Keeping Perspective

Building on my last blog entry on putting personal health expenditures in perspective, I'd like to share a resource with you that I use for keeping the economy's health in perspective.

Just as with a good investment portfolio, it pays to diversify your sources of information. One source in my panoply is Russell Investments' Economic Recovery Dashboard. (Disclosure: I have absolutely no relationship with Russell Investments; I invest with a different financial advisor)

It is an excellent way to quickly view market indicators and economic indicators, for current and lagging trends respectively, in historical context. I don't know a lot of people who can claim to know how the current rate of inflation compares to historical norms, so I find this resource helpful.

I subscribe to their monthly update (I have received no solicitations through them to-date, so I think it's safe) but if you mind giving up your email address they claim to update the data on every 22nd of the month - so bookmark the page and mark your calendar.

Here's the link: http://www.russell.com/Helping-Advisors/Markets/EconomicRecoveryDashboard.asp

Do We Need Public Entertainment Option?

I want to play Devil’s Advocate for a moment. When I read the Bureau of Labor Statistics’ report on Consumer Expenditures (link here) I noticed something interesting.

To set the stage, we’ve all heard about how much individual consumer spending on healthcare is “out of control” and how it’s taking up an “unsustainable” amount of consumers’ paychecks. This squeeze on the average American’s wallet is one of the main reasons, assuming everyone’s being honest, that we are debating healthcare reform and the need for government intervention in what is described as a broken system.

But what if the numbers show that individual Americans spend almost as much on entertainment as they do on their healthcare?

That’s precisely what the Bureau of Labor Statistics 2008 report shows: that Americans allocate as much of their income to having fun as to taking care of themselves. Furthermore, the rate at which the spending is increasing is greater for entertainment: 5.1% to healthcare’s 4.3%.

This raises the tongue-in-cheek questions: do we need comprehensive entertainment reform to reign in these spiraling costs? Are we getting quality for our entertainment dollar? And do we need a public entertainment option to compete with private entertainment in order to keep it honest?

Health Insurance Exchanges

There's been a lot of discussion lately about the possible mandate for individuals to carry health insurance - much like we're obliged to have an auto insurance policy if we drive. A key enabler of the individual mandate is a means for every person to comparison shop for, and purchase, health insurance.

In an Amazon.com-like fashion, health insurance exchanges seek to fill that need. My company, CSC, built the U.S.'s first health insurance exchange: The Commonwealth Connector.

Given the current health reform debate, I thought it would be timely to write a case study on our successes and lessons learned from the experience so that other State and Federal entities could benefit. Just this week, my piece was published at HealthNewsDigest.com, and the link to it is here.

As always, I welcome your feedback.

Is $44,000 Enough?

I was recently on a conference call with the manager of a physican practice, and he was asked "is the money being allocated to physicians for EMR implementation in the stimulus package enough?"

For those of you who don't know, the American Recovery and Reinvestment Act (ARRA) of 2009 has a section in itspecifically targeted towards health information technology - called HITECH. In it, there are dollars set aside for providers who take Medicare and Medicaid patients to encourage them to adopt electronic medical records (EMR) systems. There are also penalties for not adopting the technology by a certain deadline. A practice that begins its adoption by no later than 2012 can earn up to a maximum of $44,000, though the practice will have to bear the up-front cost and apply for repayment. I've included a picture of the payment schedule from my reading of the act.


While $44,000 might sound like a lot of money for a piece of software, it's not the software that was the cost driver for this practice. Of course the manager mentioned how the EMR changes a practice's workflow; an EMR is not a bolt-on technology that helps solve one particular problem more effectively, such as a new bed management system that optimizes the utilization of the beds in a facility. So the time spent by the practice to change how they do business is a cost, but not one that's easily quantified.

The cost that surprised me, and one I'd taken for granted, was pointed out when the manager talked about the conversion of paper charts to the EMR. A brand-new practice that started on Day 1 with an EMR wouldn't incur this cost, but one that had been in business for decades would have an enormous burden to bear in inputting a patient's history into the EMR.

