Is College a Lousy Investment?

by Megan McArdle Sep 9, 2012 1:00 AM EDT
http://www.thedailybeast.com/newsweek/2012/09/09/megan-mcardle-on-the-coming-burst-of-the-college-bubble.html
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Mythomania about college has turned getting a degree into an American neurosis. It's sending parents to the poorhouse and saddling students with a backpack full of debt that doesn't even guarantee a good job in the end. With college debt making national headlines, Megan McArdle asks, is college a bum deal?

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Why are we spending so much money on college?

And why are we so unhappy about it? We all seem to agree that a college education is wonderful, and yet strangely we worry when we see families investing so much in this supposedly essential good. Maybe it’s time to ask a question that seems almost sacrilegious: is all this investment in college education really worth it?

The answer, I fear, is that it’s not. For an increasing number of kids, the extra time and money spent pursuing a college diploma will leave them worse off than they were before they set foot on campus.

Is college a bum deal? Megan McArdle, author of this week’s ‘Newsweek’ cover story, talks about the diminishing value—for some— of a college degree.

For my entire adult life, an education has been the most important thing for middle-class households. My parents spent more educating my sister and me than they spent on their house, and they’ re not the only ones ... and, of course, for an increasing number of families, most of the cost of their house is actually the cost of living in a good school district. Questioning the value of a college education seems a bit like questioning the value of happiness, or fun.

Donald Marron, a private-equity investor whose portfolio companies have included a student-loan firm and an educational-technology startup, says, “If you’re in a position to be able to pay for education, it’s a bargain.” Those who can afford a degree from an elite institution are still in an enviable position. “You’ve got that with you for your whole life,” Marron pointed out. “It’s a real imprimatur that’s with you, as well as access to all these relationships.”

That’s true. I have certainly benefited greatly from the education my parents sacrificed to give me. On the other hand, that kind of education has gotten a whole lot more expensive since I was in school, and jobs seem to be getting scarcer, not more plentiful. These days an increasing number of commentators are nervously noting the uncomfortable similarities to the housing bubble, which started with parents telling their children that “renting is throwing your money away,” and ended in mass foreclosures.

An education can’t be repossessed, of course, but neither can the debt that financed it be shed, not even, in most cases, in bankruptcy. And it’s hard to ignore the similarities: the rapid run-up in prices, at rates much higher than inflation; the increasingly frenetic recruitment of new buyers, borrowing increasingly hefty sums; the sense that you are somehow saving for the future while enjoying an enhanced lifestyle right now, and of course, the mountain of debt.

The price of a McDonald’s hamburger has risen from 85 cents in 1995 to about a dollar today. The average price of all goods and services has risen about 50 percent. But the price of a college education has nearly doubled in that time. Is the education that today’s students are getting twice as good? Are new workers twice as smart? Have they become somehow massively more expensive to educate?

Perhaps a bit. Richard Vedder, an Ohio University economics professor who heads the Center for College Affordability and Productivity, notes that while we may have replaced millions of filing clerks and payroll assistants with computers, it still takes one professor to teach a class. But he also notes that “we’ve been slow to adopt new technology because we don’t want to. We like getting up in front of 25 people. It’s more fun, but it’s also damnably expensive.”

Vedder adds, “I look at the data, and I see college costs rising faster than inflation up to the mid-1980s by 1 percent a year. Now I see them rising 3 to 4 percent a year over inflation. What has happened? The federal government has started dropping money out of airplanes.” Aid has increased, subsidized loans have become available, and “the universities have gotten the money.” Economist Bryan Caplan, who is writing a book about education, agrees: “It’s a giant waste of resources that will continue as long as the subsidies continue.”

Promotional literature for colleges and student loans often speaks of debt as an “investment in yourself.” But an investment is supposed to generate income to pay off the loans. More than half of all recent graduates are unemployed or in jobs that do not require a degree, and the amount of student-loan debt carried by households has more than quintupled since 1999. These graduates were told that a diploma was all they needed to succeed, but it won’ t even get them out of the spare bedroom at Mom and Dad’s. For many, the most tangible result of their four years is the loan payments, which now average hundreds of dollars a month on loan balances in the tens of thousands.

A lot of ink has been spilled over the terrifying plight of students with $100,000 in loans and a job that will not cover their $900-a-month payment. Usually these stories treat this massive debt as an unfortunate side effect of spiraling college costs. But in another view, the spiraling college costs are themselves an unfortunate side effect of all that debt. When my parents went to college, it was an entirely reasonable proposition to “work your way through” a four-year, full-time college program, especially at a state school, where tuition was often purely nominal. By the time I matriculated, in 1990, that was already a stretch. But now it’s virtually impossible to conceive of high-school students making enough with summer jobs and part-time jobs during the school year to put themselves through a four-year school. Nor are their financially shaky parents necessarily in a position to pick up the tab, which is why somewhere between one half and two thirds of undergrads now come out of school with debt.

Photos: I’m Saddled With Debt

Peter Yang for Newsweek

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In a normal market, prices would be constrained by the disposable income available to pay them. But we’ve bypassed those constraints by making subsidized student loans widely available. No, not only making them available: telling college students that those loans are “good debt” that will enable them to make much more money later.

It’s true about the money—sort of. College graduates now make 80 percent more than people who have only a high-school diploma, and though there are no precise estimates, the wage premium for an elite school seems to be even higher. But that’s not true of every student. It’s very easy to spend four years majoring in English literature and beer pong and come out no more employable than you were before you went in. Conversely, chemical engineers straight out of school can easily make triple or quadruple the wages of an entry-level high-school graduate.

James Heckman, the Nobel Prize–winning economist, has examined how the returns on education break down for individuals with different backgrounds and levels of ability. “Even with these high prices, you’re still finding a high return for individuals who are bright and motivated,” he says. On the other hand, “if you’re not college ready, then the answer is no, it’ s not worth it.” Experts tend to agree that for the average student, college is still worth it today, but they also agree that the rapid increase in price is eating up more and more of the potential return. For borderline students, tuition hikes can push those returns into negative territory.

Effectively, we’ve treated the average wage premium as if it were a guarantee—and then we’ve encouraged college students to borrow against it. The result will be no surprise to anyone who has made the mistake of setting his or her teenager loose in a shopping mall with a credit card and no spending limit. Eighteen-year-olds demand amenities—high-speed Internet, well-upholstered classrooms, world-class fitness facilities—and in order to stay competitive, college administrators happily provide them. Then they raise the tuition for which the 18-year-olds are obediently borrowing the money.

“We have an academic arms race going on,” says Vedder. “ Salaries have done pretty well. Look at the president of Yale. Compare his salary now with his salary in 2000.” In 2000, Richard Levin earned $561,709. By 2009, it was $1.63 million. “A typical university today has as many administrators as faculty.”

Vedder also notes the decrease in teaching loads by tenured faculty, and the vast increase in nonacademic amenities like plush dorms and intercollegiate athletics. “Every campus has its climbing wall,” he notes drily. “You cannot have a campus without a climbing wall.”

Just as homeowners took out equity loans to buy themselves spa bathrooms and chef’s kitchens and told themselves that they were really building value with every borrowed dollar, today’s college students can buy themselves a four-year vacation in an increasingly well-upholstered resort, and everyone congratulates them for investing in themselves.

On the iPad

·         An interactive guide on how not to get screwed by college

Unsurprisingly those 18-year-olds often don’t look quite so hard at the education they’re getting. In Academically Adrift, their recent study of undergraduate learning, Richard Arum and Josipa Roksa find that at least a third of students gain no measurable skills during their four years in college. For the remainder who do, the gains are usually minimal. For many students, college is less about providing an education than a credential—a certificate testifying that they are smart enough to get into college, conformist enough to go, and compliant enough to stay there for four years.

When I was a senior, one of my professors asked wonderingly, “ Why is it that you guys spend so much time trying to get as little as possible for your money?” The answer, Caplan says, is that they’re mostly there for a credential, not learning. “Why does cheating work?” he points out. If you were really just in college to learn skills, it would be totally counterproductive. “If you don’ t learn the material, then you will have less human capital and the market will punish you—there’s no reason for us to do it.” But since they think the credential matters more than the education, they look for ways to get the credential as painlessly as possible.

There has, of course, always been a fair amount of credentialism in education. Ten years ago, when I entered business school at the University of Chicago, the career-services person who came to talk to our class said frankly,“We could put you on a cruise ship for the next two years and it wouldn’t matter.”

But how much, exactly, does credentialism matter? For years there’s been a fierce debate among economists over how much of the value of a degree is credentials and how much the education. Heckman thinks the credentialism argument—what economists call “signaling”—is “way overstated.” His work does show that a lot depends on outside factors like cognitive ability and early childhood health. But he says flatly that “no one thinks that schooling has no effect on ability.”

That debate matters a lot, because while the value of an education can be very high, the value of a credential is strictly limited. If students are gaining real, valuable skills in school, then putting more students into college will increase the productive capacity of firms and the economy—a net gain for everyone. Credentials, meanwhile, are a zero-sum game. They don’t create value; they just reallocate it, in the same way that rising home values serve to ration slots in good public schools. If employers have mostly been using college degrees to weed out the inept and the unmotivated, then getting more people into college simply means more competition for a limited number of well-paying jobs. And in the current environment, that means a lot of people borrowing money for jobs they won’t get.

But we keep buying because after two decades prudent Americans who want a little financial security don’t have much left. Lifetime employment, and the pensions that went with it, have now joined outhouses, hitching posts, and rotary-dial telephones as something that wide-eyed children may hear about from their grandparents but will never see for themselves. The fabulous stock-market returns that promised an alternative form of protection proved even less durable. At least we have the house, weary Americans told each other, and the luckier ones still do, as they are reminded every time their shaking hand writes out another check for a mortgage that’s worth more than the home that secures it. What’s left is ... investing in ourselves. Even if we’re not such a good bet.

Between 1992 and 2008, the number of bachelor’s degrees awarded rose almost 50 percent, from around 1.1 million to more than 1.6 million. According to Vedder, 60 percent of those additional students ended up in jobs that have not historically required a degree—waitress, electrician, secretary, mail carrier. That’s one reason the past few decades have witnessed such an explosion in graduate and professional degrees, as kids who previously would have stopped at college look for ways to stand out in the job market.

It is in that market that students may first, finally, have begun to revolt. For decades, when former English majors wondered how to get out of their dead-end jobs, the answer was “go to law school”—an effect that was particularly pronounced in economic downturns. In 2010 in the Los Angeles Times, Mark Greenbaum warned prospective lawyers that “the number of new positions is likely to be fewer than 30,000 per year. That is far fewer than what’s needed to accommodate the 45,000 juris doctors graduating from U.S. law schools each year.”

That was the year that LSAT taking peaked, with 170,000 prospective lawyers signing up for the test. But then students apparently started heeding Greenbaum’s warning. Two years later that figure dropped to just 130,000, lower than it had been in more than a decade. Law-school applications also dropped, from 88,000 to 67,000.

That’s a heartening sign for those of us who believe that we’ve been graduating too many unemployable lawyers. But as we saw with the housing and dotcom booms, what comes after a bubble is not usually a return to a nice, sustainable equilibrium; it’s chaos. Of course, the first thing to do when you’re in a hole is stop digging. But that still leaves you in a pretty big hole.

Everyone seems to agree that the government, and parents, should be rethinking how we invest in higher education—and that employers need to rethink the increasing use of college degrees as crude screening tools for jobs that don’t really require college skills. “Employers seeing a surplus of college graduates and looking to fill jobs are just tacking on that requirement,” says Vedder. “De facto, a college degree becomes a job requirement for becoming a bartender.”

