What If There IS No Spending Problem? March 15, 2013March 15, 2013 [HOUSEKEEPING: This site has been moved to a more robust server. I hope there will now be fewer outages. Sorry for the difficulties of the last couple of days. Yesterday’s column, if you missed it, is back up — and a actually bit more polished thanthe version that originally went out.] Updates below on BOREF, SIGA, GLDD, and others, but first . . . A REALLY INTERESTING PERSPECTIVE Kevin Rasmussen: “What if there is no spending problem? I posted your site’s quote of the day on FaceBook the other day: In 1800, 75% of [an American] working man’s expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%. — The Wall Street Journal, September 20, 1996 “Interesting statistic, I thought. My smart friend Jason posted this link [to a piece by blogger and ex-mathematician Doug Muder] as a response. It’s a perspective I hadn’t considered. Interesting!” It is indeed! . . . Government spending goes out of control because healthcare costs go out of control. But just capping what the government spends on Medicare and Medicaid (i.e., the Ryan plan) doesn’t fix anything. If healthcare costs are unsustainable, then what does it matter whether we’re paying those costs through government, through private insurance, or out of our pockets? Personally, it’s all the same to me whether I go broke paying taxes, paying health insurance premiums, or paying my doctor. So a liberal would rather imitate the countries who already get better healthcare for less money than we do and increase the government’s role, ideally with a single-payer system. Summing up: Liberals and conservatives agree that we have a long-term problem, but they argue about what kind of problem: a government spending problem or a healthcare cost problem. Recently I ran into a potentially game-changing question: What if there is no problem? In other words, instead of being trapped in the dismal liberal/conservative argument about which apocalypse we’re headed towards, what if we’re actually not headed towards an apocalypse at all? “That’s crazy!” That was my first reaction too. I mean, look at that graph. But the guy making the claim (William Baumol in the recent book The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t) has a track record that earns him a hearing. Baumol is an economist who is most famous for identifying Baumol’s Cost Disease in the 1960s. His observation is that although the economy as a whole becomes more productive with the advance of technology, not all sectors progress equally, and some don’t improve their productivity at all. For example, a 21st-century farmer feeds far more people than a 19th-century farmer. Likewise, a worker at a modern shoe factory makes more shoes than a 19th-century cobbler. But it still takes four talented musicians to perform a Beethoven string quartet, and they don’t do it any faster than they did in Beethoven’s day. String quartets have not seen a productivity increase. The economic consensus of the 1960s said that wages were tied to productivity. If that were true, then classical musicians would have seen their incomes crash relative to farmers and shoemakers, who would by now be vastly wealthier than the lowly performers of the New York Philharmonic or the Boston Pops. In fact that didn’t happen, because in the long run the labor market has a supply side as well as a demand side, the result being that every profession has to pay enough to induce talented people to make whatever sacrifices are necessary to enter that profession. But something has to give somewhere, so we see the productivity difference as inflation: The price of a New York Philharmonic ticket is going to rise much faster than the cost of a loaf of bread or a pair of shoes. So Baumol’s observation is that industries with a large component of personal service are not going to increase their productivity as fast as the rest of the economy, and as a result those industries are going to see higher inflation than the economy as a whole. Year-by-year those higher inflation rates might just be a nuisance, but over time exponential growth works its dark magic: If two products each cost $1 today, but one is subject to a 2% inflation rate and the other 10%, in 100 years the low-inflation product costs $7.25 and the high-inflation product costs $13,781. Health care. Health care has a high component of personal service. It does not have high productivity growth. Now this part gets a little tricky, because we all know how much medical technology has improved over the decades. But the improvement is almost entirely on the outcome side rather than the productivity side. Adrian Peterson could tear up his knee and be better than ever the next season, where half a century before Gale Sayers was never the same. But the amount of attention patients need from doctors and nurses has not gone down. Health professionals are doing better for their patients, but they are not processing more of them faster. And most of us wouldn’t want them to. If you heard that one local hospital had one nurse for every five patients and another “more productive” hospital had one nurse for every 50, which would you choose for your surgery? If one doctor sees 30 patients in an hour of clinic time and another doctor only six, which would you pick as your PCP? So back in the 1960s, Baumol looked at this situation and concluded that medical inflation was here to stay. Not because doctors are greedy or health insurance companies are evil or socialized medicine is inefficient, but just from the nature of health care. While other factors undoubtedly matter, the exponential growth would happen anyway. . . . Baumol predicts that over time government spending will rise as a percentage of the economy. But we can afford it. . . . In Baumol’s model, government spending isn’t crowding out everything else. As a society, we aren’t doing without manufactured goods [or food] because health care is soaking up all our money; we’re just using less of our labor to produce the manufactured goods [and food] we want. . . . Read the whole thing? A really interesting piece. BOREF A ninth airline, 10 more slots — here. SIGA Controversial — as reported in a piece I missed Tuesday. The questions seem to be: will SIGA’s contract with the government stand, both as to price and quantity? will the legal ruling requiring it to share revenues with a competitor be tossed out on appeal? will the company find other commercial uses for its drug and for other related efforts it may have in development? I surely don’t know, but am holding. GLDD The stock dropped by a third or so in after-hours trading last night on this news of fairly modest accounting problems — but raising the worry there may be something more — coupled with the departure of the COO. This company has been around for more than a century and the fundamental case for owning it remains strong. At $6.20 last night, or $7.30 as I type, this may be a better time to buy than sell. SODA Randy Woolf: “We have one of these frugal alternatives to SodaStream, and like it. A bit more ‘do it yourself’ fuss than SodaStream, but you can make your soda more carbonated this way. The CO2 refill cartridges are MUCH cheaper.” Amy Vail: “I’ve had and loved my Soda Stream for two years now… and discovered recently these are made on an illegal settlement in the occupied West Bank. There are other soda fountain options out there, though. Unfortunately, those brands are not carried around here, so I’m not sure what to do now.” Ah, but if you watch the video from yesterday’s column, I think you will feel much better about the politics of your soda. UTHR John Seiffer: “Any word from your guru on either UTHR or FCSC? I bought both and and am up more in UTHR than I’m down in FCSC. My problem is I never know when to sell. Any thoughts?” Yes: << UTHR continues to show strong earnings and awaits a decision on its oral treprostinil. The FDA initially rejected the application even though one trial succeeded so they refiled the application and the deadline is in a month or so. It has been hard to read the FDA on this situation but it certainly could get an approval. On the other hand, sales for this indication will be limited. The stock looks fully valued at the current price but in this crazy market probably rallies on the approval. >> FCSC << FCSC is an odd company. Most biotech companies prefer to have regular conference calls with investors. This one strangely does not. They were capacity constrained last year but then got an investment from billionaire Randal Kirk. Still little evidence they will be self sustaining on a commercial basis in the near term. Two options: (1) Sell, take the loss, and move on. (2) Hold for the chance that you wake up and one of the gene therapy applications has succeeded or sales eventually pick up. I’m not a fan of strategy 2. I like to know when I’ll be right. This was really meant to be a trade into the FDA approval and then “sell on the news.” Stupidly, we hung on. >> If we were perfect, we’d have all the money in the world. Gotta leave something for everybody else. Have a great weekend. (Especially you, Will Portman, And you, Scott Prouty.)