So when this tangible and necessary cost is taken into account, the $44,000 is a contribution, but is certainly not sufficient in covering the cost of EMR adoption by physician practices. Any practice that is considering pursuing the dollars promosed by HITECH for EMR adoption will need to broaden their perspective of what the total cost of an EMR truly is.

"A Computer Never Healed Anyone"

"Health information technology is just another way for consultants to make money, after all, a computer never healed anyone."

Those are the sentiments I've read and heard from some skeptical physicians. While it's true that a computer never healed a person of its own volition, I do believe that health information technology can play an important role in improving outcomes.

Now, there's another piece of evidence supporting that belief. A study released this month by the Integrated Healthcare Association (IHA) suggests that there is a positive relationship between adoption and use of information technology in physician-hospital organizations (PHOs) and the quality of care delivered to patients.

The study assigned a score to PHOs and their adoption of HIT, and those PHOs with the highest scores had a statistically significant correlation to improved quality of care. A picture of the key chart is in this post above.

The executive summary of the report can be found here, and the data supporting the summary can be found here.

By the way, my response to the HIT-skeptical physican has been, "and neither has a telephone, but do you think the phone has helped outcomes and quality of care?"

Things Are Looking Up

So, the Conference Board released their August report on economic indicators today and things are indeed looking up.

The big news isn't that the leading indicators are trending upward, though that is certainly good news. The big news is that the concurrent index (i.e., indicators of activity going on right now) have flattened for the first time since October 2008.

This could mean that the negative economic conditions have bottomed out, and because the leading indicators are trending up we could see current conditions begin to trend upward next month.

The original publication is here, and a PDF version is here. Pay close attention to the graph in the PDF, it's pretty illustrative of why can be at least a little optimistic.

A Working Alternative

I don't usually do this in my blog, so forgive me for letting the lazy days of summertime get to me and give you a link to read with little added content or analysis.

I read a good Op/Ed piece in the Wall Street Journal this morning written by the CEO of everyone's favorite organic/health food chain, Whole Foods. It's an excellent, comprehensive set of practical proposals that if taken in their entirety (not piecemeal) could actually make a positive change and produce meaningful healthcare reform.

The link is here.

Pay close attention at the end to the real experience Whole Foods has had in the other countries where they do business and employ people. What have employees in countries where healthcare "is a right" asked for from Whole Foods in terms of their healthcare?

What is a PHR Anyway?

The problem: a caregiver needs to know your medical history, but your patient records are scattered with many individual providers. Your dermatologist has some of your medication history and knows you have an allergic reaction to penicillin. Your urologist has the lab results from a creatinine test done on your blood from a year ago. And your primary care physician has a ten-year history of your weight, vitals, and overall health.

How do you bring them together? (Other than with a hailstorm of faxes?)

Enter the PHR, the personal health record. The PHR takes a step to address this problem by creating a place for all your medical history (allergies, medications, encounters, etc.) to be stored. Best of all, you own it and manage it. Many products (Google Health, Microsoft HealthVault, etc.) are being raced to market in the hopes of being the place where you deposit this information. Let's face it, the first place you put it will probably be the place your history stays since you won't want to move your information once you put it there.

An important feature of a PHR allows you to grant access to caregivers not only to view your health information, but also to add to it in a structured fashion. The information systems that your hospital, your physician, and your other caregivers use (such as Epic, Meditech, eClinicalWorks, GE Centricity, etc.) will have interfaces to your PHR to do this, or will through a health information exchange (HIE). The individual contributions of each of these providers will accumulate in your PHR and form a much more complete picture of our medical histories.

In my opinion, putting the right information in the hands of your caregivers is the best use of information technology for improving the health of people, and for improving outcomes.

Can We Be Friends?

Quick sidebar: Economist Arthur Laffer (of the famous Laffer Curve) wrote an editorial in the WSJ this morning that makes a similar argument as I did in this blog for stripping the insulation from healthcare costs (he calls it the "healthcare wedge") that may be an alternative to the current plans being offered for healthcare reform. He argues the point more eloquently than I did, though. Check it out!

