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Jane the Actuary General Interest

Forbes post, “How The Weimar Hyperinflation Really Went Down – And Why That Matters”

Originally published at Forbes.com on July 6, 2020.

 

Modern Monetary Theory — the dream that we can spend quite a bit more money on such government programs as the Green New Deal, a Universal Basic Income, or similar agenda items merely by printing the money (or the 2020 virtual equivalent thereof) — insists that the United States has much more “room” for spending-via-money-printing without triggering inflation than is otherwise believed to be the case, and, in any event, if inflation does appear to be getting out of hand, our politicians and economics-experts can easily adjust as needed. My lament has long been that is hubris of the highest order, to imagine that it is possible to come up to that line, but not crossing over into unleashing exactly the sort of inflation which can exact so much harm on so many, especially the elderly with fixed incomes.

But I’ve now read in more depth about the hyperinflation of Weimar Germany, in the form of the book When Money Dies, by Adam Fergusson (first published in 1975, and reprinted in 2010), and have been surprised to learn that the story is not quite what I had believed to be the case. The main outline of the crisis is well-known: during World War I, the government funded its costs by means of borrowing, expecting to make up the funds by profiting from a victory. Instead, they were saddled with unfathomably-high reparations, which they were obliged to pay in hard currency. To continue to fund regular government operations, they turned to the printing press; and the more inflation increased, the more difficult it became to collect any sort of taxes paid in arrears. An already-bad situation became much, much worse in 1923, especially in summer and fall, until a stabilization plan pegging a new currency to items of tangible value, took hold in November, in which, when all was said and done, a new mark, the Rentenmark, was worth 1 trillion Reichsmark; and at the same time, at long last, the German government was obliged to balance its budget. (Wikipedia is one ready source of information.)

The story seems straightforward enough — and offers the prospect that some other, smarter, more technocratic, government could do a better job in the future. But the piece to this story that’s missing is this:

Until the crisis took that turn for the (far) worse in 1923, the politicians and industrialists who controlled Germany judged their situation to be the lesser of two evils.

German businesses managed to cope with the situation in various ways, such as dealing in other currencies. Unions demanded regular and automatic inflation adjustments which, until the fall of 1922, kept blue-collar wages at an acceptable level relative to prices. Anyone with any cash invested in stocks to hold on to some of the value of their funds. Renters benefited from rent control based on pre-inflation rents; borrowers saw the real cost of their debt vanish. Clever speculators might even feel they could profit from the situation. And the frenzy with which everyone spent, to get rid of their cash for items of value meant that, ironically, there was little unemployment in the country, however weak the purchasing power may have been.

Fergusson writes of the wealthy industrialist Hugo Stinnes, in spring 1922,

“He justified inflation as the means of guaranteeing full employment, not as something desirable but simply as the only course open to a benevolent government. It was, he maintained, the only way whereby the life of the people could be sustained” (p. 74).

And into this mix fell the Ruhrkampf: the occupation, in January 1923, of the Ruhr Valley, the industrial heart of the country, by French and Belgian armies, in order to seize coal and other goods that they claimed as reparations payments. In protest, the Germans adopted a policy of passive resistance — mines and factories shut down, and the German government printed yet more marks in order to fund relief programs for the occupied Ruhr, and in the succeeding months crime, looting, barter, all accelerated as the mark collapsed. In September of 1923, the financial devastation Germany faced finally led the government to declare the end of the passive resistance — and a State of Emergency, and further political chaos and threats of local rebellions, plus, as the harvest proceeded, the refusal of farmers to bring food to market as long as the currency was worthless — before the ultimate implementation of currency reform in conjunction with the Dawes Plan to restructure reparations and provide loans.

Here are, in the end, two key paragraphs in Fergusson’s book:

“Long before the Ruhr invasion, and perhaps even before the preliminary meetings of the Reparations Commission, there came a stage when it was politically impossible to halt inflation. In the middle of 1920, after the brief post-Kapp Putsch period of the mark’s stability, the competitiveness of German exports declined, with unemployment beginning to build up as a result. The point was presumably not lost on the inflators. Recovery of the mark could not be achieved without immediate repercussions in terms of bankruptcies, redundancies, short-time working, unemployment, strikes, hunger, demonstrations, Communist agitation, violence, the collapse of civil order, and thus (it was believed), insurrection and revolution itself.

“Much as it may have been recognized that stability would have to be arranged some day, and that the greater the delay the harder it would be, there never seemed to be a good time to invite trouble of that order. Day by day through 1920, 1921 and 1922 the reckoning was postponed, the more (not the less) readily as the prospective consequences of inflation became more frightening. The conflicting objectives of avoiding unemployment and avoiding insolvency ceased at last to conflict when Germany had both” (p. 253 – 254).

