Econ Weekly (July 5, 2021)

Inside this Issue:

  • The Latest on Labor: Lots of New Jobs in June
  • Ford Gored: June Sales Plummet as Chip Crunch Grips
  • Health Care History: How Did It Get So Messed Up?
  • Dining In, Dining Out: General Mills Mulls America’s Meals 
  • The Dollar Store Story: The Triumphs of Small Box Retail
  • Amazon’s Impact on Prices: Deflationary or Inflationary?
  • Wholesale Fairy Tale: Record Sales for Distribution’s Whales
  • Oh Gee, 6G: Looking to the Next, Next Thing in Telecom
  • Uncle Sam’s Helping Hand: How U.S. Stimulus Stims Global Growth
  • And This Week’s Featured Place: Madison, Wisconsin, More than Just Campus and Capitol   

Quote of the Week

“In recent months, public interest in a ‘digital dollar’ has reached fever pitch… But before we get carried away with the novelty, I think we need to subject the promises of a CBDC [central bank digital currency] to a careful critical analysis.”

-Fed Vice Chair for Supervision Randal Quarles, speaking at the Utah Bankers Association Convention

Market QuickLook

The Latest

The June figures are in. And they deserve some celebratory Independence Day fireworks.

The U.S. economy last month produced a hearty 850,000 new jobs, up from 583,000 in May and 269,000 in April. It’s a good sign for the convalescing labor market. And it heightens the likelihood of the Federal Reserve tapering its stimulus measures sooner than later.

Or maybe not. The June jobs report, viewed in detail, portrays a labor market still far from fully mended. Some 9.5m Americans remain unemployed, up from 5.7m just prior to the Covid crisis. Another 6.4m want a job but aren’t for the moment looking for one (in some cases for childcare reasons or health fears). The unemployment rate remains at 5.9%, compared to 3.5% pre-crisis. For Black males (excluding teenagers) the rate is close to 10%. What’s more, the percentage of the U.S. population in the labor force remains stuck at historically low levels—just 62% in June.

Write it down in your calendar: The Fed’s next FOMC policy meeting will take place July 27th and 28th.  What will it do? That depends in part on whether inflation—much higher this spring than most economists expected—continues to run hot. The Labor Department will publish June’s consumer price index (CPI) on July 13. But the Fed’s preferred inflation index—personal consumption expenditure (PCE)—won’t come out until after the next FOMC meeting (its scheduled release is July 30).

A strengthening if still-suboptimal labor market is one defining characteristic of the U.S. economy as it begins the second half of 2021. Another is the unequivocally robust demand reported across industries. Ever clearer signs of cooling off are now evident in red-hot sectors like housing and autos. But broadly speaking, there’s ongoing demand bullishness, as highlighted in the latest ISM manufacturer survey. Respondents, however, also described a corollary characteristic of the economy right now, one affecting the supply side. They report trouble filling open positions, worker absenteeism, shortages of raw materials, difficulties transporting products and rising commodity prices. So: Demand extremely strong. Supplies extremely tight. Frustrating, but better than the opposite.

The first half of 2021 will be most remembered for the epic vaccination drive that effectively ended the pandemic for most Americans. By the end of the second quarter, life was back to normal in many respects—restaurants open, planes full of tourists, packed baseball stadiums booing the Yankees.

Some other first-half highlights: Remember the wild meme stock phenomenon (GameStop, AMC, etc.)? Overall, the S&P 500 stock index rose 34% in the half, with the tech-heavy Nasdaq up 52%. That was representative of a wider outbreak of rising asset prices—homes, commodities, SPACs, etc.—that left some fearing a bubble. A bubble bust did occur in the wild west cryptomarket, whose future is nevertheless a target of ongoing investment.