It's no secret that most Americans have a deep mistrust of their health insurance company. We firmly believe that it's in the company's best interest to take as much as the market will bear from us in terms of monthly premiums, and give as little as possible in the way of payments when we seek care.

But what if there was a way that our insurance companies could cut costs, and we could be truly, genuinely be healthier because of our relationship with said evil company?

I think there's a way to do it, and it's through predictive analytics.

Health insurance companies have a wealth of historical information about subscribers in the form of claims data. Every time I go to the doctor, or have a test done, or see a specialist, my healthcare professional would like to get paid for their services, and so they file a claim with my insurance company.

Over time, the millions of claims being filed by healthcare professionals for services performed on all of us becomes a treasure trove of data for analysis. Each one of those claims is coded with certain pieces of information, and something that's present on every claim is an element called a "service type code", or in other words "what kind service did I perform on the patient?"

Imagine if we performed an analysis on the dates of service and service type codes and found a statistically significant pattern of claims that looked like this:

Patient: Male, age >55, smoker, BMI >28.7
Claim 1, Day 1: Office visit
Claim 2, Day 3: Lipid profile
Claim 3, Day 30: Office visit
Claim 4, Day 35: Emergency room admission, heart attack

This is a simplification, but it's to illustrate a point. If this pattern had predictive power, wouldn't it be a great win for both the patient AND his insurance company if they made a call to his doctor on day 31 saying, "we've noticed that your patient has just fallen into our high-risk profile for heart attack in the immediate future. Please make a wellness outreach and begin an immediate statin and anticoagulant regimen if appropriate." (This assumes healthcare professionals get paid for proactive outreach, which is a topic for another day.)

I know I'd appreciate not having the heart attack, and certainly the health insurance company would like to avoid paying the tens of thousands of dollars it would cost to save my life. I benefit, and they benefit.

If this were done for all of us, we might have more reasons to like our health insurance companies!

Stripping the Insulation from Healthcare

First, a shameless plug for my suggestion to reform Medicare first before asking the American people for more responsibility: Peggy Noonan, an editorial writer for the Wall Street Journal makes the same suggestion,in the ghostly form of FDR, in her weekly Declarations column on August 1, 2009. Maybe I'm not crazy after all!? Link here.

So, in my previous blog entries, I wrote that by making consumers and providers more aware of the real cost of care, we would take a step towards reforming the system. In this entry I will walk through a very simplified ripple effect of how it might work.

• People know the cost of their care (e.g., my angioplasty costs $7500)
• People pay more up-front for their care with Medicare's new high deductables (e.g., I pay $5000 out of pocket for that angioplasty. Ouch!)
• More physicians get paid more directly, and more quickly (claims have a lot of friction, cash is immediate and transparent)
• More physicians want to take Medicare patients into their practice (now Medicare pays well, and quickly)
• Brief tangent: as a whole, reimbursement rates for healthcare professionals usually do not cover the cost of care. For example, the doctor incurs 100% of the cost of your checkup, and your insurance company decided that 60% of that amount is "reasonable". This leads physicians to be tempted to "cost shift" and perform services that have higher reimbursement rates in order to cover what they should have been paid in the first place. How would you feel if the government declared that you were being paid 40% too much for your job?
• Over time, more med students and RNs go into primary care to get paid Medicare's higher reimbursements instead of the current trend of more students and RNs fleeing into higher-paid specialties.
• As supply of primary care physicians increases, prices decline, quality increases (simple elasticity of supply)
• As Americans realize cost of care, they proactively take better care of themselves, use services less, pay smaller premiums and copays (simple elasticity of demand)

In the end we have more docs, willing to provide more care, at lower cost, higher quality, and healthier Americans. No, this is not a silver bullet (this is) and there are many other pieces to the puzzle, such as policy changes in subsidies that make unhealthy food cheaper than healthy food, and the inevitable cultural angst we will feel with changing from conspicuous consumption to consumption with integrity. In other words, if you exercise your freedom to engage in unhealthy behavior, you have the integrity to exercise your freedom to pay for it.