We have started to see some change on the finance side. A law passed in 2007 allows many students to cap their loan payment at 10 percent of their income and forgives any balance after 25 years. But of course, that doesn’t control the cost of education; it just shifts it to taxpayers. It also encourages graduates to choose lower-paying careers, which diminishes the financial return to education still further. “You’re subsidizing people to become priests and poets and so forth,” says Heckman. “You may think that’s a good thing, or you may not.” Either way it will be expensive for the government.

What might be a lot cheaper is putting more kids to work: not necessarily as burger flippers but as part of an educational effort. Caplan notes that work also builds valuable skills—p robably more valuable for kids who don’t naturally love sitting in a classroom. Heckman agrees wholeheartedly: “People are different, and those abilities can be shaped. That’s what we’ve learned, and public policy should recognize that.”

Heckman would like to see more apprenticeship-style programs, where kids can learn in the workplace—learn not just specific job skills, but the kind of “soft skills,” like getting to work on time and getting along with a team, that are crucial for career success. “It’s about having mentors and having workplace-based education,” he says. “Time and again I’ve seen examples of this kind of program working.”

Ah, but how do we get there from here? With better public policy, hopefully, but also by making better individual decisions. “ Historically markets have been able to handle these things,” says Vedder, “and I think eventually markets will handle this one. If it doesn’t improve soon, people are going to wake up and ask, ‘Why am I going to college?’?”

September 15, 2012

Saving Seniors from ObamaCare

By John C. Goodman

9/15/2012

Two things about the Affordable Care Act (ObamaCare) are increasingly clear: (1) seniors have been singled out and forced to bear a disproportionate share of the cost of a new entitlement for young people and (2) the states are administratively just not ready to implement the new program in time for its January 1, 2014, start date.

So here's a simple proposal that will not affect the federal deficit: Delay the scheduled cuts in Medicare spending by five years and pay for that expense by delaying the 2014 start date of ObamaCare by two years.

That would give everyone time to find a better way to reform the health care system. It would also impact this fall's election. Every member of Congress would be asked to vote up or down on a single question: Who do you care more about: senior citizens or ObamaCare?

Over the next 10 years, ObamaCare will reduce Medicare spending by $716 billion. The Obama administration had hoped to achieve these spending reductions through increased efficiency, based on the results of pilot projects and demonstration programs. The problem: the Congressional Budget Office (CBO) has said in three consecutive reports that these projects are not working as planned and are unlikely to save money. As a fallback device, the health reform law set up a bureaucracy, the Independent Payment Advisory Board (IPAB), that will have the power to reduce doctor and hospital fees to such an extent that access to care for the elderly and disabled will be severely impaired.

In fact, the Medicare actuaries tell us that squeezing the providers in this way will put one-in-seven hospitals out of business in the next eight years, as Medicare fees fall below Medicaid's. Harvard health economist Joseph Newhouse predicts senior citizens may be forced to seek care at community health centers and in the emergency rooms of safety net hospitals, just as Medicaid recipients do today.

Consider people reaching age 65 this year. Under ObamaCare, the average amount spent on these enrollees over the remainder of their lives will fall by about $36,000 at today's prices. That sum of money is equivalent to about three years of benefits. For 55 year olds, the spending decrease is about $62,000 — or the equivalent of six years of benefits. For 45 year olds, the loss is more than $105,000, or nine years of benefits.

In terms of the sheer dollars involved, the planned reduction in future Medicare payments is the equivalent of raising the eligibility age for Medicare to age 68 for today's 65 year olds, to age 71 for 55 year olds and to age 74 for 45 year olds. But rather than keep the system as is and raise the age of eligibility, the reform law tries to achieve equivalent savings by paying less to providers. This will decrease access to care for seniors dramatically, and ultimately create a two-tiered health care system — with the elderly getting second class care.

A five-year delay in Medicare payment cuts can be paid for by pushing back the start date of ObamaCare from 2014 to 2016. The reason: Beginning in 2014, state health insurance exchanges are supposed to be up and running for individuals and families who lack access to employer-provided health coverage and do not qualify for Medicaid. But more than one-third of states (16) have done almost nothing to prepare for the exchanges. Another 20 states have made some progress but not enough. Further, health insurance exchanges will require significant investments in information technology that states simply cannot afford.

The delays contemplated here will give Congress time to replace ObamaCare's command-and-control approach to health care with reforms that will empower patients, free doctors and allow competition in the marketplace.

In the meantime, delaying the start of these two major provisions will protect seniors, save taxpayers money and allow lawmakers time to enact health reforms that actually work.

http://townhall.com/columnists/johncgoodman/2012/09/15/saving_seniors_from_obamacare

• wsj September 15, 2012, 5:00 AM

Number of the Week: Top 20% of Earners Take Home 51% of All Income

By Conor Dougherty

51.1%: The share of all income going to the top 20% of earners.

Last year, as the median U.S. household income declined, income inequality rose to its highest level in decades. The top 20% of households took in 51.1% of all income in 2011, up from 50.2% in 2010 and the highest share since at least 1967, according to the Census Bureau.

The growth at the top came at the expense of middle- and low-income earners. After the top, each quintile of income earners saw their share of income decrease, with the biggest drop among middle income earners. The middle fifth of households took in 14.3% of all income last year, the lowest since 1967 and down from 14.6% in 2010.

“Many middle class families have moved into the lower-income quintiles creating an income distribution that is less flat,” economists at IHS Global Insight wrote in a recent note to clients.

Global Insight, a Lexington, Mass. research firm, notes the aging of the population is also weighing on incomes. “As more and more of the population enters retirement, income shrinks and more households move into lower income categories,” the firm wrote. “The baby boomers, those born between 1946 and 1964, are now starting to move into retirement age. Since this is a relatively large group, there will continue to be a negative impact on median household income from this age cohort.”

Last year’s rising income inequality is a direct consequence of the recession and grudgingly slow recovery, but there is also a more pernicious set of long-term factors — such as a less-educated work force.

The short run problem is that the recession was brutal and the recovery sluggish, in particular for middle class professions like manufacturing and construction. Despite the improvement in manufacturing during the recovery — and the recent uptick in construction activity — those sectors still haven’t come close to recovering the losses they incurred during the recession. Meantime, workers in the highest-paying jobs haven’t come under the same type of pressure.

Also, no matter what sector they work in, when people who’ve lost jobs are re-hired in another industry it often takes a while for them to get back to their old salary.

“When they transition to some other sector they can’t draw on their 10 or 15 years of experience — they have to start over,” said Michael Greenstone, an economist professor at the Massachusetts Institute of Technology.

But while the recession was tough, the inequality problem is also a longer term issue that stems from a rapidly changing economy that is played on a global stage and puts more stock into education. Median earnings for full-time male workers, for instance, were $48,202 in 2011, less than in the 1970s on an inflation adjusted basis. That decline that has been particularly acute for men who didn’t go to college, Mr. Greenstone notes.

“Many Americans are competing with a hammer when they should be competing with a semiconductor,” he says.

• wsj September 14, 2012, 6:40 p.m. ET

Notable & Quotable

Economist Donald J. Boudreaux explains why the data necessary to rationally plan a market economy cannot be known to central government.

Donald J. Boudreaux writing in thefreemanonline.org, Sept 1:

A market economy is indescribably vast and complex—its success depends on so many intricate, changing details all somehow being made to work smoothly together that the "facts" that are essential to its thriving cannot be catalogued with anywhere near the completeness that can be achieved by a 21st-century scientist studying and cataloging the "facts" that enable sparrows to fly. A sparrow is complex compared, say, to a limestone rock. Compared to the modern market economy, however, a sparrow is extremely simple.

A surge in the supply of steel in Detroit for the month of October 2012—an uptick in consumer demand for a specific color of car and a downtick in demand for another color—the possibility of using a new financial instrument to spread investment risks more widely—unexpected difficulties in hiring workers who possess a certain set of skills—an innovation that lowers the costs of advertising—an electrical failure that threatens to shut down for several days a section of a factory—a trucking company that discovers it underestimated the fuel costs of delivering 1,000 new automobiles to dealerships throughout New England. . . . Dealing with details such as these—details that Hayek called "the particular circumstances of time and place"—is not incidental to the success of a modern economy; it is of the essence.

Awareness of these facts, and of knowledge of workable options of how to respond to them, are key to the growth and continued success of any market economy. These facts are dealt with successfully only in market economies and only to the extent that individuals on the spot are free to respond to these facts as they, individually, see fit.

Yet no observer or planner or regulator can see and catalog all these highly specific facts. The facts—each of which must be dealt with—are far too numerous at any moment for an observing scientist to catalog even if that moment were to be frozen for decades. Greatly intensifying this complexity is the reality that these facts are forever changing. A moment from now many of these facts will be different from what they are at this moment.

Nevertheless, too many people, including politicians, continue to believe that because they can observe a handful of bulky facts about the economy, they can thereby know enough to intervene into that economy in ways that will improve its operation. That belief, though, is hubris. It's very much like believing that you'll fly if you simply strap on a pair of wings and commence to flapping madly.

• wsj September 14, 2012, 6:34 p.m. ET

Oregon's Death Tax Defiers

Another state tees up repeal on the November ballot.

Small business owners and farmers have been some of the hardest hit by the tough economy, and those who stay afloat increasingly worry they won't be able to pass on their enterprises to the next generation. In liberal Oregon, of all places, a measure will be on the ballot this November to ease the burden by eliminating the state's death tax.

Last year, after Oregon farmer Pauline Andrews's grandparents died, her family had to pay several thousand dollars in death taxes to keep land that had been in the family for over 100 years, and they'll have to pay again when her parents die. "My family has paid taxes our whole lives," Ms. Andrews says. "We would definitely have to sell property just to be able to pay the death tax for the third time."

She's not the only one. Under current Oregon law, the tax kicks in at 10% on estates worth a mere $1 million and rises to 16% on estates of $9 million. That hits many family-owned businesses and farms that wouldn't qualify as rich even in Elizabeth Warren's book of envy.

Often, the businesses own assets like buildings, land, equipment or vehicles that make them eligible for the tax but aren't liquid enough to allow a sale to pay the tax collector. To obey the law, heirs are forced to sell parts of their business or close it down to come up with the cash.

Some 58% of all death tax filings in Oregon are on estates worth less than $3 million. That's no surprise: As businesses and families get close to the federal estate tax threshold of $5 million, they are more likely to have hired lawyers to help them avoid the tax. (Think Warren Buffett.)

Critics of the repeal initiative, known as Measure 84, claim the phase-out over three years will hurt the state's general revenue fund and thus money for education or welfare. But death tax revenues make up less than 1.5% of Oregon's general fund—roughly $100 million of the $7.5 billion annual budget.

Oregon is merely the latest in a wave of states that are considering or have repealed their estate levies. In 2001, all 50 states had death taxes. By this summer 31 states had taken those taxes off their books, including most recently Tennessee, which is phasing out its tax over several years, and Ohio, which will eliminate its tax in January.

According to the latest poll commissioned by Common Sense for Oregon, a nonprofit group leading the repeal effort, the measure is ahead by roughly 19%. Forty-eight percent of voters support repeal, 29% are opposed, and 23% are undecided. That suggests the repeal effort could still be undone by a burst of opposition advertising, financed perhaps by government unions or a billionaire who shields his taxes by creating a foundation.

They shouldn't be able to get away with the standard liberal argument that the estate tax hurts no one but the rich. Its biggest targets are family businesses, entrepreneurs and professional households that have saved over a lifetime, and that have already paid taxes on their income once or even two times. By punishing them, the economy suffers and so does everyone else.