Borrowing costs remained cheap after a brief Q1 jump in Treasury yields petered out. After another big round of fiscal stimulus in Q1, President Biden’s efforts to pass infrastructure and social aid legislation remain unfulfilled. At the state and local government level, budgets that looked crisis-like early in the pandemic now appear flusher than ever. Corporate America—including its financial firms—had a great first half, with more details on Q2 coming soon. American households, buoyed by the fiscal stimulus and rising asset prices, are in good shape too.

Nature wouldn’t stay out of the headlines. Unusual cold in Texas. Unusual heat in the Pacific Northwest. These and other weather events punctuated concerns about climate change, accelerating an end to the age of hydrocarbons. With companies like ExxonMobil watching nervously in Texas, auto companies in Detroit are betting the farm on electric vehicles.

Speaking of the farm, more federal dollars, higher prices and a boost in food consumption made it a good first half for the agriculture sector. That said, a severe western drought is threatening the livelihoods of some farmers. Nature wasn’t responsible for all disruptions though. An already strained supply chain was at one point gummed up further by a mega-ship stuck in the Suez Canal. A semiconductor shortage became a major national security issue. Cyberattacks were an even bigger national security issue.

What else stands out about the first half of 2021? A housing shortage. Big railroad and media mergers. Corporate titans and private equity flooding money into health care. China tensions flared. Will Apple build a car? Everyone’s hoping to unlock productivity gains with artificial intelligence. Washington wants to check Big Tech. Logistics and e-commerce are more vital than ever. Exports are down but imports are way up. The other health crisis—the opioid crisis—worsened during the pandemic. Structural deficiencies in the systemically important short-term money market remain unaddressed. The care economy and the creator economy received lots of attention. Global tax reform is high on the political agenda. And stepping back for a look at what the American economy needs most… It’s arguably the need to reverse a decades-long upward cost trajectory of the Three Hs: housing, health care and higher education.

In more immediate matters, oil prices rose again last week, chipping away at those solid household finances. There’s a changing of the guard at Amazon. Krispy Kreme and Robinhood were in the news for their IPOs. United ordered lots of new planes from both Boeing and Airbus. Facebook got a favorable ruling on an antitrust matter. And Walgreens spoke of building new health care solutions for customers “overwhelmed trying to manage different health conditions, providers, appointments, bills and medication, all of which are on different platforms and channels.” That sums things up quite nicely.


  • General Mills: Based in Minneapolis, a big center for agribusiness, General Mills both manufactures and markets branded food products everyone knows, including breakfast cereals like Cheerios and Wheaties. Ice cream is a big category too; surely, you’ve heard of Häagen-Dazs. It also sells granola bars and pet food, among other items. Consistent with broader macroeconomic developments, General Mills is seeing both strong demand and rising costs, pushing it to raise prices. The price hikes, in turn, make demand conditions for the rest of this year hard to forecast—will people respond by buying a lot less? Executives do seem convinced that consumption patterns were irrevocably changed by the pandemic, not least the tendency for people to shop online—e-commerce now accounts for 11% of the company’s sales, up from 5% pre-pandemic. Execs also say many younger people learned to cook while stuck at home, which points to sustained strength in at-home consumption. But there is, to be clear, some degree of shift now taking place between at-home dining and dining out. Back on the topic of rising costs, General Mills is a big buyer of agricultural commodities like grains (wheat, oats and corn), dairy products, sugar, fruits, vegetable oils, meats, nuts and vegetables. It spends a lot on carton board, plastic and metal for packaging as well. General Mills doesn’t earn its living selling directly to consumers. Instead, its customers are mostly grocery stores and other food retailers. And one stands out: Walmart, America’s largest company, generates a fifth of all worldwide revenue for General Mills.
  • Ford: Of the U.S. automakers, Ford is feeling the most pain from the semicon shortage. In June, it sold 116,000 vehicles, down 27% y/y. Sales for the entire second quarter did still rise, by 10% y/y. But rival General Motors, by contrast, saw Q1 sales jump 40%. Supply chain headaches notwithstanding, these are good times for automakers, with demand exceptionally strong and prices up thanks to the short supply. Ford’s ugly June numbers, though, show summer revenues could take a big hit.