And as an old friend of mine mentioned, this plan should not include people with congenital illnesses or genetic causes to what ails them. I do believe we are a fair, generous, and compassionate nation, but if we are to take good care of the people who truly need it, we must take better care of ourselves first with better information and better choices. We are insulated from the cost of care, and strippling that insulation away might yield some unexpectedly positive results.

Breaking the Triple Constraints, or, Why I Like Lasik

In an earlier post I suggested that lawmakers fix Medicare before asking the American people to support an even larger healthcare system. Controlling the cost of Medicare, without harming benefits, is essential to buildingthat trust. How can we do that?

In considering how it can be done, I can't help but think about Lasik, the elective eye surgery that many people get to correct their vision, and when successful, to live without glasses or contact lenses.It changes lives, but it's paid for entirely out of pocket.

When Lasik was first introduced, it was expensive, and few doctors could perform it. Years later, the cost has come down, the quality has gone up, and the number of doctors who perform it has increased as well.

Isn't this what we want for the rest of healthcare: lower costs, higher quality, more accessibility? And somehow, it happened without government intervention or subsidy. Adam Smith would be proud.

But how and why did it happen? Certainly the fact that it's an elective procedure played a part (elasticity of demand for you economics geeks out there). But there's an aspect of human behavior involved that I want to point to and suggest it might be the key to breaking the triple constraints of healthcare and here it is: knowing the cost of your care before you need it makes a material difference.

I found some testimony given to the House Ways and Means Committee which supports this idea.The original text is available here.

It's not a dry read - it's conversational and moves quickly.

I'll draw your attention to one specific part of the testimony, where Ha Tu of the Center for Studying Health System Change and Dr. Regina Herzlinger of the Harvard Business School are testifying about high-deductible plans (i.e., plans where patients have more financial skin in the game and therefore more of an interest in how much their care costs).

In the text, search for the words: "Mr. McCrery" to get to it quickly. They testify that evidence shows that as people become aware of the cost of care, they do two things:

1) Decide not to get the care, because they don't really need it (this applies mostly to elective procedures) but more poignantly,
2) Their outcomes improve because patients know how much it's going to cost them if they don't comply with their medication schedules, follow-up appointments, checkups, etc.

As the testimony cautions, we don't want to oversell the benefits of this model, but how much could we reform healthcare if consumers knew the real cost of care, and had more of a stake in their own healthy choices?

For example, heart disease is the leading killer of American men and women, and is highly preventable through behavioral changes such as smoking cessation and weight loss years before the adverse event happens. If you knew today that a heart attack would cost you $20,000 (and not just your $500 deductable) do you think you might take a little better care of yourself?

Put another way, if you can see how putting calories or fat content on restaurant menus might make a positive difference in diners' choices, it shouldn't be much of a stretch to understand how seeing the cost of your future care might positively influence your present choices.

In another blog entry I will walk through a simple example ofof how removing the insulation from cost that we have might have a positive ripple effect through the entire healthcare system.

Questioning A Given

Health information technology (HIT) is often cited as a means to achieve improvements in efficiency and savings. But, I was wondering today: has anyone conducted any studies on what, if any, tangible improvements a healthcare provider enjoys after the adoption of HIT.

I wanted to question the assumption that HIT makes anything better for providers. So let's start from the beginning and ask this question:

What precisely gets better with the adoption of HIT into a practice?

I did some Googling and searched some academic databases through my alumni accounts, and there are many individual studies and articles on the subject. I managed to locate a research article that first appeared in the Annals of Internal Medicine in 2006 by Chaudhry et al. that conducted a literature review of over 250 studies on the impacts of information technology on healthcare, which is a lot more exhaustive and scientific than my own random searching could ever hope to be. Here is a link to the original paper.

