.  Why do they want more than they could possibly need?

See Bob Jensen's "Rotten to the Core" document at http://www.trinity.edu/rjensen/FraudRotten.htm
The exact quotation from Jane Bryant Quinn at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

Why white collar crime pays big time even if you know you will eventually be caught ---

Bob Jensen's threads on professionalism and ethics ---

Bob Jensen's Rotten to the Core threads ---

September 5, 2012 reply from Paul Williams


This is the wrong question because business schools across all disciplines contained therein are trapped in the intellectual box of "methodological individualism." In every business discipline we take as a given that the "business" is not a construction of human law and, thus of human foible, but is a construction of nature that can be reduced to the actions of individual persons. Vivian Walsh (Rationality Allocation, and Reproduction) critiques the neoclassical economic premise that agent = person. Thus far we have failed in our reductionist enterprise to reduce the corporation to the actions of other entities -- persons (in spite of principal/agent theorists claims). Ontologically corporations don't exist -- the world is comprised only of individual human beings. But a classic study of the corporation (Diane Rothbard Margolis, The Managers: Corporate Life in America) shows the conflicted nature of people embedded in a corporate environment where the values they must subscribe to in their jobs are at variance with their values as independent persons. The corporate "being" has values of its own. Business school faculty, particularly accountics "scientists," commit the same error as the neoclassical economists, which Walsh describes thusly:

"...if neo-classical theory is to invest its concept of rational agent with the penumbra of moral seriousness derivable from links to the Scottish moral philosophers and, beyond them, to the concept of rationality which forms part of the conceptual scheme underlying our ordinary language, then it must finally abandon its claim to be a 'value-free` science in the sense of logical empiricism (p. 15)." Business, as an intellectual enterprise conducted within business schools, neglects entirely "ethics" as a serious topic of study and as a problem of institutional design. It is only a problem of unethical persons (which, at sometime or another, includes every human being on earth). If one takes seriously the Kantian proposition that, to be rationally ethical beings, humans must conduct themselves so as to treat always other humans not merely as means, but also always as ends in themselves, then business organization is, by design, unethical. Thus, when the Israeli students had to confront employees "face-to-face" rather than as variables in a profit equation, it was much harder for them to treat those employees as simply disposable means to an end for a being that is merely a legal fiction. One thing we simply do not treat seriously enough as a worthy intellectual activity is the serious scrutiny of the values that lay conveniently hidden beneath the equations we produce. What thoughtful person could possibly subscribe to the notion that the purpose of life is to relentlessly increase shareholder wealth? Increasing shareholder value is a value judgment, pure and simple. And it may not be a particularly good one. Why would we be surprised that some individuals conclude that "stealing" from them (they, like the employees without names in the employment experiment, are ciphers) is not something that one need be wracked with guilt about. If the best we can do is prattle endlessly on about the "tone at the top" (do people who take ethics seriously get to the top?), then the intellectual seriousness which ethics is afforded within business schools is extremely low. Until we start to appreciate that the business narrative is essentially an ethical one, not a technical one, then we will continue to rue the bad apples and ignore how we might built a better barrel.


September 5, 2012 reply from Bob Jensen

Hi Paul,

Do you think the ethics in government is in better shape, especially given the much longer and more widespread history of global government corruption throughout time? I don't think ethics in government is better than ethics in business from a historical perspective or a current perspective where business manipulates government toward its own ends with bribes, campaign contributions, and promises of windfall enormous job benefits for government officials who retire and join industry?

Government corruption is the name of the game in nearly all nations, beginning with Russia, China, Africa, South America, and down the list.

Political corruption in the U.S. is relatively low from a global perspective.
See the attached graph from



Bob Jensen

How does capitalism possibly reduce as well as increase corruption in government?


I think it's because some of the more onerous types of governmental corruption, particularly outright bribery and extortion, are enormous frictions on having capitalism succeed.. If capitalism is to work at all, some of the most onerous types of political corruption have to be greatly reduced. Russian never realized this, and hence Russia remains one of the most violently corrupt and least successful "capitalist" nations on the planet.

"Mohammed Ibrahim: The Philanthropist of Honest Government Africa's cellphone billionaire, Mohammed Ibrahim, is offering a rich payoff for African leaders who don't take payoffs. He says it'll do for development what foreign aid never has," The Wall Street Journal, September 7, 2012 ---

Jensen Comment
What struck me in the above how political corruption tends to be lower in many nations that rely more on capitalism and market distributions. Note in particular the tiny blue strip of Chile in that map. At one time Chile was one of the most corrupt nations of the world. Then some students of the Chicago School are given credit for making Chile literally the most capitalist nation in South America as well as the world in general (of course not without lingering inequality problems).- ---
Chile has the best credit standing in Latin America.