This means that the Weimar hyperinflation is not merely a cautionary tale with respect to monetary policy, but with respect to larger issues of political dysfunction. How often do we worry about the depletion of the Social Security Trust Fund, but nonetheless assume that sometime between now and then, someone will fix it? The history of the Weimar hyperinflation forces us to admit that we cannot take it for granted that, if only the situation gets bad enough, someone else will fix it.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Why Does Joe Biden Want To Change The CPI Used By Social Security? An Explainer”

Originally published at Forbes.com on June 23, 2020.

 

Elizabeth Warren supported it.

So did Bernie Sanders, and three other now-departed 2020 Democratic presidential candidates.

And so does Joe Biden, though you won’t find it on his website.

It’s a long-running proposal to make one particular change in Social Security: the implementation of the CPI-E, an alternate measure for the calculation of Social Security’s annual cost of living increase, a change which would increase the level of increase in benefits from year to year. And the experts at the Penn Wharton Budget Model, in their analysis of Biden’s plan for Social Security, report that he’s on record as supporting this change as well. (The folks at PWBH verified via e-mail correspondence that the Biden campaign had confirmed this detail with them, despite its absence from the Biden website.)

This question is newly relevant in light of a GAO study published last week addressing the question of whether the current approach to adjusting benefits is the right one. The study’s conclusions were, it turns out, not particularly conclusive — recommending further study on the issue — but the popularity of this change, touted as a win for the elderly because it will increase their benefits at a faster pace from year to year, means it’s past time for me to address it, and, with it, explain the basics of CPI calculations in the first place.

The basics

Here are the basics of how the CPI is calculated, in general, based (in part) on a detailed description at the Bureau of Labor Statistics website*:

“In the CPI, the urban portion of the United States is divided into 38 geographic areas called index areas, and the set of all goods and services purchased by consumers is divided into 211 categories called item strata. This results in 8,018 (38 x 211) item-area combinations.

“The CPI is calculated in two stages. The first stage is the calculation of basic indexes, which show the average price change of the items within each of the 8,018 CPI item-area combinations. For example, the electricity index for the Boston CPI area is a basic index. . . . At the second stage, aggregate indexes are produced by averaging across subsets of the 8,018 CPI item-area combinations.” This averaging is based on usage patterns based on consumer surveys, the “market basket of goods,” but the weights are kept constant from one month to the next, for purposes of calculating the index.

For example, in December 2014, the standard CPI measure used a weight of 16.011% for food and beverages, of which coffee had a weight of 0.15%; household furnishings had a weight of 3.455%, of which dishes and flatware had a weight of 0.03%.

Note that this is not a comprehensive calculation, and the math is not always what you’d expect. In particular:

The government only uses a sampling of items within a given category. For example, “a particular type of cheese item will be chosen, with its likelihood of being selected roughly proportional to its popularity. If, for example, cheddar cheese in 8 oz. packages makes up 70 percent of the sales of cheese, and the same cheese in 6 oz. packages accounts for 10 percent of all cheese sales, and the same cheese in 12 oz. packages accounts for 20 percent of all cheese sales, then the 8 oz. package will be 7 times as likely to be chosen as the 6 oz. package. After probabilities are assigned, one type, brand, and container size of cheese is chosen by an objective selection process based on the theory of random sampling. The particular kind of cheese that is selected will continue to be priced each month in the same outlet [store].” At another store, another type of cheese might be chosen, so that “the cheese sample (or the new vehicle sample, the television sample, etc.) contains a wide variety of styles and brands of cheese, vehicles, televisions, etc.” But this sampling is not guaranteed to produce the same types of changes as the “true” inflation rate for all goods and services in the entire country, simply by means of sampling error/random chance, and to the extent that this occurs, the CPI calculation will be off.

The index is limited in its ability to address improvements or declines in quality; it’s not that the experts ignore this aspect of price changes, but it’s difficult to do with precision. For example, automobiles have, over the years, improved in terms of the safety features, fuel efficiency, technology improvements to integrate cell phones, and the like. “Adjustments for quality change in the CPI new car index include structural and engineering changes that affect safety, reliability, performance, durability, fuel economy, carrying capacity, maneuverability, comfort , and convenience. Since 1999, quality adjustments have not been made for changes associated with pollution control mandates. . . . The adjustments exclude changes in style or appearance, such as chrome trim, unless these features have been offered as options and purchased by customers. Also, new technology sometimes results in better quality at the same or reduced cost. Usually, no satisfactory value can be developed for such a change. In such cases, the quality change is ignored, and prices are compared directly.”