The results were interesting, and perhaps not what one would expect. According to the research, information technology improved healthcare in four key areas:

1) the adherence to treatment protocols
2) the surveillance of diseases
3) the reduction in medication errors
4) the decrease in utilization of care

The first three improvements can be grouped together as improvements in the quality of care: patients were treated according to the plans with the best clinical outcomes, more data on diseases were gathered and used to proactively identify high-risk patients, and mistakes in prescribing drugs to patients were reduced.

The fourth improvement is different in that it suggests a gain in efficiency. Apparently, when clinicians are exposed to the cost of a given treatment, especially in the areas of diagnostics and imaging, utilization of these services decreases. This does not imply that the patient's treatment outcomes were better as a result of this efficiency, just that the efficiency appeared.

There is a robust debate about the place of information technology in healthcare, and I hope that by understanding how it can help a practice we can help to set our expectations appropriately. If we can do that for ourselves, and for our clients, HIT implementations will have a better chance of being perceived as a success and might be used to do what they do best: get better information in the hands of our caregivers when they need it.

Advice for Healthcare Reformers

Our nation's healthcare system as been referred to with many labels: "broken" and "unsustainable" are two that there seems to be little argument about. Our President and the Legislature have been insisting that reform is not only necessary but imminent. It's going to happen, it's just a question of when. Healthcare reform is paramount, they say, because healthcare costs are rising as a proportion of Gross Domestic Product (GDP) at an unsustainable rate.

But more recently, a growing number of Americans have been expressing their concerns about the cost of "reform". On July 14, when the Congressional Budget Office issued its nonpartisan assessment that the latest healthcare reform bill being submitted would not only increase the national debt by over a trillion dollars over the next 10 years, but also that there would be no cap on that figure (meaning, it could be even more expensive), it dealt the supporters of big change in healthcare a significant setback. The original letter from the CBO is here.

In order to rebuild the American people's confidence that Washington can reform healthcare, my advice is to start with two human service programs it already manages on our behalf: Medicare and Social Security. Here's a chart that illustrates my point (click on it for a larger version):

[source data: Office of Management and Budget, Historical Federal Outlays, 1962-2008]

Side note: wherever possible, the data I present here are from primary source material. I am not giving you data regurgitated from a talking head somewhere. These are the data from the original sources. You can (and should) look this material up yourself and get informed.

If this truly is the time to reform healthcare, and our current slate of Representatives, Senators, and President are the people to do it, can they start by reforming a program already fully under their control? Show us how efficiently Medicare can be run, and how well costs can be controlled through efficiencies, then we will gladly buy into a new government-reformed healthcare system. Show us Medicare's costs can be contained; it's already the largest consumer of healthcare in the nation, and wholly under Federal control.

I believe that if Medicare or Social Security become models of government management excellence, then the American people will have no reason to fear that the system we have, as "broken" and "unsustainable" as it may be, will be worse off when Washington "reforms" it.

Healthcare's Triple Constraints

The other day I was reading an article in the WSJ about President Obama's press conference on the topic of healthcare in the United States.

In the commentary, and in thinking about the various positions on what needs to be done with the system, I was reminded of a useful metaphor I learned about in project management: the triple constraints.

If you're not familiar with the triple constraints, imagine an equilateral triangle. At each corner of the triangle is a constraint: cost, time, and quality. The concept is simple: pick any point within the triangle and you'll see what the trade-offs in your project will be at your chosen point. For example, if your spot is precisely between "cost" and "time", implying that you want the perfect balance of the lowest cost and fastest time possible, then you will be the farthest away from "quality" possible.

Applying this to healthcare, I would argue that the constraints in our current situation are:

1) Quality (receiving the best care from the best professionals with the best outcomes)
2) Accessibility (how many people can get the care)
3) Financial Sustainability (how long we can afford to pay for the care)

The picture looks like this (image just below):

So for example, if you were to pick a point that was on the line between "Quality" and "Accessibility", meaning we want the perfect balance of the highest quality possible and the most accessibility possible, we are the farthest away from "Financial Sustainability" possible.