Tweet of the Week


  • Wholesalers: A virtual presentation hosted by Colorado-based MDM (Modern Distribution Management) talked about trends in the often-overlooked wholesale trade, which supplies and distributes bulk goods and services to retailers, manufacturers and other actors besides the end user. Sales for these companies, MDM’s Tom Gale explained, are at record levels as the economy snaps back after Covid. In the same online event, the University of Colorado’s Brian Lewandowski noted that wholesaler inventories declined less during the Covid crisis than they did during the Great Recession of 2008/09. The pandemic’s big change for the wholesale industry, meanwhile, has been the sharp acceleration of e-commerce. The wholesale trade is divided into 19 key sectors, the largest being pharmaceutical distribution, led by McKesson and AmerisourceBergen. Next in size is the grocery/foodservice trade, followed by the electrical/electronics category, followed in turn by oil and gas. Other big areas include motor vehicle parts suppliers, computer equipment and software, agricultural products, alcohol, chemicals, clothing, furniture and all the stuff that goes into construction (plumbing, wiring, hardware, etc.).
  • Dollar Stores: The Hustle’s Zachary Crockett looks at the economics of America’s two major dollar store retailers, namely Dollar General, (based near Nashville) and Dollar Tree (in the Hampton Roads area of Virginia. They’re seemingly everywhere—about 34,000 stores nationwide, which is more than the locations of CVS (10k), Walgreens (9k), Walmart (4.7k) and Target (1.9k)… combined! “On average,” Crockett writes, “a new one pops up every six hours.” The Big Two (including Family Dollar which is owned by Dollar tree) account for 70% of what’s become a $94b market. In 2020, Dollar General for its part saw revenues surge 20%, thereby surpassing Coca-Cola on the Fortune 100 list (as NPR’s Planet Money recently discussed, Dollar Tree didn’t fare as well during the pandemic because unlike its rival, it didn’t bet big on groceries). In any case, these stores in general are highly profitable, with gross margins of about 30% according to The Hustle (compared to 24% for Walmart). The models can vary some—Dollar Tree for example keeps all items priced at $1 while Dollar General charges more for some items. But both keep costs low by selling stuff other retailers don’t want—surplus items, discontinued products and so on. And they buy stuff in large quantities to secure rock bottom prices. So the toothbrush they sell for a dollar might cost them just 24 cents. They separately partner with big brands to create smaller packages of an item, which often winds up being more expensive for consumers on a unit One consequence is that the lower-income shoppers who frequent dollar stores wind up paying more per unit for their goods because they can’t afford to buy in larger quantities. Think of a $1 tube of toothpaste with 75% less quantity than the $2 tube sold elsewhere. That’s 50% cheaper but 75% less. Sure enough, most dollar stores are in low-income areas, often with few other nearby groceries. As the Wall Street Journal notes, they also tend to rent rather than own their stores. And the stores are small, implying fewer workers and lower startup costs. One thing the dollar stores are surely watching: Inflation, of course. Will a dollar have the same value tomorrow as it does today?