Changes in housing-related costs are based on the change in rents, either actual (for rental units) or hypothetical, for owner-occupied homes, regardless of whether a homeowner actually experiences those cost increases. This is really hard to wrap your head around, but here’s a thought experiment to make sense of this: some homeowners, in the aftermath of the housing market crash in 2008, were unable to sell their homes when they moved away, and were left renting the house they had formerly lived in, and owning their new home. But imagine that the reverse were true — that they rented the home they occupied and at the same time, owned a home for investment purposes, for rental income and its appreciation value. (On a personal note, when I lived in Germany for a time, I learned this was not uncommon, because both renting, and small-time landlording, were both more common than here.) Is there any difference, in terms of practical outcome as far as cost increases are concerned, between the two scenarios?

Medical care CPI calculations are particularly complex. Only out-of-pocket spending and consumer-paid health insurance premiums are included in the index (that is, government and employer-paid costs are not included, because these are not costs borne by individuals). Quality improvements in medical care are also not reflected in the index, due to the impenetrability of data. Fees reflect negotiated rates for Medicare or private insurance but not any discounts offered uninsured patients after-the-fact.

The variations

There are also two basic CPI measures:

CPI-U is the CPI for All Urban Consumers, which includes 93% of the U.S. population, and CPI-W is based on the purchasing patterns of Wage Earners and Clerical Workers, in all, about 29% of the U.S. population. This latter index is what’s used for Social Security adjustments, but is not appreciably different from the CPI-U.

In addition, there are two “experimental” indices, the CPI-E, and the C-CPI, or chained CPI.

The CPI-E uses alternate weights for households headed by someone 62 or older; for example, medical care has a weight of 12% rather than 9% for the CPI-U. A 2010 comparison of general categories of expenditure shows that levels are fairly similar at the bird’s eye view, varying by as much as two percentage points, rarely more. 14.2% of the over-65’s expenditures were on transportation compared to 16.0% of the total population, for example, but 7.0% of the total was allocated to utilities rather than 5.5%. While the older group spent 13.2% vs. 6.6% on health care, they spent half as much, 5.1% vs. 11.2% on insurance and pensions.

Using the CPI-E rather than the CPI-W to increase Social Security benefits would produce a higher increase from year to year; the Senior Citizens’ League calculates that the average difference from 1983 to 2019 was 0.25% per year, which is small in any given year but compounds over time.

But there are two reasons why the existing method of calculating the index produces questionable accuracy. First, the CPI-E calculates a new set of weights but does not collect new data, with respect to shopping patterns within any individual category (do they purchase more or less organic food, for example, and are they more or less likely to shop at Whole Foods or Aldi?); and, second, the sample size that remains when only the over-62s are used, from the larger consumer survey, may be too small to be accurate, in terms of general statistical norms for accuracy of calculations.

While changing to the CPI-E would increase Social Security inflation adjustments, the chained CPI would reduce them, because it attempts to reflect the behavior of all of us, to choose lower-priced items when the item we’d usually purchase increases. We’re seeing this in action with the various meat shortages due to Covid-19; at least, I personally have compared the cost of a package of lamb to the steak I was planning to buy, and chosen the former, and compared the cost of chicken breast to ground beef and likewise revised the week’s meal plan. As the Brookings Institute explains, “the BLS calculates one measure of inflation that uses the first period basket and another measure of inflation that uses the second period basket (which might include different items because of price changes—more chicken and less beef, for example)—and then takes the average. It does this every month, and creates an index that “chains” these changes from month to month.

Critics of the Chained CPI with respect to Social Security say that, to quote, for instance, The American Prospect, “of course, no real substitute exists for the main drivers of elderly people’s budgets, namely housing, medical care, and prescription drugs, all of which typically rise faster than inflation. You can’t really substitute ham for arthritis medication.” But as we saw above, medical care has only a three percentage-point difference, and in other categories, older adults are famously (infamously?) more cost-conscious.

For the period from 2000 to 2017, the chained CPI was lower than the regular CPI by pretty much the same differential as the CPI-E was higher than the regular CPI — which, in the end, suggests that a chained elderly CPI (a C-CPI-E?) could end up at about where you started.

Finally, the BLS is considering a change to its method of calculating the cost of housing, determining, instead of the equivalent rental cost, “how much it costs to own and occupy the home (e.g., by including mortgage interest payments but not the purchase price of the home).” How would this impact the CPI-E? Since a larger proportion of the older adult population own their homes than the adult population in general (81% vs. 71%), and they are likewise more likely to own homes free and clear, this ought to reduce the CPI index if based specifically on costs for the elderly, to the extent that rents rise faster than inflation as a whole.