In my opinion, another dimension of the debate is: who gets to choose where your particular point within the triangle is? In our pseudo-free market system, we consumers have our own ability to select where in the triangle we are. In single-payer, well-meaning Federal agencies would make the decision for you.

How confident are you that the point they pick and the one you would pick for yourself would be in the same place?

Are Genericare and Concierge the Next "Two Americas"?

The American Medical Association's mission statement begins with: "To promote the art and science of medicine and the betterment of public health."

There's an important concept in there: the physician's group believes that medicine is both a science and an art. Hold that thought for a moment.

One of the goals of the ARRA of 2009 is the promotion and adoption of electronic health records, and within that goal is the mandate that EHR technology report quality data out to the Secretary. Without question, one of the objectives of reporting healthcare quality data is for aggregation and study.

The study of aggregated healthcare outcomes data will produce better quality healthcare, or so the logic goes, by improving protocols. For those of you who don't know, a protocol in the medical sense is a standard procedure for a specific diagnosis. With better protocols, we will have better outcomes, and therefore better quality healthcare. Cost can be lowered by then putting the most routine protocols in the hands of lower-cost healthcare providers. Think "Minute Clinics" and home pregnancy tests, as examples.

Clay Christensen writes about this disruptive innovation in "The Innovator's Prescription", and suggests that the movement of treatment from highly-skilled (and highly paid) professionals to lower-skilled professionals (and perhaps even the patient herself) is the way that the healthcare industry will follow the path of many other industries, such as the computing industry did. Most of us can remember when computing was done in huge labs by a select few people. Now everyone has more computing power in their laptop than existed in an entire building forty years ago. People without any computer science education can make sophisticated models in Excel, for example.

So, if we start to put the pieces of the puzzle together, is this the picture that emerges? Given the pricing power of Medicare, and the government's aggregation of healthcare quality and outcome data in the near future, is there much doubt that protocols will be established to address many common ailments? That's the point, you say? Let's make this into a science and then we will all benefit from the most cost-effective, and demonstrably the most frequently-successful treatment.

However, many people, apparently the AMA included, believe that the practice of medicine is as much an art as a science, and so I believe that what we have the beginnings of is the crystallization of a two-tiered system: those who will consume "genericare", or predominantly protocol-based medicine, and those who will opt for the science and art of "concierge" medicine - an out-of-pocket based service where doctors treat you like a person and not an algorithmic input, and charge you a hefty fee for the honor.

Inadvertently, we may be accelerating something that I think we'd all like to avoid: a two-tiered system of healthcare, where those who have the financials means will still enjoy both the science and art of medicine, while the rest will have to hope that their specific ailment falls within standard deviation.

Is The Stimulus Package Worth It?

There's a lot of opinion about whether or not the recently passed American Reinvestment and Recovery Act (ARRA) of 2009 (aka, "the stimulus package") will help America lessen the impact of the current recession. Many people wonder if it will actually do anything. Many believe it will be of great impact.

I think I may have some insight.

About a week ago, on March 2, the Congressional Budget Office released an estimate to the Finance Committee of what the ARRA is expected to do for GDP growth over the next ten years. Ostensibly, the finance committee uses the CBO's analysis to inform themselves about the policy decisions before them.

So, using the CBO's estimate to the Finance Committee, I did a calculation of what each scenario (high estimate, low estimate, and "do nothing") would cost, in terms of lost GDP, using $13 trillion as the starting GDP.

Here's the news: in the high estimate scenario, with the stimulus package helping the most to spare us from the worst of the recession, the USA loses $1.3 trillion in cumulative GDP in the years between 2009 and 2011. In the low estimate scenario, the USA loses $2.02 trillion, and in the "do nothing" scenario the USA loses $2.2 trillion.

But wait, the $787 billion stimulus costs money, doesn't it? If you factor in the stimulus package's price tag into each scenario, the story is a bit different.

In the low estimate scenario, the lost GDP plus the bill for the stimulus package amounts to $2.8 trillion. Remember the "do nothing" scenario's cost of $2.2 trillion? This means that in the low estimate scenario, the ARRA actually puts America $612 billion further back in 2011 than if we had done nothing!