The best reason to repeal the death tax is moral: It punishes a lifetime of thrift for the inevitability of death and no purpose but punishment.

Family Health Premiums Rise 4 Percent to Average $15,745 in 2012

September 14, 2012

Annual premiums for employer-sponsored family health coverage reached $15,745 this year, up 4 percent from last year, with workers on average paying $4,316 toward the cost of their coverage, according to the Kaiser Family Foundation/Health Research & Educational Trust (HRET) 2012 Employer Health Benefits Survey.

• This year's premium increase is moderate by historical standards, but outpaced the growth in workers' wages (1.7 percent) and general inflation (2.3 percent).
• Since 2002, premiums have increased 97 percent, three times as fast as wages (33 percent) and inflation (28 percent).

The survey reveals significant differences in the benefits and worker contributions toward family premiums between firms with many lower-wage workers (at least 35 percent of workers earn $24,000 or less a year) and firms with many higher-wage workers (at least 35 percent of their workers earn $55,000 or more a year).

• Workers at lower-wage firms on average pay $1,000 more each year out of their paychecks for family coverage than workers at higher-wage firms ($4,977 and $3,968, respectively).
• This occurs even though the firms with many lower-wage workers on average pay less in total premiums for family coverage than firms with many higher-wage workers ($14,694 and $16,427, respectively).

In addition, workers at lower-wage firms are also more likely to face high deductibles than those at higher-wage firms.

• Specifically, 44 percent of covered workers at firms with many low-wage workers face an annual deductible of $1,000 or more, compared with 29 percent of those at firms with many high-wage workers.
• Across all employers, a third of covered workers (34 percent) face a deductible of that size, including 14 percent with deductibles of at least $2,000 annually.

The survey also finds that large employers are more likely than small ones to allow workers to pay their share of premiums with pre-tax income (91 percent, compared to 41 percent) and to contribute pre-tax dollars to Flexible Spending Accounts (76 percent, compared to 17 percent).

Source: "Family Health Premiums Rise 4 Percent to Average $15,745 in 2012, National Benchmark Employer Survey Finds," Kaiser Family Foundation, September 11, 2012. "Employer Health Benefits 2012 Annual Survey," Kaiser Family Foundation, September 11, 2012.

College May Never Be the Same

September 14, 2012

The college landscape is beginning to change as many universities begin shifting to online classrooms to teach students, says USA Today.

• Many universities are experimenting with Massive Open Online Courses (MOOCs) to teach students.
• Each MOOC offers a series of short video segments recorded by an instructor and followed by a quiz.
• Students can ask and answer questions on online message boards and meet up with people online to study.
• Upon completion of a MOOC, students can receive a certificate of proof that they completed the course.
• MOOCs have proven to ignite an interest, as more than 160,000 people signed up to take a free artificial intelligence class offered by Stanford professor Sebastian Thrun.

The goal of MOOCs is to lower the costs of higher education, potentially making them free for all students. Providers of MOOCs can turn to advertising and licensing as a source of revenue. They can also charge students to receive their certificates upon completion. In any case, MOOCs represent a vast reduction in costs associated with higher education.

Critics argue that students can game the system and have other people take tests and quizzes for them. In response, Pearson, an education publishing company, will begin to allow students to take a proctored final exam for some courses. This provides a way for the identity of students to be checked to ensure that students enrolled in the course are the same ones taking the exam.

Finally, MOOCs offer the possibility for people around the world to get quality education at little to no cost. Students in Mongolia and India have signed up for courses offered by MIT, for example. This will help developing countries tremendously as they seek to provide higher education for its citizens.

Source: Mary Beth Marklein, College May Never Be the Same," USA Today, September 12, 2012.

September 18, 2012
http://finance.townhall.com/columnists/danieljmitchell/2012/09/18/tax_rates_impact_economic_performance_but_other_policies_also_matter

Tax Rates Impact Economic Performance, but other Policies also Matter

By Daniel J. Mitchell

9/18/2012

I’m a big fan of fundamental tax reform, in part because I believe in fairness and want to reduce corruption.

But I also think the flat tax will boost the economy’s performance, largely because lower tax rates are the key to good tax policy.

There are four basic reasons that I cite when explaining why lower rates improve growth.

1. They lower the price of work and production compared to leisure.
2. They lower the price of saving and investment relative to consumption.
3. They increase the incentive to use resources efficiently rather than seek out loopholes.
4. They attract jobs and investment from other nations.

As you can see, there’s nothing surprising or unusual on my list. Just basic microeconomic analysis.

Yet some people argue that lower tax rates don’t make a difference. And if lower tax rates don’t help an economy, then presumably there is no downside if Obama’s class-warfare tax policy is implemented.

Many of these people are citing David Leonhardt’s column in Saturday’s New York Times. The basic argument is that Bush cut tax rates, but the economy stunk, while Clinton increased tax rates and the economy did well.

The defining economic policy of the last decade, of course, was the Bush tax cuts. President

George W. Bush and Congress, including Mr. Ryan, passed a large tax cut in 2001, sped up its implementation in 2003 and predicted that prosperity would follow. The economic growth that actually followed — indeed, the whole history of the last 20 years — offers one of the most serious challenges to modern conservatism. Bill Clinton and the elder George Bush both raised taxes in the early 1990s, and conservatives predicted disaster. Instead, the economy boomed, and incomes grew at their fastest pace since the 1960s. Then came the younger Mr. Bush, the tax cuts, the disappointing expansion and the worst downturn since the Depression. Today, Mitt Romney and Mr. Ryan are promising another cut in tax rates and again predicting that good times will follow. …Mr. Romney and Mr. Ryan would do voters a service by explaining why a cut in tax rates would work better this time than last time.

While I’ll explain below why I think he’s wrong, Leonhardt’s column is reasonably fair. He gives some space to both Glenn Hubbard and Phil Swagel, both of whom make good points.

“To me, the Bush tax cuts get too much attention,” said R. Glenn Hubbard, who helped design them as the chairman of Mr. Bush’s Council of Economic Advisers and is now a Romney adviser. “The pro-growth elements of the tax cuts were fairly modest in size,” he added, because they also included politically minded cuts like the child tax credit. Phillip L. Swagel, another former Bush aide, said that even a tax cut as large as Mr. Bush’s “doesn’t translate quickly into higher growth.” Why not? The main economic argument for tax cuts is simple enough. In the short term, they put money in people’s pockets. Longer term, people will presumably work harder if they keep more of the next dollar they earn. They will work more hours or expand their small business. This argument dominates the political debate.

I hope, by the way, that neither Hubbard nor Swagel made the Keynesian argument that tax cuts are pro-growth because “they put money in people’s pockets.” Leonhardt doesn’t directly attribute that argument to either of them, so I hope they’re only guilty of proximity to flawed thinking.

But that’s besides the point. Several people have asked my reaction to the column, so it’s time to recycle something I wrote back in February. It was about whether a nation should reform its tax system, but the arguments are the same if we replace “a flat tax” with “lower tax rates.”

…even though I’m a big advocate for better tax policy, the lesson from the Economic Freedom of the World Index…is that adopting a flat tax won’t solve a nation’s economic problems if politicians are doing the wrong thing in other areas.

There are five major policy areas, each of which counts for 20 percent of a nation’s grade.

1. Size of government
2. Regulation
3. Monetary Policy
4. Trade
5. Rule of Law/Property Rights

Now let’s pick Ukraine as an example. As a proponent of tax reform, I like that lawmakers have implemented a 15 percent flat tax.

But that doesn’t mean Ukraine is a role model. When looking at the mix of all policies, the country gets a very poor score from Economic Freedom of the World Index, ranking 125 out of 141 nations.

Conversely, Denmark has a very bad tax system, but it has very free market policies in other areas, so it ranks 15 out of 141 countries.

In other words, tax policy isn’t some sort of magical elixir. The “size of government” variable accounts for just one-fifth on a country’s grade, and keep in mind that this also includes key sub-variables such as the burden of government spending.

Yes, lower tax rates are better for economic performance, just as wheels matter for a car’s performance. But if a car doesn’t have an engine, transmission, steering wheel, and brakes, it’s not going to matter how nice the wheels are.

Not let’s shift from theory to reality. Here’s the historical data for the United States from Economic Freedom of the World. As you can see, overall economic policy moved in the right direction during the Clinton years and in the wrong direction during the Bush-Obama years.

To be more specific, the bad policy of higher tax rates in the 1990s was more than offset by good reforms such as lower trade barriers, a lower burden of government spending, and less regulation.

Similarly, the good policy of lower tax rates last decade was more than offset by bad developments such as a doubling of the federal budget, imposition of costly regulations, and adoption of two new health entitlements.

This is why I have repeatedly challenged leftists by stating that I would be willing to go back to Bill Clinton’s tax rates if it meant I could also go back to the much lower levels of spending and regulation that existed when

September 18, 2012
http://finance.townhall.com/columnists/danieljmitchell/2012/09/18/tax_rates_impact_economic_performance_but_other_policies_also_matter

September 15, 2012

http://www.nytimes.com/2012/09/16/opinion/sunday/do-tax-cuts-lead-to-economic-growth.html?_r=2&pagewanted=print

Do Tax Cuts Lead to Economic Growth?

By DAVID LEONHARDT

Washington

FOR one of my occasional conversations with Representative Paul D. Ryan over the last few years, I brought a chart. The chart showed economic growth in the United States in the last several decades, and I handed Mr. Ryan a copy as we sat down in his Capitol Hill office. A self-professed economics wonk, he immediately laughed, in what seemed an appropriate mix of appreciation and teasing.

One of the first things you notice in the chart is that the American economy was not especially healthy even before the financial crisis began in late 2007. By 2007, remarkably, the economy was already on pace for its slowest decade of growth since World War II. The mediocre economic growth, in turn, brought mediocre job and income growth — and the crisis more than erased those gains.

The defining economic policy of the last decade, of course, was the Bush tax cuts. President George W. Bush and Congress, including Mr. Ryan, passed a large tax cut in 2001, sped up its implementation in 2003 and predicted that prosperity would follow.

The economic growth that actually followed — indeed, the whole history of the last 20 years — offers one of the most serious challenges to modern conservatism. Bill Clinton and the elder George Bush both raised taxes in the early 1990s, and conservatives predicted disaster. Instead, the economy boomed, and incomes grew at their fastest pace since the 1960s. Then came the younger Mr. Bush, the tax cuts, the disappointing expansion and the worst downturn since the Depression.

Today, Mitt Romney and Mr. Ryan are promising another cut in tax rates and again predicting that good times will follow. But it’s not the easiest case to make. Much as President Obama should be asked to grapple with the economy’s disappointing recent performance (a subject for a planned column), Mr. Romney and Mr. Ryan would do voters a service by explaining why a cut in tax rates would work better this time than last time.

That was precisely the question I was asking Mr. Ryan when I brought him the chart last year. He wasn’t the vice presidential nominee then, but his budget plan has a lot in common with Mr. Romney’s.

“I wouldn’t say that correlation is causation,” Mr. Ryan replied. “I would say Clinton had the tech-productivity boom, which was enormous. Trade barriers were going down in the Clinton years. He had the peace dividend he was enjoying.”

The economy in the Bush years, by contrast, had to cope with the popping of the technology bubble, 9/11, a couple of wars and the financial meltdown, Mr. Ryan continued. “Some of this is just the timing, not the person,” he said.

He then made an analogy. “Just as the Keynesians say the economy would have been worse without the stimulus” that Mr. Obama signed, Mr. Ryan said, “the flip side is true from our perspective.” Without the Bush tax cuts, that is, the worst economic decade since World War II would have been even worse.

