Courtesy of the brilliant Janis Ian. Yes, you read that right. A heavy metal knitting championship. If this is any guide and based on the Finns I’ve met, Finland must be one strange country.

Speaking of health care, how high would the Medicare payroll tax need to be to cover the Medicare system’s shortfall, depicted above graphically? That’s the reason there will be more health care spending reform. Either we’re going to cut costs, we’re going to borrow without limit, increase personal income taxes, or we’ll raise the Medicare payroll tax and probably all four.

Sports analogies don’t usually capture my imagination but I found this post at City Journal on the “James Harden economy” included some valuable insights, namely:

More serious than the decline in base hits in baseball or elegant passing in basketball is the frayed connection, in our market economy, between optimal competitive behaviors and the social goods that they are supposed to support. Corporate profits and stock-market valuations have surged for decades, while the incomes of typical workers have stagnated. Growth and wealth have concentrated in ever-narrower geographic areas. Productivity barely rises.

A report released in May by Republican senator Marco Rubio highlights a fundamental shift underlying some of these trends: businesses are no longer the nation’s long-term investors. “Developing productive, long-life capital assets,” the report argues, is “the primary task required of any successful economy.” Market capitalism presumes that the business sector, borrowing from elsewhere in the economy, will fund the creation of these assets. But that “money circuit” has short-circuited: in aggregate, the business sector now lends more than it borrows, a practice “quite at odds with traditional models of corporate finance,” as Federal Reserve economist Roc Armenter observes.

Rubio quotes economic historian Alfred Chandler: “The continuing productivity, competitiveness, and profitability of these enterprises and of the industries and nations in which they operate depend on constant reinvestment.” But this “constant reinvestment” isn’t happening. The data show instead a “financialization” of the economy: “Nonfinancial companies’ balance sheets look increasingly like financial institutions’ balance sheets: that is, they increasingly borrow and lend for profit.” Firms generate profit growth through arbitrage opportunities like the offshoring of labor, by “rationalizing” their workforces, and by investing in financial assets or just buying back their own stock.

These are the modern economy’s “step-back threes.” They lie within the rules and they put wins on the board, but they aren’t yielding the broader benefits for which the game exists. Firms have found a new way to win, and it isn’t pretty.

Don’t blame the companies. They are merely seeking the incentives they have. If you want things to change, we’ve got to change the incentives. What “rule changes” should we implement?

In a post at RealClearPolicy on controlling the cost of health care in the United States, James Capretta reveals that he is yet another economist who doesn’t understand the health care system in the United States. Or the one in Switzerland for that matter. Yes, Switzerland has a system that provides universal coverage based on private insurance companies. But Switzerland is a small, consensus-based country in which every policy of any scope is approved by a direct popular vote. When something becomes the law in Switzerland, you can be confident that it represents the consensus of Swiss public opinion. Additionally, incomes in Switzerland are much more equal than in the United States.

You can contrast Swiss policies with those in the United States but suggesting that because it works in Switzerland it should work in the U. S. is not well-founded.

His prescriptions open mildly enough with suggesting that pricing in health care be more transparent:

First, the federal government can help patients become autonomous consumers of medical services by simplifying the process of price comparisons. The market today is opaque, with pricing that is impossible for the average consumer to compare across providers. The federal government could help consumers by creating a list of standardized services for which pricing must be provided by all relevant facilities and clinicians. The prices attached to each item on the standardized list would cover exactly the same set of services needed to address the patients’ needs, and thus allow for apples-to-apples price comparisons. In addition, insurers should be required to make “referenced-based” payments for those services when provided out-of-network at the average of the rates they have negotiated with their preferred providers. These steps would allow consumers to become active shoppers for many medical services that can be purchased in discrete packages in non-emergency situations.

That won’t do anything about costs but it’s benign. Then he goes off the rails by proposing that Americans should have more skin in the game:

Second, the government should move toward defined contribution payments for subsidized insurance coverage instead of open-ended payments. In particular, in Medicare and in job-based insurance, plan enrollees should get a fixed level of support toward insurance enrollment that is not tied to the overall costs of the plans they select. In Medicare, this means a “premium support” model. In job-based coverage, the federal tax break for employer-paid premiums should be capped to encourage firms to provide fixed levels of support at the maximum tax-preferred level.

What he’s missing is that in the United States most health care demand is created not by patients but by physicians and there is next to no evidence that most patients are capable of economizing prudently. What the evidence actually supports is that patients may economize foolishly, resulting in an overall increase in services required.

A premium support system does not encourage or discourage insurance companies in the U. S. from doing anything for two reasons: 1) most corporate plans are self-insuring—insurance companies are only administrators and bear no risk; 2) insurance companies’ percentage of the take is presently capped.

On the surface the facts on the ground respecting the U. S. health care system suggest that Medicare For All is a better solution. My reservations about it are mostly that, confronted with angry constituents unable to get the health care they want and facing long waits for what they can get, politicians will inevitably raise reimbursement rates. How do I know that? They’ve been doing it for 50 years.