In the high estimate scenario, which is the one where the most optimistic ROI multipliers are used to gauge the success of the stimulus, America is only $98 billion better off than if it had done nothing!

So this suggests that both sides of the argument are right, in a sense. Those who say the stimulus won't do much, and those who say it doesn't go far enough are right, as it buys us little relative value versus the "do nothing" scenario even in the CBO's best estimate.

In my opinion, the key is in the multipliers: the CBO doesn't believe that the stimulative effects of the ARRA are all that stimulating. If we were spending the stimulus dollars on activities that would generate better returns, those multipliers would be higher, and we would get "more bang for our (stimulus) buck", and the loss in GDP over the next few years would be smaller.

Male Mortality And Doing Something About It

I read a nice article on men's shorter lifespan, as compared to women's. It appears here.

In a nutshell, men are wired for competition, and women are wired for longevity. There are interesting points made about our behavioral differences and how they bring our average down: men are more likely to die driving drunk, women spend 50% more on healthcare, women are better consumers of healthcare information, and those are just a few examples.

The article also points to a new ad campaign promoting men paying more attention to preventative medicine, and health management in general. It's a lighthearted pitch called "Real Men Wear Gowns", and it can be found here (http://www.ahrq.gov/realmen/).

So if you're a man who's reading this, and living a shorter life than women do seems unfair to you, then do something about it! If nothing else, share the link with other men, that is, if you're man enough to.

A Flashback to the Future

Lately, when I read or listen to news sources, it's hard not to come across someone saying "Wall Street is dead as we know it", or words to that effect. A quick Google of the phrase "the end of wall street" yields over 48.5 million hits. Clearly, the concept is on a lot of people's minds.

I can't help but think back to last summer, when our collective attention was focused on one thing: gasoline prices. When a gallon of regular unleaded exceeded $4.00, there were many smart, well-paid, people predicting that $7.00/gallon gasoline was soon to be a reality, and a barrel of crude oil on the futures market would cost over $200.

Ostensibly wise, reasonable people made the assertion "the days of $2.00-a-gallon gasoline are over". It was so unthinkable that gasoline would be affordable again that this was a slam-dunk, no-brainer statement. You need only look at your local gas station to see proof of how something so clear and obvious at the time can quickly become irrelevant.

So I'm not sure why Wall Street was surprised when Geithner announced the details around the next phase of the TARP, and dumped mainly financial stocks to the tune of a 382-point drop today. Were they really expecting a man with less than a month on the job to definitively figure out the key to unlock the downward spiral in banking and the economy?

The triumph of hope over experience, indeed.

Few people truly understand how the world's financial markets work, and those who do understand its workings appreciate a small niche of it enough to make vast sums of money for themselves. And guess what? They're not telling anyone how it works, until maybe after the fact when they dish the tell-all story.

Why do I think this? Imagine if you could accurately predict where the traffic jams were going to be tomorrow morning before your morning commute (assuming, of course, you drive to work). If only you have this information, your prediction will most likely come true: you will be the only person on a back road and you'll breeze into work effortlessly.

However, imagine if many people had this information, not just you. Would that back road be empty? No. It would have many people on it as well; all the other people who had the same information as you, and who predicted that the back road would be clear.

That would invalidate the prediction, wouldn't it? So to stay accurate, your prediction would have to be able to adapt infinitely to take into account all the other predictions being made by your fellow commuters, who also have infinitely adapting predictive information. In the end, you'd be right back where you are now: unable to say with any certainty where the uncongested road would be.

And so it goes with trying to predict market behavior, and our immediate financial future: the more people who have a glimpse into the future, the more people will adapt to it, and therefore ruin the prediction.

Here's the lesson to take away from all this: the people who do get it are placing their bets now on what's going to happen, and they're not telling anyone about it. Anyone who publicly says they know what's next, doesn't know. Like the people who shorted real estate stocks just before the bubble burst, they will be happy to tell us about it after their party's over.