Since that conversation, I have asked the same question of conservative economists and received similar answers. “To me, the Bush tax cuts get too much attention,” said R. Glenn Hubbard, who helped design them as the chairman of Mr. Bush’s Council of Economic Advisers and is now a Romney adviser. “The pro-growth elements of the tax cuts were fairly modest in size,” he added, because they also included politically minded cuts like the child tax credit. Phillip L. Swagel, another former Bush aide, said that even a tax cut as large as Mr. Bush’s “doesn’t translate quickly into higher growth.”

Why not? The main economic argument for tax cuts is simple enough. In the short term, they put money in people’s pockets. Longer term, people will presumably work harder if they keep more of the next dollar they earn. They will work more hours or expand their small business. This argument dominates the political debate.

But tax cuts have other effects that receive less attention — and that can slow economic growth. Somebody who cares about hitting a specific income target, like $1 million, might work less hard after receiving a tax cut. And all else equal, tax cuts increase the deficit, as Mr. Bush’s did, which creates other economic problems.

When the top marginal rate was 70 percent or higher, as it was from 1940 to 1980, tax cuts really could make a big difference, notes Donald Marron, director of the highly regarded Tax Policy Center and another former Bush administration official. When the top rate is 35 percent, as it is today, a tax cut packs much less economic punch.

“At the level of taxes we’ve been at the last couple decades and the magnitude of the changes we’ve had, it’s hard to make the argument that tax rates have a big effect on economic growth,” Mr. Marron said. Similarly, a new report from the nonpartisan Congressional Research Service found that, over the past 65 years, changes in the top tax rate “do not appear correlated with economic growth.”

Mr. Romney and Mr. Ryan, to be sure, are not calling for a simple repeat of the Bush tax cuts. They say they favor a complete overhaul of the tax code, reducing tax rates by one-fifth (taking the top rate down to 28 percent) and shrinking various tax breaks. Many economists think such an overhaul could do more good than the Bush tax cuts, by simplifying the tax code.

The problem for anyone trying to evaluate the Romney plan, however, is that there isn’t a full plan yet. He will not say which tax breaks he would reduce, and the large ones, like the mortgage-interest deduction, are all popular. In a painstaking analysis, the Tax Policy Center showed that achieving all of Mr. Romney’s top-line goals — a revenue-neutral overhaul that does not increase the tax burden of the middle class — is not arithmetically possible. History is littered with vague calls for tax reform that went nowhere.

Beyond taxes, Mr. Romney has declined to detail what spending cuts he would make, although he has promised to make big ones. And some of the programs that would be at risk — medical research, education, technology, roads, mass transportation — probably have a better historical claim on lifting economic growth than tax cuts do.

The policies that new presidents pass tend to be ones on which they laid out specifics, be they the Bush and Reagan tax cuts or the Obama health overhaul. Based on the specifics, Mr. Romney puts a higher priority on tax cuts than anything else. Yet the reality of the last two decades has caused conservative economists, and Mr. Ryan himself, to acknowledge the limits of tax cuts.

In one of our conversations, Mr. Ryan told me that the single most important objective of any economic plan had to be raising growth. “We have to figure out how best to grow the pie so it helps everyone,” he said.

It is certainly true that strong economic growth helps solve almost every challenge the country faces: the deficit, unemployment, the income slump, even the rise of China. It is also true that some liberals put too much emphasis on the distribution of the pie and not enough on the size.

But when you dig into Mr. Romney’s and Mr. Ryan’s proposals and you consider recent history, the fairest thing to say is that, so far at least, they have laid out a plan to cut taxes. They have not yet explained why and how it is also an economic-growth plan.

David Leonhardt is the Washington bureau chief of The New York Times.

Economic Freedom of the World: United States Not in Top 10

September 19, 2012

The Fraser Institute's Economic Freedom of the World 2012 index measures the degree to which the policies and institutions of countries are supportive of economic freedom. Forty-two variables are used to construct a summary index and to measure the degree of economic freedom in five broad areas: (1) size of government; (2) legal system and property rights; (3) sound money; (4) freedom to trade internationally; and (5) regulation.

• In this year's index, Hong Kong retains the highest rating for economic freedom, 8.90 out of 10.
• The other top 10 nations are: Singapore, 8.69; New Zealand, 8.36; Switzerland, 8.24; Australia, 7.97; Canada, 7.97; Bahrain, 7.94; Mauritius, 7.90; Finland, 7.88; and Chile, 7.84.
• The rankings (and scores) of other large economies in this year's index are the United Kingdom, 12th (7.75); the United States, 18th (7.69); Japan, 20th (7.64); Germany, 31st (7.52); France, 47th (7.32); Italy, 83rd (6.77); Mexico, 91st, (6.66); Russia, 95th (6.56); Brazil, 105th (6.37); China, 107th (6.35); and India, 111th (6.26).
• The scores of the bottom 10 nations in this year's index are: Venezuela, 4.07; Myanmar, 4.29; Zimbabwe, 4.35; Republic of the Congo, 4.86; Angola, 5.12; Democratic Republic of the Congo, 5.18; Guinea-Bissau, 5.23; Algeria, 5.34; Chad, 5.41; and, tied for 10th worst, Mozambique and Burundi, 5.45.

The United States has experienced a substantial decline in economic freedom during the past decade.

• From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore.
• After increasing steadily during the period from 1980 to 2000, the rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010.
• The ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).

Nations that are economically free out-perform non-free nations in indicators of well-being:

• Nations in the top quartile of economic freedom had an average per-capita gross domestic product of $37,691 in 2010, compared to $5,188 for bottom quartile nations.
• In the top quartile, the average income of the poorest 10 percent was $11,382, compared to $1,209 in the bottom in 2010 current international dollars.
• Life expectancy is 79.5 years in the top quartile compared to 61.6 years in the bottom quartile.

Source: James Gwartney, Joshua Hall and Robert Lawson, "Economic Freedom of the World: 2012 Annual Report," Fraser Institute, September 18, 2012.

• September 17, 2012, 7:07 p.m. ET

Environmental Protection Up in Smoke

Dead wood fuels wildfires. Too bad lawsuits keep the Forest Service from thinning out the trees.

By TERRY L. ANDERSON

Bozeman, Mont.

When the wildfires that are burning millions of acres in the West are finally smothered by winter snows, environmentalists undoubtedly will blame climate change. They might look in the mirror instead.

Environmental laws since the 1970s require public input into federal land-use decisions including logging on national forests. This has led to lawsuits challenging efforts by the U.S. Forest Service to prevent forest fires by thinning out trees (most of which are dead or diseased) and brush by machines and carefully controlled burns. This dead wood is the fuel that feeds catastrophic wildfires.

Removing the fuel reduces the likelihood of fires, and if fires do break out, makes them easier to fight. Meanwhile, the suppression of fires costs the federal government nearly $2.5 billion annually.

Enlarge Image

Associated Press/Billings Gazette

Trucks and trailers flee a wildfire burning south of Roundup, Mont.

A fuels-management project to log and thin 4,800 acres in the Bozeman, Mont., watershed exemplifies the problem. This project has been held up since 2010 on grounds that the environmental-impact assessment did not adequately protect the habitat of the Canadian lynx and the grizzly bear, both listed as threatened species.

Now a wildfire threatens the watershed, burning over 10,000 acres and costing more than $2 million to fight. As one firefighter put it, "fire is the environmentalist's way of thinning the forests."

Jack Ward Thomas, President Clinton's forest service chief, noted a few years ago that court battles have tied the agency in a "Gordian knot" creating a "vicious cycle of increasing costs, time delays, and inability to carry out management actions." As a result, most national forests are a tinder box of old-growth trees ravaged by disease and insects.

Making matters worse, dense conifer canopies intercept rain and snow, with 30% lost to evaporation instead of soaking into the ground or flowing into rivers. When a little rain fell on the Bozeman fire on Aug. 31, the Forest Service reported that it was caught in the tree tops and quickly evaporated. An estimate by Wesleyan University's Helen Poulos and James Workman for California's Sierra Nevada Mountain Range puts the annual water loss due to evaporation at more than five trillion gallons. That is enough to supply Los Angeles for 26 years.

Forest fires also contribute significantly to atmospheric carbon. A 2007 study by the federally funded Center for Atmospheric Research found that "large wildfires in the western United States can pump as much carbon dioxide into the atmosphere in just a few weeks as cars do in those areas in an entire year." Scientists at Stanford University and the National Snow and Ice Data Center believe that carbon soot from wildfires is adding to the greenhouse effect and contributing to this summer's unusual thaw in the Arctic and Greenland.

Cutting the "Gordian knot" is necessary if the Forest Service is to properly manage national forest assets and reduce wildfires. A start would be to require environmental groups to post a sizable bond when they file lawsuits. If the area burns while the suit is in the courts, the bond would be forfeited to defray firefighting costs.

This would allow public involvement through judicial review but hold opponents accountable. This might lead to a more responsible form of environmentalism.

Mr. Anderson is president of Property and Environment Research Center in Bozeman, Mont., and a senior fellow at Stanford University's Hoover Institution.

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• wsj Updated September 21, 2012, 1:02 a.m. ET

Wal-Mart to Drop Amazon's Kindle

Chain Will Stop Carrying E-Book Devices, Says It Isn't Related to Industry Gripe of 'Showrooming'

By ANN ZIMMERMAN And GREG BENSINGER

Wal-Mart will stop selling Amazon's Kindle, becoming the latest traditional bricks-and-mortar retailer to say no to the signature product of one of its fiercest rivals. George Stahl has details on The News Hub.

Wal-Mart Stores Inc. WMT +0.51% is no longer going to serve as a showroom for Amazon.com Inc.'s AMZN -0.33% Kindle devices.

The world's largest store chain said Thursday that it will stop selling Kindle tablets and electronic readers, in what analysts saw as a sign of growing competitive strain between the two retail titans.

Wal-Mart's move to stop carrying the Kindle, which follows a similar decision by Target Corp. TGT +0.60% in May, comes after Amazon angered retailers last holiday season, when it promoted a smartphone app called Price Check that allowed users to compare Amazon's prices to those at stores by scanning bar codes.

Enlarge Image

Jenn Ackerman for The Wall Street Journal

Best Buy (above), Staples and RadioShack continue to carry Kindles, in contrast to Target and Wal-Mart.

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Retailers such as Target have subsequently complained to vendors that they plan to fight back against such examples of "showrooming," the term given for when shoppers check out products in stores, only to buy them more cheaply from online retailers such as Amazon, which don't collect sales taxes in many states.

Wal-Mart denied that competition from Amazon was behind its decision to stop stocking Kindle products. "Our customers trust us to provide a broad assortment of products at everyday low prices, and we approach every merchandising decision through this lens," the Bentonville, Ark., based retailer said in a statement.

An Amazon spokesman didn't return a call seeking comment.

Wal-Mart will continue to stock rival products including Apple Inc.'s AAPL -0.49% iPad tablet and Barnes & Noble Inc.'s BKS -2.20% Nook e-reader. A person familiar with the matter said Wal-Mart wanted to sell only electronic readers and tablets that allowed customers access to an array of content providers.

The Bentonville, Ark., chain also was unhappy with Amazon's decision to offer a cheaper Kindle Fire product that contained advertising without disclosing that consumers could remove the ads after paying a $15 fee, the person said.

Some retail experts weren't buying that rationale.

"Wal-Mart and other retailers don't want to facilitate Amazon in any way," said Forrester Research analyst Brian Walker. "Wal-Mart probably doesn't sell many Kindle units, but they don't want to become a showroom for Amazon, who they are fighting tooth and nail with on almost all their other products."

Amazon is increasingly competing with Wal-Mart on everyday items such as diapers in addition to products such as books and electronics.