Also note how non-capitalist nations that are wealthy in resources such as Russia, Saudi Arabia, and Veneszuela are the most corrupt in the world.

The real test over the next 50 years will be China. China is a very corrupt nation, especially at the local levels of government. It will be interesting to see if the continued rise in capitalism can work a miracle somewhat like that in Chile ---

This does not tell college graduates something that they don't already know:  Temporary and Low Wages
"Majority of New Jobs Pay Low Wages, Study Finds," by Catherine Rampell, The New York Times, August 30, 2012 ---

While a majority of jobs lost during the downturn were in the middle range of wages, a majority of those added during the recovery have been low paying, according to a new report from the National Employment Law Project.

The disappearance of midwage, midskill jobs is part of a longer-term trend that some refer to as a hollowing out of the work force, though it has probably been accelerated by government layoffs.

“The overarching message here is we don’t just have a jobs deficit; we have a ‘good jobs’ deficit,” said Annette Bernhardt, the report’s author and a policy co-director at the National Employment Law Project, a liberal research and advocacy group.

The report looked at 366 occupations tracked by the Labor Department and clumped them into three equal groups by wage, with each representing a third of American employment in 2008. The middle third — occupations in fields like construction, manufacturing and information, with median hourly wages of $13.84 to $21.13 — accounted for 60 percent of job losses from the beginning of 2008 to early 2010.

The job market has turned around since then, but those fields have represented only 22 percent of total job growth. Higher-wage occupations — those with a median wage of $21.14 to $54.55 — represented 19 percent of job losses when employment was falling, and 20 percent of job gains when employment began growing again.

Lower-wage occupations, with median hourly wages of $7.69 to $13.83, accounted for 21 percent of job losses during the retraction.

Continued in article

"Charles G. Koch: Corporate Cronyism Harms America:  When businesses feed at the federal trough, they threaten public support for business and free markets," by Charles G. Koch, The Wall Street Journal, September 9, 2012 ---

"We didn't build this business—somebody else did."

So reads a sign outside a small roadside craft store in Utah. The message is clearly tongue-in-cheek. But if it hung next to the corporate offices of some of our nation's big financial institutions or auto makers, there would be no irony in the message at all.

It shouldn't surprise us that the role of American business is increasingly vilified or viewed with skepticism. In a Rasmussen poll conducted this year, 68% of voters said they "believe government and big business work together against the rest of us."

Businesses have failed to make the case that government policy—not business greed—has caused many of our current problems. To understand the dreadful condition of our economy, look no further than mandates such as the Fannie Mae and Freddie Mac "affordable housing" quotas, directives such as the Community Reinvestment Act, and the Federal Reserve's artificial, below-market interest-rate policy.

Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.

With partisan rhetoric on the rise this election season, it's important to remind ourselves of what the role of business in a free society really is—and even more important, what it is not.

The role of business is to provide products and services that make people's lives better—while using fewer resources—and to act lawfully and with integrity. Businesses that do this through voluntary exchanges not only benefit through increased profits, they bring better and more competitively priced goods and services to market. This creates a win-win situation for customers and companies alike.

Only societies with a system of economic freedom create widespread prosperity. Studies show that the poorest people in the most-free societies are 10 times better off than the poorest in the least-free. Free societies also bring about greatly improved outcomes in life expectancy, literacy, health, the environment and other important dimensions.

So why isn't economic freedom the "default setting" for our economy? What upsets this productive state of affairs? Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers.

We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.

We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn't ordinarily buy.

Because they have the advantage of an uneven playing field, crony businesses can drive their legitimate competitors out of business. But in the longer run, they are unsustainable and unable to compete internationally (unless, of course, the government handouts are big enough). At least the Solyndra boondoggle ended when it went out of business.

By subsidizing and mandating politically favored products in the energy sector (solar, wind and biofuels, some of which benefit Koch Industries), the government is pushing up energy prices for all of us—five times as much in the case of wind-generated electricity. And by putting resources to less-efficient use, cronyism actually kills jobs rather than creating them. Put simply, cronyism is remaking American business to be more like government. It is taking our most productive sectors and making them some of our least.

The effects on government are equally distorting—and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.

Subsidies and mandates are just two of the privileges that government can bestow on politically connected friends. Others include grants, loans, tax credits, favorable regulations, bailouts, loan guarantees, targeted tax breaks and no-bid contracts. Government can also grant monopoly status, barriers to entry and protection from foreign competition.