I found this story, reported in the Ventura County Star, interesting. Huy Fong Foods, the company that makes the popular Sriracha sauce, has been embroiled in a legal battle with its erstwhile supplier of peppers, Underwood Family Farms, for some time. Underwood won:

A week after a jury awarded his farm operation $23.3 million in a lawsuit with former partner and Sriracha maker Huy Fong Foods, Craig Underwood said what winning parties often say.

The money can’t be spent yet because it hasn’t arrived. When and if it does — pending the appeal Huy Fong’s lawyers promise — the longtime Ventura County pepper farmer has plans.

“It will allow us to pay down debt, take care of obligations and hopefully get the farm back on track,” said Underwood in his business’s Camarillo office. He sat in a conference room decorated with the new pepper sauces the farm operation is selling and an exhibit from the trial showing the explosive growth of the now dissolved partnership with Huy Fong.

The Irwindale hot sauce company built by David Tran is known for its Sriracha with the rooster logo. It sued Underwood Ranches regarding the bitter end of the 28-year partnership in which Underwood grew jalapeños for Huy Fong.

Here’s the telling part:

Underwood witnesses testified Tran suddenly tried to change terms of the 28-year-marriage late in 2016 after his efforts to hire away Underwood’s chief operating officer were rejected. They said the changes made it impossible for the partnership to continue, triggering a financial earthquake for the grower.

The jury ruled unanimously for the Camarillo farm operation, finding Huy Fong violated its contract and fraudulently concealed and misrepresented information. It awarded Underwood $13.3 million to cover two years of financial losses. An additional $10 million was awarded in punitive damages.

IMO this was clearly a case that could and should have been settled out of court but in which the personalities of the litigants prevented such a settlement. The clearest winners were the attorneys.

There is a witticism attributed to Napoleon: “Do not interrupt your opponent when he is making a mistake.” This morning President Trump succeeded in executing an own goal by tweeting that the four freshmen Democratic women should go back to their own countries, impelling other Democrats, who’d been busily tearing themselves apart, into defending them.

I have said multiple times that I have little or no insight into President Trump’s thinking. Maybe he has some deep strategy but I doubt it. He shoulda left well enough alone.

Yet another Chicago politician has had his home searched by federal agents. The Chicago Tribune reports:

Federal agents have raided the home of a second ally of Illinois House Speaker Michael Madigan, this time former Southwest Side Ald. Michael R. Zalewski, his attorney said Saturday.

Thomas Breen, the former 23rd Ward alderman’s lawyer, confirmed that a search warrant was carried out at Zalewski’s home. Breen told the Tribune that he could not comment further.

“Michael has been known to be a hardworking straight shooter his entire life. We do not think that this investigation will change his good reputation,” Breen said Saturday.

Citing unnamed sources, the Better Government Association and WBEZ-FM 91.5 reported Friday that the Zalewski raid involved an attempt to get work for Zalewski at ComEd and “interactions” between Madigan, Zalewski and Mike McClain, a veteran former ComEd lobbyist and Madigan confidant. None could be reached for comment.

Don’t be concerned that the feds will run out of Chicago politicians. As long as a politician can get a cushy, high-paying job following their political careers from organizations they’re supposed to be regulating, there will be plenty of new politicians to take their place.

According to the Wall Street Journal the immigration enforcement “raids” have begun:

Federal immigration authorities attempted raids in at least two neighborhoods in New York City on Saturday, according to a person familiar with the matter, a day prior to when President Trump had said Immigration and Customs Enforcement agents would begin national roundups of people illegally in the U.S.

In New York City, ICE agents went to residences in the Harlem section of Manhattan and Brooklyn’s Sunset Park neighborhood, the person said. The agents were rejected by people at the residences because they didn’t have warrants, but plan to return at least to Sunset Park tomorrow, according to the person.

A spokeswoman for ICE in New York said that the agency won’t offer specific details related to enforcement operations. “As always, ICE prioritizes the arrest and removal of unlawfully present aliens who pose a threat to national security, public safety and border security,” the spokeswoman said.

The attempted raids in New York come as Democratic city officials and community activists across the U.S. have been mobilizing for the planned roundup.

After word of the raids leaked last week, President Trump on Friday told reporters before embarking on a fundraising trip to Milwaukee that the roundup would begin on Sunday “and they’re going to take people out and they’re going to bring them back to their countries.”

Mr. Trump said the raids would focus on criminals, saying agents would “take criminals out, put them in prison, or put in them in prison in the countries they came from.”

As long as those being apprehended are on final deportation orders, I think that Democratic politicians who’ve been quite vocal in their defense of these illegal migrants are overplaying their hands. When asylum requests are rejected those making the requests are by definition no longer “asylum-seekers”. These politicians need to be seen to be showing more sympathy for legal immigrants and American citizens than for those entering the country illegally.