  • Labor: As Friday’s jobs report showed, the labor market is still much smaller relative to its pre-crisis size. But it’s clearly getting stronger. For that thank the continuing rebound in leisure and hospitality hiring. The sector—generally big but low-paying (see chart)—alone accounted for a full 40% of those 850,000 newly created jobs last month, with restaurants and bars leading the way. That said, the sector’s unemployment rate remains high at 11%. Sectors with the lowest unemployment rates, by contrast, are finance, education and health, government and manufacturing. Some other highlights of the June jobs report: One is that longterm unemployment (those looking for a job for 27 weeks or more) accounts for more than 40% of the total unemployed. The percentage of teleworkers in the labor force declined from 17% in May to 14% in June—it’s a sign that workers are returning to offices. Among those not in the labor force last month, 1.6m were prevented from looking for work due to the pandemic (the number was 2.5m in May).
  • Labor: Here’s still more from the labor report: The private sector generated roughly 80% of the 850,000 new jobs created in June—the rest by the government sector. Carmakers cut jobs as factories temporarily closed due to semicon shortages. After leisure and hospitality, the retail sector produced the most new jobs, led by clothing stores. There was a drop in couriers and messengers, probably due people returning to in-store shopping. Temporary employment agencies hired a lot of new workers. The reopening of schools and childcare centers led to significant job gains too. The job market should get a further boost in September when schools fully reopen after the summer break. It’s also when federal bonus unemployment benefits expire nationwide.
  • Treasuries: Who owns U.S. Treasuries? According to SIFMA, foreign countries owned 29% of the $21.4 trillion outstanding in Q1. Among those foreign owners, Japan holds about 18% and China roughly 16% (note that foreign central banks keep Treasuries in reserve to ensure a ready supply of U.S. money, i.e., dollars, which their companies and banks need to conduct international business). The U.K. is next at 6%, followed by Ireland with 4%. Next to foreigners, the largest holder of outstanding Treasuries is the Federal Reserve itself, which has been buying a lot to pump liquidity into the financial system—the Fed owns 22% of the total. Mutual funds, pension plans, individual investors, banks and insurance companies are also big holders. That $21.4 trillion total, by the way, doesn’t include inter-governmental debt, such as Treasuries held by Social Security and Medicare (that’s just Uncle Sam owing money to itself). Also note that Treasury debt comes in different maturities: 54% are Treasury notes, which are paid back over two-to-ten years. Treasury bills, which run for less than a year, account for 22% outstanding. Another 14% are Treasury bonds that run for 30 years. There’s also a separate category of Treasuries called TIPS, which protect against inflation.
  • Carbon: New York University’s Gernot Wagner, speaking about the cost of climate change on Wilmington Trust’s Capital Considerations podcast, says countries should have a goal of pricing carbon. He acknowledges though, that it’s not easy to quantify the costs of each marginal ton of carbon dioxide emitted. The costs are hard to measure, indeed, but increasingly visible. Wagner notes how awareness of the climate change problem increased after Superstorm Sandy in 2012, which led to a temporary shutdown of Wall Street—if that didn’t wake up the powers that be, perhaps nothing would. This year’s disruptive freeze in Texas was another revelatory event—the power grid couldn’t handle it. He also mentions how polar ice caps are warming at three times the global average, which puts coastal cities at risk. There are, of course, costs associated with mitigation efforts, i.e., transitioning to new fuels, which can be an opportunity for some but a cost for those with legacy energy assets. The world, meanwhile, depends on different countries to pursue different mitigation priorities. In Brazil, for example, the most important thing is protecting the Amazon rain forest. In the U.K., it’s phasing out coal-fired power plants. Helpfully, the global imperative to reduce carbon emissions is benefitting from the massive renewable fuel subsidies offered by Germany and China. They’ve helped bring costs for solar power in particular, way down.
  • Childcare: In a follow-up to an item in last week’s Econ Weekly, here’s another perspective about the childcare policy dilemma. It’s also from the Boston Fed in its Six Hundred Atlantic podcast, this time highlighting a federally-funded childcare program that already exists: Military Child Care, or MCC, which likes to say “we care for your children while you protect America.” It’s generally regarded as high quality, affordable and flexible, for eligible U.S. personnel stationed at military bases across the globe (the Department of Defense oversees more than 800 centers, some open around the clock). They’re not immune from problems, the podcast cautions, including long-waits to enroll. But some see it as a template for a national childcare program that would cover more Americans.