Whatever form these privileges take, Americans are rightly suspicious of the cronyism that substitutes political influence for free markets. According to Rasmussen, two-thirds of the electorate are convinced that crony connections explain most government contracts—and that federal money will be wasted "if the government provides funding for a project that private investors refuse to back." Some 71% think "private sector companies and investors are better than government officials at determining the long-term benefits and potential of new technologies." Only 11% believe "government officials have a better eye for future value."

Continued in article

Bob Jensen's Rotten to the Core threads ---

Bob Jensen's threads on the stalled recovery ---


September 2, 2012 message from Jagdish Gangolly

I was shocked to read the statistics on government spending, NOT
from some left-wing source, but from the Marketwatch and the Forbes.



September 2, 2012 reply from Bob Jensen

Hi Jagdish,

I also saw that, but such restraints on spending were not all Obama's choice. The article you cite is very misleading. Spending is dictated heavily by the House of Representatives which became blocked heavily by the Tea Party victories opposing President Obama's spending proposals. Since then the President and the House have been deadlocked in virtual paralysis

The President-House of Representatives deadlock has created the infamous "fiscal cliff" ---

The significant impact of the multiple tax cut expirations and spending reductions that take effect at the end of calendar year 2012 has been referred to as the "fiscal cliff."CBO estimated in May 2012 that allowing current law to take effect would reduce the deficit by a net $560 billion in 2013, roughly half the $1.2 trillion 2011 deficit. Real GDP growth in 2013 would be reduced to 0.5% versus 1.1%, with a high probability of recession during the first half of the year (a 1.3% GDP contraction) followed by 2.3% growth in the second half. Over the long-run, lower deficits and debt support relatively higher growth estimates, however.

. . .

Timing of solutions

How urgently should the U.S. put plans in place to address its budget challenges? Fed Chair Ben Bernanke stated in January 2007: "The longer we wait, the more severe, the more draconian, the more difficult the objectives are going to be. I think the right time to start was about 10 years ago."

In fairness, most of items in the federal budget are non-discretionary with about 23% going to Medicare and 20% to Social Security obligations to retired and disabled Americans, 19% to the military (the majority of which is non-discretionary due to military retirement, medical, and Veterans commitments). Only 18% of the budget is considered discretionary, if you want to call it discretionary given the tremendous power of special interest lobbies in Washington DC. ---

Total outlays in recent budget submissions Annual U.S. spending 1930-2014 alongside U.S. GDP for comparison. 

George W. Bush was the most spendthrift president in U.S. history and never said no to his House and Senate controlled by the Democrats. President Obama, in my opinion, has used his veto power not so much to restrain spending as to limit spending on GOP favored spending bills. The Tea Party solidly made its mark and will probably continue to hold back President Obama's wishes for spending 2013-2016. The Romney-Ryan proposals do not reduce the spending totals so much as redirect much of the spending toward discretionary military and energy spending and away from such things as environmental protection. Personally, I think Romney and Ryan will go down in defeat.

Only political paralysis is restraining spending by the federal government.

Former Comptroller General David Walker has been saying this all along
"Social Security’s Woes Are Worse Than You Think," by Ramesh Ponnuru, Bloomberg, August 27, 2012 ---

While the Romney and Obama camps have made increasingly bitter accusations about each other’s plans for Medicare, a bipartisan consensus on entitlements has emerged in the past few years. Too bad that consensus is wrong.

On both left and right, the politicians and the experts are saying the U.S. needs to fix Medicare -- and have made fixing Social Security an afterthought. President Barack Obama has signed changes to Medicare into law, but has done nothing about Social Security. For two years in a row, Republicans in Congress have supported budgets that rein in the growth of Medicare spending but leave Social Security alone. Expect to hear a lot more about Medicare than Social Security at the Republican convention this week.

The main reason Medicare is getting more attention is that in the long run, it has much higher costs than Social Security. That’s why it’s often described, accurately, as the driver of America’s long-term debt problem.

The Social Security gap looks small, though, only in relation to Medicare. On any other scale, it’s pretty big. The 1983 deal to fix Social Security is often held up as a model of bipartisan achievement, with the implication that it just needs to be replicated to fill the gap: No big deal. Charles Blahous, a Social Security trustee and the author of a recent book on the program, points out that this model is actually pretty discouraging. Twice as Large

In 1983, the financing gap over the next 75 years amounted to 1.8 percent of payroll. Blahous estimates that the gap today, measured using the same standards as in 1983, is 3.5 percent: almost double what it was then. And every year that passes without action, that number gets bigger. Do we think today’s politicians are prepared to solve twice as large a problem as their predecessors did?