Row Faster!

The Bureau of Labor Statistics has released its revised Q3 2008 productivity report. According to the report, worker productivity increased during the third quarter. Sounds like a good thing, doesn’t it?

If you look a little more closely at the numbers, you’ll realize it’s not all it seems.

Productivity is a ratio consisting of output produced to hours worked. The way we want productivity to increase is to make more output and hold hours worked constant. That would be one way to improve the ratio.

The other way to improve this (or any) ratio is to decrease the denominator, which is exactly what’s happened in the latest productivity increase: the number of hours worked by the labor force declined in Q3. This decrease is due to activities like forced furloughs and shortening of the work week to avoid layoffs.

Once again, the American worker learns to do more with less. In this case, it’s with less time to do the same amount of work. So grab and oar and row faster!

See For Yourself Just What’s In The Senate's Stimulus Bill

If you were wondering what’s in the stimulus package that’s being put together by the U.S. Senate, I found a concise breakdown of the allocations from the Congressional Budget Office (CBO) here.

Unlike the full text of the bill, this is an easily skimmable 25 pages. If you’re wondering what’s in it, take a look.

When you’re looking at the dollar amounts that the different industries and interests are lined up to receive, something to keep in mind is that there’s no guarantee that all the money being requested in the bill will actually ever be spent. It’s like a giant line of credit.

Case in point: there are sometimes clauses in the specific grants mandating that States match some proportion of the federal funds they wish to receive. For example, in the Health Information Technology section of the Senate’s bill in section 3013, subsection (i) there’s a clause that says:

(i) Required Match-
(1) IN GENERAL- For a fiscal year (beginning with fiscal year 2011), the Secretary may not make a grant under subsection (a) to a State unless the State agrees to make available non-Federal contributions (which may include in-kind contributions) toward the costs of a grant awarded under subsection (a)(3) in an amount equal to—
(A) for fiscal year 2011, not less than $1 for each $10 of Federal funds provided under the grant;
(B) for fiscal year 2012, not less than $1 for each $7 of Federal funds provided under the grant; and
(C) for fiscal year 2013 and each subsequent fiscal year, not less than $1 for each $3 of Federal funds provided under the grant.

So, while the funds have been pledged, if a state cannot come up with their match, then the federal money will not be disbursed.

Gee, I wonder how a State could raise $20 million it didn’t have in its budget previously...

The Savings Ripple Effect

Many people have bemoaned the average American's low rate of savings. "We spend too much and save too little" to paraphrase the critics, and so news that Americans are spending less and saving more, likely because of job uncertainty, is sure to please some.

Here's an interesting potential ripple effect of that increased savings rate: the price of crude oil futures will continue to decline despite an increase in American consumption of refined petroleum products such as gasoline. Here's why...

American consumers were relied on for a long time to buy goods made in other countries, most notably China. As the WSJ reported yesterday, an estimated 20 million workers lost their jobs in China. With Chinese factories not producing as much, they are consuming fewer petroleum products (e.g., less fuel for factory machines, less oil for plastics) and so global demand will decline. When demand declines, so do prices.

So maybe there's unexpected good news to be had when Americans save more?

A Glimpse of More Economic Pain to Come

I was looking at some just-released (2/2/2009) leading economic indicators, and sure enough, construction spending is declining across most industries. This is not a surprise. Also not surprising is the slow but steady increase in spending in certain segments: healthcare, public safety, and sewage and waste disposal.

The result that suggests that there's more pain to come was this: manufacturing construction was consistantly increasing over the last four months of 2008. Since manufacturing construction projects tend to be highly capital-intensive, are sometimes scheduled years in advance, and are often more than a year in their completion, this means we're still expanding our structural capacity to produce products in a time of recession and declining consumer and corporate spending. This is not a good thing.

Couple this with the recent news of increasing inventories, and we may be due for even more layoffs and more contractions in corporate spending in the near future, as the supply of products and the infrastructure to make them continues to diverge from the demand for those products and the demand for manufacturing capacity.