The Inflation Debate

  • Jason Furman, once a top White economic advisor, joined David Beckworth’s Macro Musings podcast to offer his assessment of inflation risk. The two big concerns, he says, are 1) that prices rise faster than wages, leading to loss of real income for Americans and 2) that higher prices cause a recession, either by forcing the Fed to raise interest rates or by depressing demand (like how people are already starting to slow their purchases for cars and houses as prices soar). Not that Furman thinks these outcomes are likely. But they’re probable enough to take seriously. He emphasized the importance of keeping inflation expectations anchored, which he suspects played an important role in allowing strong labor markets and low inflation to coexist just prior to the pandemic—usually strong labor markets lead to higher inflation (or so the Phillips Curve model suggests). There was a similar strong labor-low inflation situation in the 1990s, also likely aided by anchored inflation expectations, according to Furman. Companies and workers expected prices to stay stable, so they acted like it—no scramble to raise prices or demand higher wages. But are expectations changing now? Well, there’s not much sign of any such phenomenon yet— financial markets seem to be betting a lot of money that expectations will stay anchored (have you seen the bond market?). But markets and economic forecasters alike can be wrong—it’s important to recognize the high level of uncertainty right now, Furman says. He also notes how financial markets (specifically the Treasury market) is currently influenced by some technical forces like the Treasury Department running off its cash holdings, the Fed’s ongoing Treasury purchases and the trend of pension funds putting more money into Treasuries. And remember: From December to March, the bond market was signaling inflation (while the real economy didn’t show much). Only in Q2 did that reverse: Bond yields fell, and the real economy started producing surprisingly high CPI and PCE readings. Amid the uncertainty, Furman advises to be cautious about adding to much fiscal fuel to the fire all at once. Throw one log onto the fire at a time, he insists, to see how inflation reacts. It’s quite likely, he says, that the current high readings are indeed transitory, as the Fed insists. Supply should catch up to demand. Washington is done handing out checks. And don’t forget structural forces like an aging population, low-cost labor pools in emerging markets, the demand for safe assets, new technologies and so on. The counter-argument? That supply won’t catch up as quickly as some think, that wages won’t come down so quickly and that expectations won’t stay anchored. In addition, prices for what Econ Weekly calls the “Three H’s”—housing, health care and higher education—will continue their upward longterm trajectory.
  • Just a few more points from Furman’s discussion with Beckworth: Does he think there’s a silver lining to the fact companies can’t find workers? Aren’t they now stepping up investments as a result, which should in theory trigger a “reverse hysteresis” that improves the long-run productivity of the economy? Perhaps, but Furman puts equal weight on the possibility of hysteresis itself, given the incredibly high levels of unemployment last year hindering people’s future careers and eroding their skill sets. This would seem to herald lower long-run productivity. Separately, Furman spoke about the influential paper he wrote with Larry Summers earlier this year, entitled “Reconsideration of fiscal policy in an era of low interest rates.” A key point is that debt to GDP ratios are misleading because they don’t take interest rates into account. With rates currently so low, the U.S. can afford to borrow more. Furman and Summers look at the present value of America’s future GDP over an infinite period, borrowing an estimate from the Social Security trustees. The amount is $3.8 quadrillion, which makes a $21.2 trillion debt burden sound, well, less burdensome.
  • NYU’s Scott Galloway, on his Prof G podcast, rejects the view that Amazon is a deflationary force. The theory goes like this: Amazon so relentlessly drives down costs, which leads to lower prices for consumers. Nah-ah, Galloway says. “If you [a third-party retailer] want to be anywhere on e-commerce you have to be on Amazon. And if you want to be successful on Amazon, you have to be part of their search algorithm. And you optimize for their search algorithm by basically spending a ton of money on Amazon through their media group, using their fulfillment…” He goes on to argue that all this spending drives up costs, forcing retailers to raise the price they need to charge on Amazon. And then to stay relevant in its search engine (now the world’s second largest after Google) you have to agree to never sell your products cheaper anyplace else. “I think we’re going to find that Amazon is not as deflationary as everybody thinks.” As a corollary to this opinion, the Wall Street Journal made news with a report last week about Amazon’s practice of taking ownership rights in companies that sell on its platforms.