Right now, we spend more money on Social Security than on Medicare, and that will remain the case for a while. The programs’ trustees project that by 2035 Social Security will consume 6.4 percent of the economy and Medicare 5.7 percent. The Medicare projection may be optimistic about recent attempts to impose cost controls, but we shouldn’t expect Medicare to become vastly larger than Social Security in the next two decades. After that point, Social Security costs start going down as demographics play out while Medicare becomes a vastly larger problem.

But our finances will be in what’s technically called a world of hurt before Social Security costs peak. Under current projections by the Congressional Budget Office, by 2025 public debt will have reached 106 percent of gross domestic product. By 2035, it will have reached 181 percent. What would happen after that point is an academic question: We can’t allow ourselves to get there.

We need to fix both programs. If anything, it’s Social Security that ought to be saved first because it’s the more urgent near-term problem. Some of the steps we can take to make the program solvent, moreover, would improve Medicare’s finances, too. Raising the retirement age, for example, would encourage people to work longer and thus pay more taxes into both programs. Restraining Growth

Perhaps even more important, we have a better sense of how to restrain the growth of Social Security than of Medicare.

One promising option is to reduce the growth of Social Security benefit levels, especially for high earners. The program could be reformed so that high earners who retire in 2040 receive the same benefit level that high earners who retire in 2020 will -- with an adjustment for inflation, but nothing more. Under the program as it stands now, those future retirees will get a bigger benefit.

Benefit levels for people in the middle of the income spectrum, meanwhile, could be set so that they more than keep up with inflation but don’t rise as much as currently scheduled.

It’s easy to attack this sort of proposal. In the past, opponents have said, for example, that it would be a draconian 40 percent cut in benefits for high earners. That’s true, when the proposal is compared with the benefit levels that the law has scheduled but hasn’t figured out how to pay for. Compared with today’s benefit levels, though, it’s not a cut at all.

Democrats will prefer to raise taxes, especially on high earners, to let benefits grow faster. The drawback to this approach is that higher payroll taxes, the CBO has found, discourage people from working and saving. We would be taking a hit to economic growth for a purpose -- boosting benefit levels for relatively well-off seniors -- that shouldn’t be a high social priority. It seems perverse to raise taxes on high earners to finance higher benefits for them.

Continued in article

Bob Jensen's threads on entitlements are at

About the only group supporting windmill farms these days are business developers and windmill manufacturing firms seeking quick profits

"Greens Against Green Energy Big Solar gets the Big Oil treatment.," The Wall Street Journal, September 4, 2012 ---

A couple of weeks ago we wondered if green lobbying groups would object to new Department of Interior rules to streamline environmental approval for solar energy projects on hundreds of thousands of acres of federal land. ("The Solar-Painted Desert," Aug. 13, 2012.) Well, here we go. Three environmental groups—Western Lands Project, Basin and Range Watch, and Solar Done Right—have filed a formal complaint of the kind that often presages a lawsuit.

The letter of protest to the Bureau of Land Management alleges that the agency "failed to analyze numerous impacts of solar energy plant development within several Solar Energy Zones" and that allowing "industrial-scale solar generation" could result in the "virtual privatization of public lands."

But here's the real shocker: The letter complains that "no scientific evidence has been presented to support the claim that these projects reduce greenhouse emissions." And "the opposite may be true. Recent work at the Center for Conservation Biology University of California, Riverside, suggests that soil disturbance from large-scale solar development may disrupt Pleistocene-era caliche deposits that release carbon to the atmosphere when exposed to the elements, thus 'negat[ing] the solar development C [carbon] gains.'"

So solar energy, like corn ethanol, really doesn't reduce greenhouse gas emissions? Now they tell us.

And there's more, says the letter: The environmental impact from these solar panels "are long-term (decades to centuries)" and they threaten the habitat of "endangered species, including the desert tortoise, Mojave fringe-toed lizard, flat-tailed horned lizard, golden eagle and desert bighorn."

Who knows if these objections have any factual basis. They're similar to the exaggerated complaints that greens have used for decades to kill or delay natural gas drilling, coal mining, road building, and the construction of dams for hydropower. But it's certainly news that some greens are even turning against green energy. Welcome to the club, Big Solar.

Jensen Comment
My local PBS television station broadcasts from Burlington, Vermont. I should point out that hundreds of years ago to the naming of the Green Mountains of Vermont applies equally to the Green People in Vermont today who stand solidly behind nearly every environmental protection and taxing initiative ever dreamed up. Vermont also the anti-business state that bans new Wal-Mart stores. Vermont currently has two anti-business socialist senators in Washington DC.