Despite growing competition with Amazon, Best Buy Co. BBY +0.84% said it would continue to sell Kindle devices. Staples Inc. SPLS +1.56% and RadioShack Corp. RSH +0.71% also plan to continue selling them.

"We stand for choice and it is our aim to carry all of the latest technology devices," a Best Buy spokesman said." It gives our customers the opportunity to touch and compare a variety of products to find the one that best fits their needs.

Wal-Mart's move is largely seen as symbolic, retail experts said. While losing sales at Wal-Mart may dent Amazon, customers buy most Kindle devices directly from Amazon.com.

"Losing a retail channel as big as Wal-Mart always hurts," said Sarah Rotman Epps, who specializes in tablet sales at Forrester. "Other retailers are important to them, especially at the holidays. But Amazon will be fine without Wal-Mart."

Wal-Mart shares rose 38 cents to $74.75 Thursday on the New York Stock Exchange. Amazon shares, trading on the Nasdaq Stock Market, finished down 87 cents at $260.81.

Write to Ann Zimmerman at ann.zimmerman@wsj.com and Greg Bensinger at greg.bensinger@wsj.com

• wsj September 19, 2012, 11:28 AM

Global Trade Slowdown

By Justin Lahart

Data gathered by the CPB Netherlands Bureau for Economic Policy Analysis show that global trade volumes grew an unusually low 2.6% in the second quarter compared with a year earlier; the average pace over the past 20 years has been 6.1%. The two major West Coast ports, the ports of Los Angeles and of Long Beach, Calif., reported that outbound container volumes fell by 4.1% in August from a year earlier. That was the steepest drop since September 2009.

In and of itself, the drop in trade seems unlikely to derail the U.S. economy. Housing is doing better, after all, and consumer spending has lately been perking up. But for companies that are exposed to global trade — either because they make the goods that get traded around the world or move those goods — it means that the bad news is far from over.

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• wsj Updated September 19, 2012, 5:27 p.m. ET

Apple, Publishers Reach E-Book Price Settlement in EU

By FRANCES ROBINSON And THOMAS CATAN

Apple Inc. AAPL +0.03% and four major publishers have formally offered to settle an antitrust case by the European Commission over their e-book pricing, allowing Amazon.com Inc. AMZN +1.12% and other retailers to resume discounting their titles in the region.

The offer is notable because Apple and one of those publishers—Macmillan—have refused to sign on to a similar settlement in the U.S., where they are gearing up for a court fight with the government over allegations they colluded to fix prices.

The discrepancy raises the prospect that booksellers in Europe will be allowed to discount books by Macmillan in particular, whereas U.S. retailers will not. Macmillan declined to comment on the reasons for its differing legal approaches.

Apple didn't respond to requests for comment.

The details of the settlement offer, hashed out in April, were made public on Wednesday for the first time by the European Commission. The commission will give people a month to submit comments on the proposal before it is approved.

Under the proposal, Apple and the four publishers would agree to let retailers cut e-book prices and offer promotions for a period of at least two years. They also will suspend for five years contracts that effectively barred publishers from selling e-books at prices lower than Apple's.

The companies wouldn't pay any money under the deal.

Last year, both the European Commission and the U.S. Justice Department opened investigations into whether Apple and five publishers had illegally colluded over pricing before Apple's first iPad was launched in 2010.

The publishers named were CBS Corp.'s CBS +1.34% Simon & Schuster Inc.; Lagardère SCA's Hachette Book Group; Pearson PSON.LN +0.17% PLC's Penguin Group (USA); Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH; and HarperCollins Publishers Inc., a unit of News Corp., NWSA +1.63% which also owns The Wall Street Journal.

Until the iPad's introduction, publishers would set a wholesale price and a suggested cover price, which retailers were free to discount. But publishers were upset at Amazon's deep discounting of new best sellers, which it sold at $9.99 to spur sales of its Kindle e-readers.

Apple offered publishers a new way to price their books, under which the publishers would set the final price themselves and Apple would take a 30% cut for selling the books in its iBookstore. Five major publishers signed on with Apple and then imposed a similar agency model on Amazon, effectively banning it from discounting.

In, April, the Justice Department filed an antitrust lawsuit against Apple and five publishers, accusing them of colluding to raise the price of e-books. Three of the publishers—Hachette, HarperCollins and Simon & Schuster—agreed to settle the case without admitting wrongdoing.

The settlement was approved by a U.S. court on Sept. 6 and Amazon started discounting some of those companies' titles almost immediately. The same three companies have agreed to pay $69 million in restitution to e-book consumers to settle U.S. litigation.

Despite offering to settle in Europe, Apple and Macmillan are preparing to fight the U.S. charges in a New York federal court in a trial scheduled to begin on June 3, 2013. Penguin, a holdout on both sides of the Atlantic, is also slated to go to trial. The European Commission said its investigation into Penguin is continuing, and a spokesman for Penguin's parent said the company feels it didn't do anything wrong.

If accepted, Apple's proposed agreement with the EU would void its contracts with Penguin, which could render the matter largely moot.

A Justice Department spokeswoman declined to comment Wednesday.

Write to Frances Robinson at frances.robinson@dowjones.com and Thomas Catan at thomas.catan@wsj.com

• wsj September 19, 2012, 6:53 p.m. ET

Hard Unemployment Truths About 'Soft' Skills

Finding qualified applicants for high-tech jobs would be great. So would finding someone who can answer the phone.

By NICK SCHULZ

At a recent dinner in Washington, D.C., with representatives from major American manufacturing companies, I listened as the talk turned to how hard it is to find qualified applicants for jobs.

"What exactly are the skills you can't find?" I asked, imagining that openings for high-tech positions went begging because, as we hear so often, the training of the U.S. workforce doesn't match up well with current corporate needs.

One of the representatives looked sheepishly around the room and responded: "To be perfectly honest . . . we have a hard time finding people who can pass the drug test." Several other reps gave a knowing nod. Applicants were often so underqualified, they said, that simply finding someone who could properly answer the telephone was sometimes a challenge.

More than 600,000 jobs in manufacturing went unfilled in 2011 due to a skills shortage, according to a survey conducted by the consultancy Deloitte.

The problem seems soluble: Equip workers with the skills they need to match them with employers who are hiring. That explains the emphasis that policy makers of both parties place on science, technology, engineering and math degrees—it is such a mantra that they're known by shorthand as STEM degrees.

American manufacturing has become more advanced, we're told, and requires computer aptitude, intricate problem solving, and greater dexterity with complex tasks. Surely if Americans were getting STEM education, they would have the skills they need to get jobs in our modern, high-tech economy.

Enlarge Image

Associated Press

A job fair outside a Safeway in Portland, Ore., Jan. 12.

But considerable evidence suggests that many employers would be happy just to find job applicants who have the sort of "soft" skills that used to be almost taken for granted. In the Manpower Group's 2012 Talent Shortage Survey, nearly 20% of employers cited a lack of soft skills as a key reason they couldn't hire needed employees. "Interpersonal skills and enthusiasm/motivation" were among the most commonly identified soft skills that employers found lacking.

Employers also mention a lack of elementary command of the English language. A survey in April of human-resources professionals conducted by the Society for Human Resource Management and the AARP compared the skills gap between older workers who were nearing retirement and younger workers coming into the labor pool. More than half of the organizations surveyed reported that simple grammar and spelling were the top "basic" skills among older workers that are not readily present among younger workers.

The SHRM/AARP survey also found that "professionalism" or "work ethic" is the top "applied" skill that younger workers lack. This finding is bolstered by the Empire Manufacturing Survey for April, published by the Federal Reserve Bank of New York. It said that manufacturers were finding it harder to find punctual, reliable workers today than in 2007, "an interesting result given that New York State's unemployment rate was more than 4 percentage points lower in early 2007 than in early 2012."

The skills shortage is not just an absence of workers who can write computer code, operate complex graphics software or manipulate cultures in a biotech lab—as real as that scarcity is. Many people lack what the writer R.R. Reno has called "forms of social discipline" that are indispensable components of a person's human capital and that are needed for economic success.

This is not an exercise in blaming the victim. There's plenty of fault to go around, from America's inadequate K-12 education system to the collapse of intact families and the resultant erosion of human and social capital in many communities. But we shouldn't delude ourselves about the nature of the problem facing many of the millions of Americans who can't find work.

Mr. Schulz is DeWitt Wallace Fellow at the American Enterprise Institute and editor of American.com.

• wsj Updated September 13, 2012, 7:33 p.m. ET

Doctor, Hospital Deals Probed

By ANNA WILDE MATHEWS

The Sacramento Bee/Associated Press

Kamala Harris, California's attorney general, whose office is probing whether mergers of hospitals and doctor groups are pushing up prices.

California's attorney general has launched a broad investigation into whether growing consolidation among hospitals and doctor groups is pushing up the price of medical care, reflecting increasing scrutiny by antitrust regulators of medical-provider deals.

The office of the attorney general, Kamala D. Harris, has sent subpoenas, known as civil investigative demands, to several big hospital operators in the state, including San Francisco-based Dignity Health and San Diego's Scripps Health and Sharp HealthCare. Northern California's 24-hospital Sutter Health system has also received one, as has Santa Barbara-based Cottage Health System, according to people with knowledge of the matter. Subpoenas have also gone to major California health insurers, those people said.

The probe, which has been under way for several months, is examining hospital systems' reimbursement from the insurers, according to people with knowledge of the matter. The regulator appears to be focusing on whether the systems' tie-ups with physicians, as well as ownership of hospitals, have given them the market power to boost prices in a way that violates antitrust law, these people said.

Nationally, health-care providers are rapidly merging into bigger health systems, moves that they say will improve efficiency. The number of hospital deals last year, 86, was the biggest since 2000, according to Irving Levin Associates, a research firm that tracks health-care transactions.

Also, nearly a quarter of all specialty physicians who see patients at hospitals are now employed by the hospitals, according to an estimate from the Advisory Board Co. ABCO -1.22% That is more than four times the 5% in 2000. Among primary-care doctors who see patients in hospitals, the employed share has doubled to about 40% in the same time frame.

The American Hospital Association said consolidation doesn't routinely drive up prices; the California Hospital Association referred questions to the national group. Hospitals are merging and employing more doctors in order to streamline and improve care, under pressure from health regulators urging a more integrated approach under the federal health overhaul law, said Melinda Hatton, AHA's general counsel. "The antitrust agencies and national health-care policy don't seem to be really in sync at this point," she said.

Some research suggests that mergers can drive up health-care prices. A 2010 study published in the journal Health Affairs said concentration among health-care providers in California had led to "a definite shift in negotiating strength toward providers, resulting in higher payment rates and premiums."

See More on the Study

A 2010 study published in Health Affairs said concentration among health-care providers in California had led to "a definite shift in negotiating strength toward providers, resulting in higher payment rates and premiums."

An evaluation of the Health Affairs study funded by the AHA said it was flawed because it relied on "anecdotal observations" and didn't adequately examine such factors as consumer preference that could lead to differences in hospital reimbursement.

Some state reviews are already in place. In California, takeovers of nonprofit hospitals typically must be cleared by the attorney general's office under laws regulating charities, and if their dollar value is large enough they also get a federal antitrust examination.

But moves that bring doctor groups, particularly smaller practices, under a hospital system's umbrella may not require pre-review. California law typically blocks hospitals from directly employing practicing doctors; physicians can work for systems' affiliated foundations.

The Federal Trade Commission, which has filed several recent suits to block hospital acquisitions, is also closely watching hospitals' purchases of doctor groups, and mergers that combine physician practices, Richard Feinstein, director of the FTC's bureau of competition, said in an interview.