  • Small Business Administration (SBA): The Government Accountability Office (GAO) says the SBA expects to spend $54b this year excluding Covid-related programs. Most of its budget goes to helping small businesses affected by disasters. But it also provides help in accessing capital, obtaining access to federal contracts and promoting minority- and women-owned businesses. It offers entrepreneurs management and technical assistance as well, along with training in how to launch and expand companies. The SBA has its roots in the 1930s New Deal but wasn’t formally established until 1953. At the time, it assumed some responsibilities of the Reconstruction Finance Corporation (RFC), created in 1932 to provide funding for businesses of all sizes during the Depression; it later financed war production. The Covid crisis and its impact on small businesses has kept the SBA extremely busy of late. And keep in mind that new business formation is currently at historically high levels. In case you’re wondering: How does the federal government define a small business? For one, it’s organized to generate a profit. It’s independently owned and operated. It’s not dominant in its field nationally. And it does not exceed certain size thresholds periodically updated by the SBA.
  • Debt: An update on what Washington owes: As of April, gross federal debt was $28.2 trillion, according to the latest Treasury Department figures. That includes some debt held by the federal government itself, i.e., the Social Security and Medicare trust funds. Just the debt held by the public (which also includes Federal Reserve holdings) amounts to $22.1 trillion. The figure was $16.8 trillion in late 2019.



  • Madison, Wisconsin: What do you call a Wisconsin city that’s growing ten times the pace of its state’s largest city? You call it Madison, whose metro area population grew 10% in the 2010s, far outpacing Milwaukee’s 1%. If Milwaukee symbolizes a struggling midwestern rust belt economy, then Madison reflects the exact opposite: A fast-growing knowledge-based economy that looks more like Austin, the poster child for every ambitious city’s aspirations. It’s smaller, for sure. A lot smaller, with fewer than 700,000 people in the metro area. But like Austin, Madison has two stable bedrocks of economic might: 1) it’s the seat of its state government and 2) it’s home to a giant public university. In 2018, the state of Wisconsin employed more than 36,000 people in Madison, making it by far the area’s largest employer. Number two, sure enough, is the University of Wisconsin (UW), with close to 15,000 employees, according to the Department of Housing and Urban Development (HUD). That doesn’t even include the university’s hospital (another 7,000-plus jobs). Government-sector jobs overall account for more than 21% of all Madison-area jobs. And the university, including its hospital and its affiliated startup firms, claims its statewide economic impact amounts to some $15b. UW, meanwhile spent more than $1.1b on research and development in 2016, according to the National Science Foundation. With so much R&D and so many college-educated residents, it’s no wonder that Madison, part of Dane County, has lots of tech startups relative to its smallish size. Median household income for Dane County? $74,000, compared to a national average of $63,000. The percentage of county residents with a college degree? 51%, compared to 32% nationally. Madison’s success is sometimes overlooked amid the broader Wisconsin narrative—that it’s a state known for family-owned farms producing dairy products like cheese. There’s Milwaukee, of course, which only ranks number 40 among America’s largest metros. As recently as 2005, the HUD noted in a recent report, manufacturing was still the largest employment sector in Milwaukee. But long gone are the days when German immigrants brewing beer and toiling in factories was a hallmark of economic dynamism. Livestock was always big business in Wisconsin. And packing the meat too—there’s a reason they’re called the Green Bay Packers. But none of this is representative of Madison. There, the median age is just 31. A tenth of residents commute using public transit. Inbound tourism makes a meaningful economic contribution. And during the pandemic, as tech talent fled big cities like San Francisco and New York, Madison proved an attractive lure. A LinkedIn study, furthermore, ranked it number one for cities that retained its tech talent during the Covid crisis. Its largest private employer, in fact, is a health care software company called Epic Systems. Being small has its advantages, including a lower cost of living. But it has its disadvantages too. Madison is a two-plus hour drive from Milwaukee, the nearest big city and airport. The nearest hub airport is almost three hours away in Chicago. Minneapolis is more than four hours by car. It’s one reason why large companies won’t put their headquarters in Madison. But no worries. Not when you have a giant university, and not when your city is the state capital.