But a substantial number of the Greens of Vermont are belatedly very unhappy about the windmill farms that were built in Vermont before it was realized how destructive windmills are on the environment. Firstly, windmills kill tens of thousands of birds each year. Secondly, the loud windmill noise disturbs the tranquility of the mountains and valleys. Thirdly, both the tall windmills and the tall electricity transmission towers are eyesores to natural beauty.

It was interesting to watch how the Greens interviewed on Vermont's PBS station have changed from aggressive supporters of windmills to aggressively resisting future windmill farms. The local developers, however, are still seeking permission to build such farms.

At this point in time the Greens of Vermont seem to be against anything that generates electric power. They want their Vermont Yankee nuclear plant shut down tomorrow. They abhor coal and oil fired power plants. And I doubt that drilling for natural gas by fracking in Vermont will ever be allowed.

Meanwhile back in the White Mountains of New Hampshire, the man (George Foss) that I bought my cottage from owns over 1,000 acres of mountain top about 10 miles south of my cottage. He tried unsuccessfully to get the local community of Easton to partner in the development of a windmill farm on this land. The Greens of Easton solidly voted the idea down even though the revenues generated would allow huge reductions in local property taxes.


Why U.S. Medical Costs Are so High:  Wastes Caused by Losing Causes

As usual, I preface this by saying that I favor a national health care insurance system, possibly like the one in Canada where people of all levels of income pay their fair share for medical services. Having said this, I point out that in providing basic medical services to all citizens the quality of the medical services decline in terms of waits for such services, difficulties for many to get replacement knees, hips, and organs, and the need to come to the U.S. for some of the great specialty physicians and medical centers.

Two reasons medical costs are higher in the U.S. is that the U.S. spends more on average per capita on futile extensions of life for a few weeks or months, which is the most single costly component of Medicare costs according to CBS Sixty Minutes. The other reason is the hundreds of billions spent in the U.S. on medical research where other nations become free riders on the most successful discoveries.

The High Cost of Dying
On November 22, 2009 CBS Sixty Minutes aired a video featuring experts (including physicians) explaining how the single largest drain on the Medicare insurance fund is keeping dying people hopelessly alive who could otherwise be allowed to die quicker and painlessly without artificially prolonging life on ICU machines.
"The Cost of Dying," CBS Sixty Minutes Video, November 22, 2009 ---

What is really sad is the way Republicans are standing in the way of making rational cost-benefit decisions about dying by exploiting the "Kill Granny" political strategy aimed at killing a government option in health care reform.
See the "Kill Granny" strategy at --- www.defendyourhealthcare.us
Other nations simply do not spend as much on saving extremely premature babies and the terminally ill.

The High Cost of Research
"How Much Would You Pay for Three More Months of Life?," by Laura Beil, Newsweek Magazine, September 3, 2012, pp. 40-44  ---

In his more than 35 years of practice, Dr. Lowell Schnipper has seen a lot of women die from breast cancer. A patient’s options start to dwindle by the time tumor cells set up outposts in the bones, lungs, and other organs, defying all attempts to keep them under control. But in June, when the government approved Perjeta, Schnipper had something new to offer. The drug is one of an innovative class of drugs known as “targeted therapies.”

As the chief of oncology at Beth Israel Deaconess Medical Center in Boston, Schnipper knew Perjeta was not a cure: added to a standard treatment with Herceptin—another targeted therapy that was hailed as a breakthrough in 1998—Perjeta gives the average woman only about six months more of calm before her disease starts to stir again. Given the limited benefit, the price was startling. For most women, a full course of the drug combination will cost $188,000—enough, he says, “to give anybody a cold sweat.”

Americans spent more than $23 billion last year for cancer drugs, more than we paid for prescriptions to treat anything else. But many oncologists are starting to question what we are getting in return for that bill, whether the war on cancer has become too much of a race to produce the next blockbuster. “In general, progress for cancer has been halting and slow,” says David Howard of the Department of Health Policy and Management at Emory University. So far, most new drugs offer only marginal extensions of life and few cures. Howard says new so-called breakthroughs “overpromise and underdeliver.” Consider the popularity of Avastin, a targeted drug approved for metastatic colon cancer in 2004. A recent study found that almost 70 percent of patients on chemotherapy were receiving Avastin within a year of its release. In clinical trials, the drug increased survival by about five months. The cost? About $10,000 a month.