For example, the FTC and the Nevada attorney general recently announced a settlement with Renown Health, a Reno, Nev.-area hospital system that acquired two cardiology practices. The pact requires Renown to release as many as 10 physicians from their noncompete agreements. A Renown spokesman declined to comment.

The FTC and the Idaho attorney general are currently investigating Boise-based St. Luke's Health System's past acquisitions, according to letters from the state regulator; the attorney general's office asked St. Luke's to delay its planned purchase of another medical group during the review. A St. Luke's spokesman said it is confident "that we've been doing everything within antitrust laws," and there is "no indication" the system has been driving higher prices.

Some state regulators often work with the federal agencies, but some are also ramping up their own activities. Massachusetts' attorney general has produced reports that warned of some health-care providers' ability to win higher reimbursements. In Pennsylvania, the attorney general in June announced an agreement with the prominent Geisinger Health System, which was acquiring a nearby community hospital, requiring it to keep the new hospital's rate negotiations with insurers separate from those of the system's flagship facility for eight years.

In some transactions, "you're losing the dynamics of competition," said James Donahue III, Pennsylvania's chief deputy attorney general. The Geisinger agreement likely saved local employers millions of dollars, he said.

Frank Trembulak, Geisinger's chief operating officer, said the community hospital was "failing," and its payment rates were inadequate. Geisinger will upgrade it with electronic medical records and other expensive changes, he said. Also, he said, merging it fully with the system would improve efficiency and integration of services.

State attorneys general can use federal antitrust law to challenge acquisitions or behavior that they consider anticompetitive, including already-consummated deals as long as four years after they close, said Douglas Ross, an antitrust lawyer with Davis Wright Tremaine LLP.

Still, state and federal regulators have in the past run into problems in attacking hospital mergers. In 2000, a federal judge rebuffed a previous California attorney general's effort to block Sutter from acquiring a financially-strapped Oakland hospital on antitrust grounds.

California health systems haven't completed a lot of major hospital deals recently, but "we have seen more hospital-physician integration going on," said Maribeth Shannon, director of the market and policy monitor program at the California HealthCare Foundation.

Scripps said it is cooperating with the attorney general's subpoena, and that the agency's "focus appears to be related to antitrust issues, however we don't know any specifics of the inquiry."

Sharp said it has "provided documents in response" to a subpoena. Dignity Health, formerly Catholic Healthcare West, said it had received a subpoena also. Sutter said it generally comments "only on matters of public record" and, when asked about investigations, "defers to the regulatory party." A Cottage Health System spokeswoman said she had no information to share.

Write to Anna Wilde Mathews at anna.mathews@wsj.com

wsj September 20, 2012, 3:47 p.m. ET

Europe Needs Service-Market Liberalization

Even in Germany, the manufacturing sector only accounts for 20% of GDP.

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By JOHN SPRINGFORD

In exchange for sharing southern Europe's debt burden, Germany is demanding liberal economic reforms in those countries. Yet Germany is not following its own advice. Its services markets are heavily regulated. Diplomas are required by law for people to work as wooden boat builders, painters and decorators, or ski instructors. Pharmacists are only allowed to own four shops. Lawyers' fees for most civil and criminal cases are set by a centrally-determined scale, not the market.

Germany's strategy for Europe's economic future hardly includes services. The German government believes that the pre-requisite for growth is more flexible labor, with competitive wages, producing manufactured goods for sale abroad: hence its call for southern Europe to deflate and shift towards exports. But even in Germany, the manufacturing sector only accounts for 20% of GDP. And since European countries mostly trade with each other, they cannot all move into external surplus at once.

That's why productivity growth in services—which make up the majority of European output—must be at the heart of any long-term growth plan. This has been anaemic in the European Union, where productivity gains averaged only 1.2% per year between 1995 and 2009. In that same period, the U.S. managed 3% average annual productivity growth.

Poorly designed national regulations have played their part in the stagnation of European productivity. But the European Union has also failed to integrate national services markets. Europeans still buy nine-tenths of their services from firms established in their home countries. Small, national markets do not generate the levels of competition necessary to drive innovation and with it, faster productivity growth.

The European Commission argues that the EU's 2006 Services Directive would open up services markets, if only the national-regulatory laggards would finally implement it. The directive made member countries review their services regulations and scrap any rules that constrained foreign firms' ability to set up or sell services from abroad.

Whether a rule inhibits establishment is, however, open to interpretation. Some national governments insist that travel agencies have a minimum number of staff, but does this constitute a barrier for a foreign firm to enter? In many cases, the EU Services Directive let member states decide such questions for themselves. Perhaps unsurprisingly, many erred towards the status quo and most national barriers to market entry remain on the books.

The EU needs a plan to open up services markets more fully, so that more productive firms in one country can move into another and take market share. Mutual recognition—where one country allows a foreign firm free access to its market, while it is regulated by its home country—would be most effective. Companies would not have to sign up to new rules, reorganize their insurance, find workers with the right diplomas, or change their ownership structure to enter a new market.

The EU's original draft for the services directive included mutual recognition for firms that were temporarily selling services abroad. But the mutual recognition clause was removed by the European Parliament, under pressure from France, Belgium, Germany and from national trade unions. The directive failed because it was too sweeping, trying to free up all markets at once. The parliament balked at the notion of Bulgarian legal firms offering advice to Belgians without oversight by Belgian regulators.

The solution is to move sector by sector. Where consumers are buying expert advice, as in law or health care, they find it difficult to appraise the quality of the advice before purchase and so are used to relying on national regulators and standards boards.

But other markets are less troublesome: If a consumer buys shoes from one shop and they break, he can go to another with a reputation for better shoes. Retail, construction, tourism, cultural content, design, and logistics are all services where buyers find it easy to appraise the quality of service, or where they can use rating websites like Tripadvisor to help. Even business consultancy could be freely delivered across the EU, as the firms that buy their services have enough information to go by (and if they don't: caveat emptor).

The EU should take a staged approach to services liberalization, starting with the paths of least resistance. It should start with mutual recognition in construction and retail markets and then move on to more heavily regulated sectors. It should also start with one-off sale of services, and then move on to permanent establishment.

Germany is right that southern Europe needs more economic liberalization—but so does Germany and the rest of the EU. With Germany on board for service-sector liberalization, a large majority of EU governments would favour reform, helping to push it through. Italy, Spain and Portugal have already made some ambitious—and politically costly—changes to their labor markets. Earlier this year, Italian prime minister Mario Monti coralled eleven other leaders to sign a letter supporting more single-market integration. Perhaps Chancellor Merkel could provide the 13th signature?

Mr. Springford is a research fellow at the Centre for European Reform. His paper, "How to build European services markets," will be published next week.

www.chicagotribune.com/news/local/breaking/chi-saturdays-cso-concert-canceled-after-musicians-strike-20120922,0,5884537.story

chicagotribune.com

Saturday's CSO concert canceled after musicians strike

Staff report

9:11 PM CDT, September 22, 2012

The Chicago Symphony Orchestra performance this evening at Symphony Center has been canceled because musicians of the Chicago Symphony Orchestra have gone on strike, officials said.

The concert at Symphony Center was to begin at 8 p.m. but was canceled after musicians went on strike, according to Chicago Symphony Orchestra Association President Deborah Rutter, who called it a "sad night" for the symphony orchestra.

"We're very disappointed that we're not presenting for another full house of very enthusiastic patrons," Rutter said in a short press conference.

Rutter said that the association has had 11 negotiating sessions with the musicians, the last of which ended around 6:15 this evening when they rejected the association's final offer.

"We believe that we offered a very fair contract," Rutter said.

Among some of the proposed terms, Rutter said musicians were offered salary increases in each year of the 3-year contract, and health benefit packages that totaled about $18,000 per musician. The association also asked musicians to increase their health benefit contribution from five to 12 percent.

In the union's most recent contract, which expired last week, the musicians' base minimum pay increased by 23 percent over a five year period, Rutter said. The average salary for musicians during the last year of the contract was $173,000.

Officials said rehearsals and concerts took place as scheduled earlier this week. However, during today’s meeting, the musicians left the negotiating table and proceeded to strike, officials said.

Bassist Stephen Lester, chairman of the Orchestra Members Committee, which negotiates the musicians contracts, was with fellow musicians setting up a picket line outside the Symphony Center entrance on Michigan Avenue Saturday night.

“We were negotiating all day today after having negotiated many times,” Lester said. “We’ve been doing a lot of negotiating. There was movement, but there remained serious economic issues that were not being addressed by the association. They were trying to force us into a concessionary contract, reducing our benefits and making it difficult for the orchestra to pay for health care and keep our basic standard of life.”

As for the cause of the negotiation breakdown, Lester said, “It was the final economic proposal (from the association), which still required us to take a decrease in compensation and exorbitant increases in the cost of health care. We’re hopeful that we will continue negotiating soon."

He denied that they walked away from the negotiating table.

"We remain anxious to conclude an agreement with the association, and we regret very much that this has affected concerts for the public and for our music director, Maestro Muti, and we hope that the situation can be resolved soon.”

On the subject of whether the musicians and management disagree over the CSO’s financial state: “There is a fundamental disagreement over what a successful orchestra is and what it means, and there’s a fundamental disagreement over the role of musicians...the negotiating style of the association has led us to question the seriousness of their desire for a contract.”

He said there was a strike authorization vote on Thursday evening.  They advised the orchestra of the seriousness of the situation.

"We are enjoying extremely strong support from the orchestra.”

As for music director Riccardo Muti’s reaction: “I have been in contact with the maestro on several occasions,” Lester said, noting that he can’t speak for Muti. “We had good conversations, amiable conversations. He understands our situation.”

As the news broke that Chicago Symphony Orchestra musicians decided to walk off the job, an hour before the Saturday show featuring Muti conducting Respighi, dozens of confused and dressed-up concert goers gathered outside the symphony center at 220 S. Michigan Ave., bewildered by the small picket line and signs announcing the strike.

Leon Brenner of Round Lake said his father played in the symphony for nearly five decades and said he's never observed anything like this.

"They had contract disputes and went on strike but not an hour before a concert where 3,000 people are attending," Brenner said. "I think it will hurt the symphony. You can't do that to your fans."

Brenner was accompanied by Al Green and his wife Karen, who drove in Friday evening from Dubuque, Iowa to see the show.

"This would have been our first time at the orchestra," Mr. Green said. "I'm not sure when we'll get another chance."

Phil Mijal of Woodridge said the experience was "very frustrating."

"We came all the way from the suburbs and it would have been nice if they had called," Mijal said.

Rick and Esther Baumgarten of Lincoln Park said they were "disgusted" by the strike and said he wasn't convinced that union members considered the impact on fans.

"We love the symphony," said Mr. Baumgarten, a 40-year subscriber. "We consider it to be one of the best in the world. I don't think I can sit and listen to them the same way again. I'll be tempted to boo them the next time I watch them, rather than cheer. This city loves them and I think they're being offensive."

Mrs. Baumgarten said she felt "double-crossed," considering that the symphony played the same show on Thursday night and played a free concert at Millennium Park Friday evening.

"If they're going to do it, do it on such-and-such date rather than bringing people down here to pay for parking and all that," she said. "I thought they had more class than that."

Not all the concert goers were so steamed, however.

"I'm disappointed that there's no show but if they have real grievances, I'm on their side," said Rick Fizdale who attended with his wife, Suzanne Faber.

"Now we'll go home," Faber said. "There will be other concerts."

Officials said that ticket holders can exchange their tickets for a future CSO performance, donate their tickets, or request a refund through the Symphony Center Box Office at (312) 294-3000.