International Comparisons

Is the United States in line or out-of-line, in comparison with other countries?

By the GAO’s count of practices in the 36 OECD countries, 27 index state pensions/Social Security benefits in whole or part based on prices. Of those, only 4 use a special index for elderly-specific inflation. None of them use a chained-type formula. (10 countries calculate a special formula for elderly-specific inflation, and 5 calculate a chained CPI index, but except for the 4 above, the remainder don’t use it in their adjustments, only for research and analysis purposes.)

Which is all well and good — but it omits the crucial piece of information that more prevalent in other countries than either of these contemplated changes is a calculation that’s based, in whole or in part, on changes to average wages rather than prices. A cursory review of the OECD Pensions At A Glance Country Profiles shows that, to take a few examples, in the Netherlands, pensions increase to keep pace with minimum wage rates; in Germany, pensions increase with wages, adjusted for “sustainability” (relative changes in the dependency ratio); and in Australia, increases are the greater of a standard CPI or a retiree-specific index, but with a minimum adjustment relative to average wages. Should the U.S. do likewise? Intellectually, it’s appealing, but it hardly seems practical given the system’s sustainability worries.

The Bottom Line

Are you still with me? The concepts here are confusing even for me — and I’m an actuary!

Making a decision about a fine-tuned inflation rate is not simple, and nothing that I’ve written (or read) suggests that there’s a single “right” or “fair” answer. In fact, here’s a thought experiment: imagine that Social Security benefits were cut, now, in an actuarially-fair way to make up for future higher cost-of-living increases. Some people would win and some would lose, depending on whether the CPI increase was higher or lower than the inflation that they themselves personally experience based on their own personal “basket of goods.” What would be the “fair” policy to enact?

In fact, no matter what adjustment method is chosen, some people will benefit more than others, because spending patterns are different — own a house or rent? have high medical bills, or in good health, or get your bills covered by Medicaid anyway? drive a car frequently or take the bus? Even something as simple as the degree to which one is accustomed to eating meat will impact how your “personal” price index compares to the Consumer Price Index.

Is the Biden campaign supporting this change because it’s the Right Thing To Do? Or because it’s an easy way to promise spending more money in favor of a voting bloc? Since it’s touted as “free money” even though it comes out of the pocketbooks, collectively, of American taxpayers, I worry that it’s the latter — but, at the same time, perhaps the fact that they don’t widely promote this position is that they recognize it’s not as simple as it appears.

 

* Thanks to Laura Miller (twitter handle @curiouser_Alice) who provided some additional clarifications and review.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Can We Fix ‘The Price We Pay’ For Medicare? A New Book Shows Some Ways Forward”

Originally published at Forbes.com on June 18, 2020.

 

When it comes to planning for retirement, the fundamental math is straightforward: your income in retirement (including reasonable savings spend-down) must equal or exceed your expenses.

Experts therefore worry about retirement readiness in terms of the degree to which Americans will have sufficient income in retirement — for example, the Center for Retirement Research calculates a National Retirement Risk Index by measuring the degree to which Americans are likely to reach or fall short of an objective of “maintain[ing] their pre-retirement standard of living in retirement.” But that’s only half of the equation; equally important but not addressed nearly as often is the other half, the expense side. And it’s for this reason that I want to share some bits & pieces of a recently-published book, The Price We Pay: What Broke American Health Care – And How To Fix It, by Marty Makary, as I clear out my bookshelf of library books in anticipation of my library’s re-opening.

Makary is a surgeon and professor and, according to his Wikipedia profile, “an advocate for high-consensus, common-sense reforms in healthcare.” His book, based on his own efforts at reform, profiles shocking ways in which healthcare costs are higher than they ought to be, and ways to reduce those costs without impacting — or even improving — quality of care.

The book begins with the example of a health fair at an African American congregation in Washington, D.C., where medical staff screen patients for “claudication” — a blockage of a leg artery which can be removed by a stenting procedure, the same sort of procedure that had become enormously popular for heart vessels, but now, thankfully, in decline after having been shown not to be beneficial in most cases, and subject to public scrutiny. This new income stream — costing patients modest sums and Medicare substantially more, $10,000 for a brief procedure (or triple the cost for private insurance) — “can generate $100,000 in one day when a doctor owns the facility,” Makary writes, and nearly always without genuine medical necessity, but instead by means of identifying prospective patients through health fair or after-church screenings.