  • Global Growth:S. dollars are driving economic recoveries around the world, the Wall Street Journal writes. In fact, this could be the first time in 15 years that the U.S. contributes more to global GDP growth than China. The reason? Washington’s big fiscal stimulus, which was larger than seen in other countries. It basically handed money to American consumers who are using some of it to buy foreign goods. There’s also a second-order effect, with German industrial machine makers, for example, getting more business from Chinese factories as the latter step-up production to meet U.S. demand. Commodity firms and agribusinesses in places like Brazil, likewise, are getting a boost with rising exports to America. In the meantime, U.S. outbound tourism is just starting to reawaken. Remittance payments from U.S.-based workers to their home countries is another channel through which the U.S. recovery is fueling recoveries elsewhere. Then there’s the U.S. dollar, whose value affects all major economies. If the dollar strengthens, which might happen if U.S. interest rates rise, emerging markets in particular will face the difficult situation of having to pay for dollar-based items, including oil and food, with their own weaker currencies. Or to quote The Economist: “Central bankers in the developing world worry that a more hawkish Fed will cause their currencies to weaken, exacerbating their inflation problems.” Foreign central banks, in turn, might have to increase rates themselves, which some are already doing.
  • Tourism: The United Nations Conference on Trade and Development (UNCTAD) said lost tourism due to the pandemic might slice more than $4 trillion from global GDP this year and last year. The loss in 2020 alone was an estimated $2.4 trillion. Tourism is arguably the world’s largest industry, and a labor intensive one that employs huge numbers of people, including younger and lower-skilled people in developing nations. But developed nations depend on tourism too. According to UNCTAD, developed nations will account for almost half the total GDP loss.

Looking back

  • Health Care: If you’re looking to feel better about America’s $4 trillion dollar health care sector, do not read Elizabeth Rosenthal’s 2017 book “An American Sickness.” It’s a damning indictment of so much that’s gone wrong in the industry, resulting in a system that’s expensive, inefficient, unfair and riddled with misaligned incentives. Early in the book, Rosenthal recounts the history of how we got where we are, starting with the days—a century ago—when medical care was basic, cheap and not terribly effective. The institutional care that existed typically came in the form of hospitals run by religious charities. But they were mostly places where people went to die, not heal. As care improved, early insurance plans offered workers lost income when they became ill. A predecessor to Baylor University’s medical center in Dallas offered the first modern health insurance plan in the 1920s. It offered a local teachers’ union a deal: For $6 a year, members would be entitled to a 21-day hospital stay, all expenses covered except for a deductible. The concept—given the name Blue Cross plans—quickly spread across the country. Profit wasn’t the hospital’s motive; it was just looking for revenue to stay open amid a rise in unpaid bills. Still, the percentage of Americans with health insurance remained small before World War II. Then came the invention and adoption of life-saving technologies like breathing ventilators and anesthesia, which added costs. During and following the war, the inflation-fearing U.S. government froze salaries, so companies lured workers by offering health insurance. Even better for the companies, they money they spent on insurance would be tax free. This was the origin of the employer-centric coverage that still exists today. Between 1940 and 1955, Rosenthal writes, the number of Americans with health insurance jumped from 10% to 60%. The major insurers were still associated with Blue Cross (for hospital care) and Blue Shield (for doctor visits). The non-profit Blue Cross-Blue Shield model offered everyone the same rate, or premium, regardless of age or health conditions. Everyone was eligible. But they would soon be joined by for-profit insurers, along with Medicare and Medicaid, both government insurance programs. The for-profit players (Cigna and Aetna were two early ones) accepted only healthier customers and charged different rates to different people getting different benefits. By the 1990s, the Blue Cross-Blue Shield insurers were left covering the sickest Americans, which was unsustainable. So they adopted a for-profit model themselves. Among them was Blue Cross-Blue Shield of California, which bought out many of its peers and became the giant insurer Wellpoint, which is now called Anthem.
  • Health Care: “An American Sickness” goes on to outline the origins of other aspects of the medical system, including hospitals which account for the largest part of spending. Many operate as non-profits, which sounds noble. But without shareholders to worry about, Rosenthal writes, they’ve come to spend a large share of their surplus revenues on executive compensation, fancy lobbies, pricey consultants and other things unrelated to care. With few market forces to curb their behavior, hospitals look to raise prices any way they can, with insurers including Medicare footing much of the bill. Companies and insurers tried pushing back in the 1990s, moving people into health maintenance organizations (HMOs) designed to control costs. But many Americans didn’t like them. Soon, a system of medical coding came to dominate the murky medical billing process, referring to codes given to specific procedures or tests, each with a predetermined reimbursement rate from the insurer. Hospitals and doctors began practicing “strategic billing,” incentivized to test and probe and scan more than necessary to run up charges. Doctor salaries, Rosenthal adds, are not tied to a level of training but to how good they are at “the business of medicine.” Testing and ancillary services became to hospitals and clinics “what booze is to restaurants: High profit margin items that can be billed for nearly any amount.” Their “rule number one: more treatment is always better.” The indictment doesn’t stop there, highlighting problems like the medical school debt that leads too many doctors to become specialists rather than primary care providers. There’s the advent of ambulatory service centers, which are like mini-hospitals often owned by doctors themselves. The shortcomings of the pharmaceutical sector is a whole separate section of the book. Medical device makers play an important and sometimes troubling role in health care costs too, the book alleges. Bottom line: There are lots of entrenched interests with incentives that don’t align with the goal of offering the best and most cost-efficient care to patients.