Union members and Rutter both said they were not sure if the two sides could reach an agreement in time for the next scheduled concert on Wednesday. The CSO website, cso.org, will contain the most up-to-date information on the status of future performances, officials said.

Chicagobreaking@tribune.com

• wsj September 21, 2012, 7:16 p.m. ET

A Capital Gains Primer

Why a tax rate differential is fair and helps the economy.

On Thursday the House Ways and Means and Senate Finance committees held a rare joint hearing on taxing capital gains in the context of tax reform. The timing couldn't be better because President Obama recently restated his support for lifting the top capital gains tax rate next year on those with earnings above $250,000 to 23.8%, or almost 60% above today's 15% rate. If Mr. Obama's Buffett Rule is also adopted, the rate would rise to 30% for those earning $1 million—the highest rate since the late 1970s.

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The question is to what purpose? This won't raise much if any revenue for the government (see "Obama's Revenue Soup," April 9, 2012). But it will impose a big cost on the economy. Amid sluggish growth that has prompted the Federal Reserve into unlimited monetary easing, it is hard to imagine a worse time to raise the tax on capital investment. None other than Lord Keynes wrote that "the weakness of the inducement to invest has been at all times the key to the economic problem."

The current Democratic obsession with raising the capital gains tax comes from a mistaken belief that the preferential rate applied to the sale of a family business, farm or financial asset is a "loophole" that mainly benefits the rich.

But that ignores the vital link between tax rates and capital investment. The lower the tax, the greater the incentive to take risks. And though Warren Buffett may not believe that tax rates matter, studies by economists such as James Poterba of MIT have documented the "significant influence" of capital gains taxes on the "demand for venture funds."

Thanks to rate reductions in 1978, 1981, 1997 and 2003 (see chart), the statutory capital gains tax has fallen to 15% from about 40%. These rate cuts unleashed historic levels of venture-capital funding for business start-ups. The funds helped launch America's entrepreneurial and high-tech revolution over the last 30 years exemplified by iconic American firms from Wal-Mart to Microsoft, Home Depot and Google that employ hundreds of thousands of Americans.

Far from being a loophole, the low tax rate applied to capital gains is beneficial and fair for several reasons. First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses.

Second, capital gains aren't adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. It's therefore possible for investors to pay a tax on "gains" that are illusory, which is another reason for the lower tax rate.

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Getty Images

Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. When you buy a stock, its valuation is the discounted present value of the earnings.

The main reason to tax capital investment at low rates is to encourage saving and investment. If someone buys a car or a yacht or a vacation, they don't pay extra federal income tax. But if they save those dollars and invest them in the family business or in stock, wham, they are smacked with another round of tax.

Many economists believe that the economically optimal tax on capital gains is zero. Mr. Obama's first chief economic adviser, Larry Summers, wrote in the American Economic Review in 1981 that the elimination of capital income taxation "would have very substantial economic effects" and "might raise steady-state output by as much as 18 percent, and consumption by 16 percent."

Almost all economists agree—or at least used to agree—that keeping taxes low on investment is critical to economic growth, rising wages and job creation. A study by Nobel laureate Robert Lucas estimates that if the U.S. eliminated its capital gains and dividend taxes (which Mr. Obama also wants to increase), the capital stock of American plant and equipment would be twice as large. Over time this would grow the economy by trillions of dollars.

Moving rates higher has damaging effects. Economist Allen Sinai estimates in a report for the American Council for Capital Formation that raising the capital gains rate to between 20% and 28% would reduce U.S. employment by between 231,000 and 602,000 jobs a year, and that with slower growth and a weaker stock market "the federal budget deficit actually ends up larger."

Even on class-warfare grounds, it is counterproductive to raise taxes on capital. Most of the returns on investment in a business benefit workers (not shareholders), because they become more productive with more modern factories, computers and equipment made possible with investment capital.

Isn't that precisely what we want in America today? As consumers and the government inevitably reduce their debt loads, the economy needs a higher level of capital investment to spur business creation and a spirited bidding up of stagnant wages. Democrats who argue for higher taxes on capital are advocating less investment and dooming workers to fewer jobs at lower wages.

Poverty, Inequality Aren’t as Bad as You Think

By the Editors Sep 20, 2012 5:30 PM CT
http://www.bloomberg.com/news/2012-09-20/poverty-inequality-aren-t-as-bad-as-you-think-view.html

Poverty statistics can be used to prove almost anything.

When the U.S. Census Bureau reported last week that 46 million Americans, or 15 percent of the population, live in poverty, conservatives said that five decades of the welfare state have had virtually no effect. Liberals answered that laissez-faire economics have kept poverty rates stubbornly high.

This debate is based on a false premise: Poverty isn’t as high as the U.S. government says it is. The reason is that federal programs, supported by Democrats and Republicans alike, have dramatically reduced poverty and, by extension, income inequality.

To understand why, let’s look at what the numbers don’t show. The Census Bureau doesn’t count safety-net benefits, including food stamps, housing aid, school lunches and other noncash transfers. Adding the cash value of food stamps alone would lower the poverty population by 3.9 million people. Census data also overcompensate for inflation by ignoring discount prices at big-box outlets such as Wal-Mart Stores Inc., where many low-income families shop. The figures don’t even factor in Medicare and Medicaid benefits.

Most Overlooked

But tax credits are the most overlooked numbers of all. One, the Earned Income Tax Credit, is refundable, meaning that some low-income breadwinners get a check from the Internal Revenue Service even if their earnings are so small that they owe no income tax. Counting that tax credit would decrease the number of people living in poverty by another 5.7 million.

The Census Bureau defines a family of four with income less than $23,021 as impoverished. But a better portrait of poverty in America would count all government benefits and tax credits, raising many households’ income considerably. An even truer picture of deprivation would measure consumption (how much a household spends on rent, autos, food and other items) rather than income (how much a household admits to bringing home in earnings). Incomes are unreliable because people are reluctant to reveal how much they make. They are less reticent when asked if they have television sets, cars and air conditioning, or if they eat out and go to movies.

When adjusted for these flaws, the level of poverty is much lower, says a new paper by economists Bruce D. Meyer at the University of Chicago and James X. Sullivan at the University of Notre Dame. Instead of 15 percent, it is only 4 percent to 5 percent. And instead of being higher than it was in 1980, poverty has declined by two-thirds.

In other words, the war on poverty hasn’t been won, but it’s making inroads. The lion’s share of the credit, the professors conclude, goes to the Earned Income Tax Credit, the Child Tax Credit and Social Security.

This may not jibe with Republican presidential nominee Mitt Romney’s quip about the “culture of dependency,” a trait he ascribed to a remarkable 47 percent of voters. The opposite is true: Anti-poverty programs have reduced dependency and encouraged work -- and can be fashioned to work even better.

One option is to strengthen the Earned Income Tax Credit. It began under one Republican president (Gerald Ford), was improved by another (Ronald Reagan), and was made refundable by a Democrat (Bill Clinton) -- in each case with the support of congressional Republicans. Studies show the tax credit was the most important factor in reducing welfare rolls, even more so than the 1996 welfare-reform law. Now geared toward single- parent families, the credit could be expanded to help two-parent families and parents without custody of their children.

Important Stabilizers

Automatic stabilizers are also important and shouldn’t be undermined, as the budget blueprint by U.S. Representative Paul Ryan, Romney’s running mate, would do. As Bloomberg View columnist Peter Orszag has written, eligibility for food stamps, unemployment insurance and relief to state governments should expand automatically, without waiting for Congress to act, when the economy is weak.

The implications of all this go beyond politics. Poverty statistics are one of the U.S.’s most closely watched indicators of economic well-being. They can help tell us if poverty- fighting programs are working, or if our taxes are being wasted. They can also steer policy-setters toward more productive solutions and away from popular yet misguided ideas.

If poverty figures are overstated, for example, then so is income inequality. The most-cited studies don’t count government benefits or employer-provided health insurance. There is little doubt that the chasm between the top 1 percent and the 99 percenters is narrower than we have been led to believe. That shouldn’t depress liberals or cheer conservatives: The inequality gap is closing because of government programs, not the stagnant incomes of the private sector.

Read more opinion online from Bloomberg View. Subscribe to receive a daily e-mail highlighting new View editorials, columns and op-ed articles.

Today’s highlights: the editors on the challenges facing Japan’s leaders; Stephen L. Carter on how Hustler magazine can inform our response to Mideast violence; Pankaj Mishra on the tangled roots of the Sino-Japanese territorial spat; William Pesek on Japan’s slow tsunami recovery; Jonathan Weil on banks inflating their capital; Matt Miller on the school strike the U.S. really needs; Mel and Patricia Ziegler on selling Banana Republic to The Gap.

To contact the Bloomberg View editorial board: view@bloomberg.net.

• wsj September 21, 2012, 6:57 p.m. ET

Leslie Michelson: Doctor to the 1% (and Maybe Someday to You)

You know how the affluent hire investment and tax specialists to run their finances? Leslie Michelson does the same for their health care.

By JOSEPH RAGO

Los Angeles

The rich are different than you and me. Not only—yes, yes—do they have more money, but they've also heard of, and many have hired, Leslie Michelson. He's their de facto primary-care doc, though he holds no medical degree.

Mr. Michelson is the CEO of Private Health Management, an ultra high-end company that borrows from concierge medicine, managed care, applied-sciences research and information technology while fitting into no neat category. The best analogue might be the investment and tax specialists that the affluent employ to run their finances; Mr. Michelson does the same for their health care. "Like private wealth management, just far more important," he quips in his modern Beverly Hills offices, all green glass and steel, white walls, white floors.

Mr. Michelson—who sounds remarkably like the actor Michael Douglas—has spent 30 years in the health-care business and thinks he has learned what's wrong and how to fix it. And how to profit from it. Thus Private Health, which he founded in 2007.

"We don't have time to wait for the system to heal, so we cure it for our patients through sophistication, brute force and technology," Mr. Michelson says. On one level he offers a glimpse into what it takes "to get people the very best health care in the world," as he puts it. Yet the real interest may lie in what Private Health's business model—reported in detail here for the first time—reveals about the future of U.S. health care.

Private Health caters to "high net worth individuals" and to businesses that retain its services for their executives as a benefit. Mr. Michelson says he serves between 12,000 and 15,000 clients, "principally in private equity, hedge funds, professional and financial services firms." Private Health is closely held and doesn't disclose its membership fees, though Mr. Michelson does say he runs "a business for people who can afford us," the implication being that if you have to ask . . .

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Terry Shoffner

Strictly defined, Private Health isn't part of the growing phenomenon known as concierge medicine, where doctors charge a retainer for more face-time and personal attention, and often take their practices off the commercial and government payment grid. Private Health isn't an insurance company either and maintains no contractual or financial relationship with its doctors. "We don't buy access," Mr. Michelson says.

A large part of what Private Health does is simply match patients with physicians, which isn't as obvious as it sounds. "People do not know how to choose doctors. It's one of the most important things you can do to promote your own health and that of your loved ones, and it's: 'My friend's cousin's relative went to Dr. Smith, and he was terrific.' Well, how do you know he's terrific?"

So Mr. Michelson built a series of proprietary algorithms to distinguish "the few who are the very best" from "the many who are very good," based on "the factors that predict excellence." For example, the premier caregivers for metastatic cancer are usually academic researchers on the cutting edge, not general oncologists. The best orthopedic surgeons perform many procedures as they master the clinical learning curve, ideally for a single injury.

His referral database includes 2,200 specialists across 160 medical fields, "reified into far finer groupings of disease than is standard practice." He says that "the world becomes so much clearer when you are able to identify the physician with the deepest and narrowest expertise in exactly what you need."