Makary then backs up a bit to discuss the scandal of hospitals overcharging patients in any instance where they don’t have in-network insurance, whether they’re uninsured or simply out-of-network. Examples he gives of hospitals billing patients “chargemaster” rates that are as much as 3 – 5 times higher than what insurance companies pay, offering meager reductions for “financial assistance,” then taking to court patients who can’t pay are appalling enough (and are just as prevalent among nominally non-profit as for-profit hospitals) that Congress is already looking at remedies to “surprise billing,” or had been doing so, in a bipartisan effort, before the pandemic hit.

Another example that’ll make your blood boil is the escalating cost of air ambulances: rather than hospitals owning the helicopters, private companies moved in. The charges were no longer covered by insurance, or, at any rate, they were covered on an out-of-network basis so that patients were left with high residual costs, and patients opened up horrifically-enormous bills: $50,000; $100,000; or more — and, what’s worse, for cases where the air ambulance wasn’t even necessary, but medical staff recommend or insist on it, receiving kickbacks along the way, and patients have no idea of the cost they’re incurring.

And while price-gouging might be solved by putting all Americans on a government-run healthcare system with prescribed payscales, that’s only one component of the problem. Makary profiles obstetricians with excessively-high C-section rates because doctors want to avoid disruption to their evenings, doctors who counsel and perform back surgery for patients who (as is nearly always true) would be better off with physical therapy, doctors who perform an upper endoscopy and a lower colonoscopy on two separate days to maximize billing rather than both-at-once to maximize patient welfare; and more. He describes the overuse of opioid prescriptions for no other reason than lack of effort in the medical profession to determine what was actually best for patients rather than doing what they’d always done. He even cites his own experience being prescribed heartburn medication rather than diet modification, and cholesterol-reducing statins without addressing his particular health- and family history. “Medicare for All” offers no answers here, especially given its promises of unlimited medical care with any provider.

More rackets: health insurance brokers who sell their employer-clients on the insurance plan which pays them the largest commission rather than offering clients the best deal. (Employers are increasingly aware and moving to other business models.) Pharmacy benefit managers where rebates and “spreads” leave employers struggling to manage costs (especially since there are only three such firms bidding on employers’ business, stymying employers’ efforts to cut costs) and employees deceived as to the true cost of their medications. “Wellness programs” which don’t actually improve the well-being of employees.

What’s to be done? One of Makary’s own initiatives is simply to prod those doctors who are not cynically abusing the system, to reduce their overtreatment by educating them that they are far beyond the norm in their field. He also uses his position within his profession to educate his peers about what’s going on with medical costs that they may be wholly unaware of.

But the recommendation that’s the most promising is a complete re-do in terms of how healthcare is delivered, as illustrated by a new provider called Iora Health. This is a company, Iora Health, Inc., not a social services agency, but their business model is about improving their Medicare patients’ health in the long term by doing more than simply scheduling annual physicals or 15 minute visits and waving them away until the next appointment. Patients don’t simply have a doctor – they are assigned a health coach, and

“Iora doctors and nurses are free to take care of people in whatever way they see fit, ranging from home visits, to giving a ride to see a specialist, to enrolling their patients in one of their classes. They pride themselves in spending a lot of time with patients so they can understand the individual’s goals, struggles, and barriers. The Iora health coaches make everyone’s job a lot easier” (p. 157).

Their clinics have a community room where they host cooking classes and game nights. They follow up with patients who miss appointments, and provide rides if needed. They investigate the life circumstances of patients who don’t take their medication rather than writing them off. (How many of us have family members of our own who could have benefitted from this?)

Makary calls them the “Tesla of health care” — radically transforming healthcare, especially for Medicare enrollees with complex needs. And their results are impressive.

“After at least three months of engagement with an Iora care team, the number of patients whose hypertension was controlled increased from 59% to 74%. Results from a cohort of 1.176 Iora Medicare enrollees over an 18-month period showed hospital admissions cut in half and emergency department visits reduced by 20%. The totalmedical spending by the insurer declined 12%. Since that study, Iora has now reduced health care spending for the populations they care for by 15%. Imagine what a 15% reduction in Medicare’s roughly $1 trillion budget would mean for the country” (p. 164). Iora has practices in Texas, North Carolina, Atlanta, Phoenix, and elsewhere. A similar company, Oak Street Health, has 21 locations in Illinois, and a total of 36 elsewhere. ChenMed’s locations are primarily in Florida. All three provide services specifically for Medicare patients.

And their business model? The clinic is paid an annual lump sum.

Yes, they’re an HMO, more-or-less, though they work with insurers/Medicare, rather than directly with patient-customers — and, at the same time, HMOs were supposed to transform healthcare, decades ago, but didn’t. Why not? Are we ready for another try? Let’s hope so.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.