Treating cancer has never been cheap, but today, the price of each new treatment seems to outpace the one before, with little bearing on its efficacy. According to figures from insurer United Healthcare, a standard cocktail of drugs for treating lung cancer used to run about $1,000 a month. Today’s regimens cost from more than $6,000 to almost $10,000—for about two more months of life. “There is no such thing as a cancer drug coming on the market that is some sort of regular drug price,” says Dr. Peter Bach of Memorial Sloan-Kettering Cancer Center in New York, who studies the impact of cancer costs on U.S. health care. “They’re all priced at spectacularly high levels.” Which leads to an unsettling question: how much is a little more time worth? Would you spend $50,000 for four more months? How about $15,000 for two weeks?

Of three frontiers in cancer treatment, targeted therapies like Perjeta are widely seen as the best hope for a cure. Traditional chemotherapy is notorious for side effects because it wields destruction indiscriminately throughout the body. Targeted therapies are designed to hit cancer cells only. Perjeta, for example, targets a protein produced in excess amounts in some breast cancers; Avastin hinders the ability of a tumor to form new blood vessels to feed itself.

. . .

The Cancer “Breakthroughs” that Cost Too Much and Do Too Little

Doctors envision the day when every patient will have therapy precisely matched to the genetic bull’s-eyes of their own cancers. The holdup has been that cancer has proven to be more genetically crafty than researchers once imagined. Scientists may build a drug to hit one target, but a tumor may also employ lots of yet-undiscovered genetic tricks to keep itself alive. Instead of a magic bullet, scientists now know that any particular tumor may need lots of magic bullets. With so many targets unknown, a lot of patients end up getting drugs that barely touch their cancers, which is why the effectiveness of many new drugs remains underwhelming.

Not that this keeps a drug from becoming a blockbuster. Patients with advanced cancer, and their physicians, are hungry for progress. As a result, almost all of the 10 bestselling cancer drugs are targeted therapies, many less than a decade old. All came on the market at thousands of dollars a month, a trend that continues today with gusto. The drug Afinitor, a daily pill, was approved in July for patients with breast cancer. It costs more than $200 a tablet. But price rarely matters to patients or even doctors, says Dr. Oliver Sartor, medical director of the Tulane Cancer Center in New Orleans. “People have already been told there is no cure for their disease,” he says. “Every increment, every improvement, gives hope, and when options are extremely limited, we all focus on the positive possibilities.”

In addition to targeted therapies, drugs have come on the market that can spur the body’s own immune cells to lead the charge. Significant hurdles have hindered this kind of treatment for years. But they are finally being overcome. The prostate cancer drug Provenge, which came on the market in 2010, was the first immune-therapy drug to gain governmental approval. It was followed the next year by Yervoy, when approved the only drug ever shown to extend survival in advanced melanoma. Men with a common kind of advanced prostate cancer who used Provenge lived an average of four months longer than the comparison group; patients on Yervoy got an average of 3.6 months. The gains are modest, but not the cost. When Sartor learned Provenge would run $93,000 per patient, “I was stunned,” he says. And even that was cheaper than Yervoy, which appeared the following year at $120,000 for four injections. He predicts the pricing of immune therapies may be seen as “a watershed moment” in the debate over health-care costs.

The third area of touted breakthroughs has been in radiation, most recently by using protons instead of traditional X-rays to kill cancer cells. It’s a controversial undertaking: many doctors believe that protons offer better precision, able to get rid of tumors without collateral damage to nearby healthy tissues. But whether protons can treat with fewer side effects than traditional radiation is, to date, a matter of debate for almost all but pediatric and certain neurological tumors.

As with new drugs, proton-beam radiation is expensive—it can run roughly twice as much as the current state-of-the-art form of radiation that uses X-rays. In the case of proton beams, much of the cost has to do with building a cyclotron to harvest the protons—a construction project that can cost upwards of $150 million. In 2001 just three centers in the country offered proton treatment, but that number is now up to 10, with a half dozen more planned. About three quarters of the proton patient population covered by Medicare are men with prostate cancer, which, because of the length of their therapy, are the most lucrative to treat.

Why do new drugs cost so much? Pharmaceutical companies say it’s payment for scientific creativity, that high prices are necessary to recover the expense of developing and manufacturing their products and to encourage more research. A spokeswoman for Bristol-Myers Squibb, which makes Yervoy, says the cost of drugs is “based on a number of factors, including the value they deliver to patients, the scientific innovation they represent, and the cost to develop them.” Part of the price is also an investment in drug discovery. “We look at not only the past research and development, but development in the future,” says Krysta Pellegrino, a spokeswoman for Genentech, which developed Perjeta.