Mr. Michelson says doctors like to belong to his informal network because they're "interested in excellence and what we stand for." He adds, with more than a little euphemism, "In a world in which 98% of the conversations are about cost containment, it's a joy for them to have somebody who's focused on enhancing quality only." No doubt true, though it probably doesn't hurt that providers also like to have a relationship with his client base, the sort of people who become university patrons or donate a hospital wing.

But Private Health is also an adaptation of the rapid advance of modern medicine, which throws off ever more and better ways to diagnose and treat disease and ultimately extend lives. The medical journals now publish 60,000 articles each year, Mr. Michelson notes, a doubling over the past decade. The half-life of a specialty is short, continually disintegrating into subspecialties, and sub-subspecialties, to the point where some doctors devote their whole career to one variant of one illness.

"As the biomedical revolution took off," Mr. Michelson says, "there should have been a counterbalance of somebody taking the position of the general contractor, the manager, and investing in the systems, the technologies and the processes to keep up." But the organization of medicine as an industry didn't change.

So the health-care delivery system, to the extent it qualifies as a system, "has no quality control, no integration, no coordination." Doctors "tend to operate in an independent and isolated way, and even specialists who've been treating the same patient for years and years typically never, ever speak to one another."

Private Health is designed to backfill these gaps whenever one of its patients has a medical emergency or complex condition, say, a traumatic brain injury or newly diagnosed cancer. A personal-care team parachutes in, led by a clinician employed by the company, and compiles a brief on the patient. They centralize and digitize the patient's medical records, usually dog-eared paper piles that can run to thousands of pages. Research scientists immerse themselves in the latest findings and treatment regimens for the particular condition involved.

Tests are double-checked—biopsy tissues are sent to an outside pathologist, MRIs to another radiologist. For an era of targeted therapies, Private Health runs a full battery of molecular diagnostics "to sequence the entire three billion base pairs of somebody's DNA in a couple of hours," Mr. Michelson marvels.

The goal is to ensure an accurate diagnosis and lay out all the treatment options. Private Health functions as a kind of running, independent second opinion. It operates in the twilight zone where there isn't a "best practice" for when and how to treat, but a continuum of risks and benefits that vary from patient to patient.

The clinician helps locate the right experts, Mr. Michelson says, and then works to "fuse together all these multiple specialists in a single team with a single objective." There are "no redos, no lost scans, no ambling around going from specialist to specialist, trying to figure out what's going on." The most frequent reaction is: "This is how medicine was always supposed to be practiced."

The idea for Private Health came to Mr. Michelson when he was running the Prostate Cancer Foundation, the multibillion-dollar philanthropy Michael Milken set up in 1993. Prostate cancer is a common disease but treatment isn't straightforward. Surgeons end up recommending surgery, radiation specialists radiation, still others "watchful waiting," etc.

Mr. Michelson says people started asking him for advice, which led to the prototype for Private Health. Eventually he decided to improve his process across more diseases and help more people.

One irony is that for all its white-glove extras (a research department, genetic profiling), a lot of what Private Health does are core functions that patients would value and providers or insurers ought to be doing but rarely do (case management, using computers). Why is that?

Cost is part of it. "It's too expensive for us to do it for everybody right now," Mr. Michelson says. Another part, he thinks, is that "the incentives are attenuated because of the structure of insurance," namely, job-based coverage.

Since businesses are the customers, not the individuals who change jobs every three years on average, insurers "act rationally" and don't invest in services with "short-term costs and long-term payback." Mr. Michelson thinks the better option is for businesses to convert to cash vouchers so their workers can buy portable policies. Right now, there is "no meaningful information about the quality of care, virtually no information about price, and no sensitivity to price," but that would change if the insurance industry built "an enduring relationship with consumers," he says.

"I understand that it is woven into the fabric of our society that employers can and should continue to pay for health insurance for their employees," Mr. Michelson declares. "But why, circa 2012, should HR departments be selecting and administering one or two or three plans for a thousand or a hundred thousand workers and their dependents? You don't need a Ph.D. in economics to understand that you will guarantee suboptimization."

Economists, if not politicians, are with him on that one. One thing everyone on the political left and right does seem to agree on, however, is that more coordination is how medicine will become more efficient over time. The debate is over how to do it. Liberals think the government can tell providers to do the same things Private Health does through regulation, which the Affordable Care Act calls "accountable care organizations," and therein lies another irony.

Another reason Mr. Michelson's model hasn't taken hold, he thinks, is that "the level of regulation that you need to deal with to be creative within health care is staggering." He says only nuclear energy can compete for complexity. Layer on layer of rules and bureaucracies means that "the entrepreneurial energies that have so transformed so many other industries aren't in play."

The final irony is that the Obama health-care reform passed in the name of equality may drive more and more patients to companies like Mr. Michelson's, especially if regulation causes quality or access to decline. Universal coverage is never as universal as its proponents want it to be, and it usually results in a double- or triple-tier system as the upper-middle classes flee. Then the medical ethicists condemn the disparities based on ability to pay that their own programs helped to create.

"What do I say ethically about that?" Mr. Michelson muses. "The notion that we're moving toward a two-tiered system misses the point by decades. We already have a multitiered system—the chasm between the very best and the very worst is much wider than people realize."

He continues: "I think it's a hard truth that if your aspiration is to provide everyone the highest quality of care, then you have precluded yourself from providing anyone with the highest quality of care. As an economic, structural, societal matter, it's impossible to achieve.

"I think we're a country where not everyone is entitled to wear the finest suits, not everyone is entitled to live in the biggest houses. We're a country where economic forces work. What we have is an obligation to provide the people who are at the lowest part of the socioeconomic spectrum a base line safety net of fair and reasonable care. We literally have not been able to do that for decades. The poorest people in this country get the worst care in the industrialized world. And even the richest do not get the quality of care they think they should be getting.

"By the way—let me be very clear—I'm a Democrat. I've been a Democrat for my entire life. I worked for President Carter. But I don't have a problem with a market-based health-care system that protects the most vulnerable and at the same time allows people who have the wherewithal and capacity to get an extraordinary level of care."

As for elitism, Mr. Michelson says, "We have been retained by some of the wealthiest people in the country, who were getting terrible care—terrible—and spending a lot of money for it." In any case, he says "our goal, our investors' goal" is to democratize his model. "Innovations such as ours have to start at the high end, because you have to figure out how to do it. And then you figure out how to systemize it and take the costs down and deliver to the mass market."

Americans, says Mr. Michelson, are "extremely good at buying things." But they don't know how to buy health care, and his company can help by giving them the tools they need. "The entire engine of American consumerism is missing in health care. What a preposterous thing."

Mr. Rago is a member of the Journal's editorial board.

wsj Updated September 21, 2012, 8:45 p.m. ET

Harley Goes Lean to Build Hogs

·         Article 

YORK, Pa.—If the global economy slips into a deep slump, American manufacturers including motorcycle maker Harley-Davidson Inc. HOG -0.38% that have embraced flexible production face less risk of veering into a ditch.

Harley-Davidson has fine-tuned its operations for smooth riding should the economy slip back into a slump. James Hagerty has details on The News Hub. Photo: Bloomberg.

Ready to Ride Out Rough Patches

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Miranda Harple for The Wall Street Journal

Motorcycles sat parked outside Harley-Davidson's Vehicle Operations building in York, Pa. The facility assembles Touring, Softail, CVO, and Trike models.

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Until recently, the company's sprawling factory here had a lack of automation that made it an industrial museum. Now, production that once was scattered among 41 buildings is consolidated into one brightly lighted facility where robots do more heavy lifting. The number of hourly workers, about 1,000, is half the level of three years ago and more than 100 of those workers are "casual" employees who come and go as needed.

This revamping has allowed Harley to quickly increase or cut production in response to shifting demand. "This is a big bang transformation," said Ed Magee, a Louisiana-born ex-Marine officer who runs the York plant, one of the Milwaukee-based company's three big U.S. production facilities.

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The efficiency gains mean Harley should be able to raise its operating profit margin for the motorcycle business [excluding financing operations] to nearly 16% this year from 12.5% in 2009, said Craig Kennison, an analyst at Robert W. Baird & Co. in Chicago. Harley no longer needs peak production levels to achieve strong profits, he said.

Overall, U.S. manufacturers generally are in better shape after slimming down and rethinking sloppy practices during the brutal 2008-09 recession. Total profits at domestic manufacturing companies, which were running at an annual rate of $363 billion in this year's first quarter, are up from $290 billion, five years ago, before the recession, according to government data.

Companies often say they learned the lessons of the past, only to get blindsided by some unexpected twist in the economic cycle. But companies generally are in much stronger financial shape than they were a few years ago. "There is a focus on performance and remaining profitable no matter what the business environment is," said Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, an economic research group in Arlington, Va.

Like Harley and others, Caterpillar Inc., CAT -0.89% a maker of construction machinery, now relies more on "flexible" workers, including part-timers and people working for outside contractors. Caterpillar generally doesn't have to pay severance costs when it lets such workers go during slow periods. Flexible workers accounted for about 16% of its global workforce as of June 30, up from 11% at the end of 2009, when many of those workers were cut because of slumping orders.

Harley got more serious about cutting costs when Keith Wandell became chief executive in 2009 amid a severe slump in motorcycle sales. On his first visit to the York plant, Mr. Magee recalled, Mr. Wandell declared the layout and working methods unsustainable. Harley began scouting sites for new plant to replace York and settled on Shelbyville, Ky. The company notified the International Association of Machinists and Aerospace Workers, or IAM, which represents York workers, that the plant would close and move to Kentucky unless they approved a new contract giving Harley more control over costs. Union members voted overwhelmingly to make concessions, and Harley stayed in York.

Instead of 62 job classifications, the plant now has five, meaning workers have a wider variety of skills and can go where needed. A 136-page labor contract has been replaced by a 58-page document.

Kim Avila, 49 years old, who has worked here for more than 17 years, said she saw the concessions as the only chance to preserve jobs. The pace of work is faster now, but she said managers and workers have more mutual respect and work together more smoothly. In the paint department, where she works, people used to do the same chore all day but now rotate through several tasks to avoid body strain and boredom. They are encouraged to fix some minor flaws in the finish themselves rather than kicking them to another department.

Some items formerly made in York, such as brackets and screws, come from outside suppliers. Production fluctuates depending on day-to-day sales, so the company doesn't have to stock up well ahead of the spring peak-selling period and guess which models and colors will be popular.

Similar changes are in the works at Harley plants in Kansas City, Mo., and near Milwaukee, Wis. In all, the restructuring will cut costs of doing business this year by at least $275 million, Harley estimates. "They've done a phenomenal job in reducing costs," said James Hardiman, an analyst at Longbow Research in Cleveland, who nonetheless has a neutral rating on the stock, due partly to uncertain demand.

The transformation has been trying at times. Harley's Mr. Magee likened it to having "open-heart surgery as we were running the marathon" in that Harley had to maintain production in York as it rebuilt the plant. New software installed recently to guide production temporarily left the plant "constipated," one manager confided.

Robots now do most of the welding and metal slicing. They slide flat sheets of steel into an 80-ton press that molds metal into fenders. A computer takes snapshots of each frame or gas tank moving along the line, relaying that information

to the painting equipment so it can prepare needed hues.

Automation has its limits. People, some wearing biker garb such as muscle shirts or U.S. flag head scarfs, still do quality-control and assembly work. To check for leaks, workers plunge gas tanks into water basins and watch for bubbles. It's the same method used for a century at Harley. Mr. Magee shrugged. "It works," he said.

Write to James R. Hagerty at bob.hagerty@wsj.com

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