Looking ahead

  • Telecom: You know about 5G telecom. But Qualcomm’s principal engineer Rajat Prakash is already talking about 6G. That was a topic of an interview he gave to the Motely Fool’s Industry Focus podcast. What is 6G? Prakash said a main theme is the idea of convergence between people’s physical and digital worlds. A 6G service would be more aware of a user’s surroundings, providing utility beyond mere communication. The technology is still in its early research phase, with participation from many governments and universities. 6G would of course be faster. And it could help support the virtual and augmented reality revolution that companies like Facebook hope to foster.
  • Cryptoeconomy: Alex Tabarrok of George Mason University remains broadly bullish on crypto. Speaking on Princeton University’s Policy Punchline podcast, he acknowledged that it’s impossible at this juncture to know which crypto projects and applications will ultimately succeed. But there’s great potential in the underlying blockchain technology, and not just to disrupt industries. It provides a whole new way to foster collaboration between people that don’t have to trust each other or even know each other. That’s already produced decentralized autonomous organizations, or DAOs, which Tabarrok says might one day prove as important as the advent of the limited liability company in the 1600s. DAOs aren’t companies in which workers, organized in hierarchies, receive salaries and wages. Instead, contributors to a blockchain-based software project typically receive tokens (which some compare to equity) that grant voting rights on how to spend funds and other decisions. Pretty much everything governing the project and its workers is encoded in a computer program. Tabarrok goes on to highlight the changing nature of the world’s social and political organization. Already, people online aren’t organized geographically (i.e., this group of people in this location is a country, and people in another location form a different country). On the contrary, online communities are organized by interests (i.e., academics discussing a topic without regard to where they live). Think about a country’s minimum wage law, he says. How much relevance does it have in a case where someone in the U.S. is outsourcing work to someone in Indonesia? Crypto will only accelerate this labor decentralization and might require a rethinking of legal frameworks; perhaps even the way we organize politically too. On a more mundane level, crypto is already offering promising applications like stablecoins and the ability to cheaply transfer money across borders. It’s also, Tabarrok notes, a general-purpose technology like electricity or the internet itself. And GPTs have the potential to bring big changes to economies and societies.


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