That said, many cancer experts remain skeptical of the notion that drug companies are simply passing along the cost of doing business and funding the incubation of new drugs. In 2004 researchers tried to test the relationship between a drug’s development and its final asking price. In the Journal of Clinical Oncology, the scientists concluded “that the drug companies are not pricing their drugs to recuperate losses associated with research and development, marketing, and operating prices, but rather [the average wholesale price] depends on what the market itself can bear.”

“It’s a marketplace where the seller has all of the control,” says Bach, from Memorial Sloan-Kettering, because private insurance companies and Medicare—the largest purchasers of drugs—are powerless to bargain for a less expensive deal. “Prices are high because they can be,” Bach says. As one doctor observed, “we are always paying for a Ferrari but often getting a Ford.” The occasional Ferrari does exist. The targeted drug Gleevec, which treats certain forms of leukemia and intestinal tumors, has allowed patients to live for years with their cancer in check.

Continued in article

Jensen Comment
At a cost of $150 million each, how many other nations have built 10 cyclotrons for harvesting proton beams for cancer treatments and research?

Only the most successful findings in the U.S. will motivate other free-rider nations to invest in such expensive hardware.

If we adopt a national health care plan the medical services will be spread more evenly across all residents of the U.S. However, we will then have to come to grips with costs of dying and costs of research that we perhaps can no longer afford on the same scale.

We will also have to come to grips with controlling punitive damage hundreds of billions in lawsuits like other nations control such frictions on medical services. Other nations like Canada provide for damages and lost income, but they do not turn medical litigation into a legal lottery.

"Canadian Malpractice Insurance Takes Profit Out Of Coverage," by Jane Akre, Injury Board, July 28, 2009 ---
Click Here

The St. Petersburg Times takes a look at the cost of insurance in Canada for health care providers.

A neurosurgeon in Miami pays about $237,000 for medical malpractice insurance. The same professional in Toronto pays about $29,200, reports Susan Taylor Martin.

A Canadian orthopedic surgeon pays just over $10,000 for coverage that costs a Miami physician $140,000. An obstetrician in Canada pays $36,353 for insurance, while a Tampa Bay obstetrician pays $98,000 for medical malpractice insurance.

Why the difference?

In the U.S., private for-profit insurance companies extend medical malpractice coverage to doctors.

In Canada, physicians are covered through membership in a nonprofit. The Canadian Medical Protective Association offers substantially reduced fees for the same coverage, especially considering that their payout is limited by caps in Canada just as in some U.S. states.

In 1978, the Canadian Supreme Court limited pain and suffering awards to just over $300,000, circumventing the opportunity for a jury to decide on an award depending on the case before them.

Canadian Medical Protective Association

Here’s how it works.

Fees for membership vary depending on the region of the country in which the doctor works and their specialty. All neurosurgeons in Ontario will pay the same, for example. The number of claims they have faced for medical malpractice does not figure into their premium

"We don't adjust our fees based on individual experience; it's the experience of the group,'' says Dr. John Gray, the executive director, "That's what the mutual approach is all about, and it helps keep the fees down for everyone,” he tells the St. Petersburg Times.

If a doctor is sued, the group pays the claim and provides legal counsel.

In the U.S., the push has been on for limiting claims, no matter how egregious the medical malpractice. President Obama was booed in June when, before the American Medical Association, he said he would not limit a malpractice jury award.

"We got a crazy situation where Obama is talking about the cost of medicine but he said, 'I don't believe in caps,' " complains Dr. Dennis Agliano, past president of the Florida Medical Association. "If you don't have caps, the sky's the limit and there's no way to curtail those costs.''

But the importance of limiting jury awards may not play into the big picture on health care reform.

Malpractice lawsuits amount to less than one percent of both the Canadian and the U.S. healthcare system, meanwhile between 44,000 and 98,000 Americans die each year due to medical errors in hospitals alone, while 16 times as many suffer injuries without receiving any compensation, reports the group Americans for Insurance Reform.

Major Difference

In Canada, an injured patient is often required to pay for the initial investigation into his case. In the U.S. the contingency fee basis, usually in the range of 30 percent, allows the injured party to proceed without a financial downside.

In both the U.S. and Canada, the definition of medical negligence is that a duty of care was owed to the patient by the physician, there was a breach h of the standard of care and the patient suffered harm by the physician’s failure to meet that standard of care.

A bad outcome in itself is not the basis of a lawsuit.

The Canadian Medical Protective Association insures virtually all of the country’s 76,000 doctors, as opposed to the U.S. where private for-profit insurance companies cover physicians for medical malpractice.

In Canada, the median damaged paid in 2007 was $91,999 and judgments favored patients 25 times, doctors 70 times.

In the U.S., many physician groups are requiring patients to waive their rights to a jury trial, even though malpractice litigation accounts for just 0.6 percent of healthcare costs.

Public Citizen, the consumer group, charges that the facts don’t warrant the “politically charged hysteria surrounding medical malpractice litigation.”

For the third straight year, medical malpractice payments were at record lows finds the group in a study released this month. The decline, however, is likely due to fewer injured patients receiving compensation, not improved health safety.

2008 saw the lowest number of medical malpractice payments since the federal government’s National Practitioner Data Bank began compiling malpractice statistics. In 2008, payments were 30.7 percent lower than averages recorded in all previous years.

In the report titled, The 0.6 Percent Bogeyman, the nonprofit watchdog group states, “between three and seven Americans die from medical errors for every 1 who receives a payment for any type of malpractice claim.”

Public Citizen previously reported that about five percent of doctors are responsible for half of the medical malpractice in the U.S. that can result in permanent injury or death. #

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November 12. 2010 message from Ramesh Fernando 

Prof. Jensen,
While it's true our spending on health-care is much lower than the US in terms of percentage of GDP and we don't have the level of malpractice suits as in the USA there are severe problems with the healthcare system. The federal government has a guaranteed I think 6% accelerator, much higher than inflation, transfer payment to the provinces for health care. I doubt the federal government can guarantee that kind of spending in the next negotiations between the provinces and the federal government.

Then again federal government transfers amount to only about 15-20% of most provincial health spending and provinces spend about 40-50% of their budget on the health budget and growing larger as the boomers age. Provinces especially Ontario and Quebec but even Alberta with it's oil and natural gas royalties will not be able to keep this up,

Ontario has a bigger deficit at $21 billion Canadian than California I think and Ontario only has 12-13 million people. Quebec which is usually a very socialist province, has actually liberalized the private element of health care services the most, there are many Ontarians who go to Quebec to get treated including private MRI scans etc. British Columbia is also following Quebec and has allowed private clinics to serve patients.

There are two cures for reducing the deficits of the provinces, one is to stop the increase in health spending so per capita spending goes down along with co-payments for superficial emergencies like colds and coughs to the doctor or emergencies. Other is to create a two tier system with a fully private one along with the public system. All three federal parties, even the governing Conservatives who are most similar to your Republicans and the Bloc Quebecois (the Quebec nationalists-separatists) are against a private system but there is a lot of support for it from the more conservative elements in Canada, including Preston Manning, the former leader of the populist Reform and former Conservative premier of Ontario Mike Harris.

They wrote a couple booklets published by the Fraser Insitute
"A Canada Strong and Free"
URL http://www.fraserinstitute.org/research-news/display.aspx?id=1277  and

"Caring for Canadians"
URL http://www.fraserinstitute.org/research-news/display.aspx?id=12928 
which basically noted the problems with the Canada Health Act.

Note I am not saying I agree with them or disagree with either way but they do have some valid points.

Ramesh Fernando
CMA Candidate
Ottawa, Ontario, Canada

"KPMG: Healthcare System Disconnect," by Rob Starr, Content, Big Four Blog, August 29, 2012 ---

According to the findings from a recent survey by KPMG LLP, the U.S. audit, tax and advisory firm, healthcare and pharmaceutical executives are clearly uncertain whether or not existing business models are sustainable over the next five years, even though they do anticipate major change in the short-term.

In fact, despite their majority opinions that current business models are at least somewhat sustainable, many provider (65 percent) and health plan (41 percent) executives do expect major business model changes in the next five years, while a majority of pharmaceutical executives (63 percent) expect only moderate changes.

Payers were more optimistic about the possibility of partnerships involving providers and suppliers, with 55 percent of respondents saying it was possible. Additionally, they said they expect that healthcare information technology, evidence-based medicine, disease management, and pay for performance incentives will be the most effective approaches to curbing costs.

Pharmaceutical executives are also struggling with change strategies. On one hand, 47 percent said a shift toward health system accountability would have a positive impact on their industry, and more than half said they are currently or will be using risk and outcome-based contracting in the future. Additionally, more than 70 percent of the executives said that comparative effectiveness research (CER) data would help show the value of their products.

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·     With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR

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Shielding Against Validity Challenges in Plato's Cave  --- http://www.trinity.edu/rjensen/TheoryTAR.htm
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