The Wall Street Journal reports that there’s good news and bad news in the early results of President Trump’s tariffs against Chinese imports. Good news first. Supply chains are moving out of China:

U.S. manufacturers are shifting production to countries outside of China as trade tensions between the world’s two biggest economies stretch into a second year.

Companies that make Crocs shoes, Yeti beer coolers, Roomba vacuums and GoPro GPRO -1.62% cameras are producing goods in other countries to avoid U.S. tariffs of up to 25% on some $250 billion worth of imports from China. Apple Inc. also is considering shifting final assembly of some of its devices out of China to avoid U.S. tariffs.

Furniture-maker Lovesac Co. is making about 60% of its furniture in China, down from 75% at the start of the year. “We have been shifting production to Vietnam very aggressively,” said Shawn Nelson, chief executive of the Stamford, Conn., company. Mr. Nelson said he plans to have no production in China by the end of next year.

The moves by U.S. companies add up to a reordering of global manufacturing supply chains as they prepare for an extended period of uneven trade relations. Executives at companies that are moving operations outside China said they expect to keep them that way because of the time and money invested in setting up new facilities and shifting shipping arrangements. Companies said the shifts accelerated after the tariff on many Chinese imports rose to 25% from 10% in May.

“Once you move, you don’t go back,” Mr. Nelson said.

That last passage is the most important. The changes are likely to be lasting. Now the bad news. American companies are not onshoring their production:

There is little evidence, though, of U.S. manufacturers bringing production from China back to the U.S., a move the Trump administration hoped the tariffs would encourage.

While imports from other Asian countries have climbed, U.S. manufacturing output has declined 1.5% through May from a recent peak reached in December, according to the Federal Reserve. The Institute for Supply Management said earlier this month that its manufacturing index slipped again in June to the lowest level since 2016.

“If we were to try to do a factory in the U.S., it would be enormously expensive,” said John Hoge, co-owner of Sea Eagle Boats Inc., which makes 85% of its inflatable kayaks, canoes and fishing boats through contract manufacturers in China. Mr. Hoge said the network of manufacturers and suppliers in China that makes boats for Sea Eagle and many of its competitors isn’t as comprehensive in any other country.

“It took us 20 years to build up the supply chain in China,” he said. Mr. Hoge estimated the 25% duty on his products that took effect in May would double the Port Jefferson, N.Y., company’s tariff expenses to about $500,000 a year.

I don’t believe that either Asian or American companies understand the implications of that last paragraph. Supply chain management is much more agile than it was 20 years ago and will become more so. What took 20 years then will proceed much more quickly now. In the future companies will change suppliers much more rapidly than they have been predisposed to do. There’s a simple reason for that. To maintain production companies need second sources and a different nameplate doth not a second source make.

While I suspect that some manufacturing will be onshored (also known as “reshored”) I think the broader pattern will be diversification of sources and that’s a good thing. For one thing we should be much more cautious in how we do business with a country that is engaging in industrial and military espionage against us at the scale at which China has done so.

Update

A. T. Kearney’s remarks on its reshoring index casts more light on the subject:

Vietnam is not the only beneficiary of changes in US trade policies. As the US and China escalated tensions, Mexican imports to the US picked up considerable steam. In 2018, Mexico increased its exports to the US by $28 billion, a growth rate of 10 percent over 2017—the fastest growth Mexico has seen in the past seven years.

While Mexico and the US have had their fair share of trade-related conflicts this past year, the magnitude of these disputes resembles a sibling quarrel compared to the brawl with China. US–Mexico tensions are calming; the US threat in June 2019 to place tariffs on 100 percent of Mexican goods until Mexico acted to reduce the flow of immigrants crossing the border was quickly resolved, with minimum sacrifice by either Mexico or the US. Renegotiation of USMCA is nearly complete, and the new agreement—which largely keeps intact the overall NAFTA framework—is likely to be ratified by all three countries’ legislatures by the end of 2019, especially given the administration’s recent lifting of Section 232 steel and aluminum tariffs on Mexico.

“Nearshoring” will become more important, something I think is an unmixed good. They go on by expanding on what would be necessary for reshoring:

One of the conditions that needs to be in place to incentivize reshoring is the presence of a stable and predictable business environment that enables companies to deliver their products freely to the end-markets of their choice. The US has taken a step backward on this front, as the discussion above indicates. But leaving trade wars aside for a moment, what else is needed for manufacturers to start bringing jobs home at a significant rate?

Chief among manufacturers’ needs is a robust labor force available at an attractive cost and composed of the right percentage of skilled workers. Last year’s 2017 Reshoring Index report commented on the continued lack of skilled labor as one of the top constraints on the growth of US-based manufacturing. In this year’s report we revisited the numbers, and the story did not change.

I agree with the first point and am skeptical of the second. I don’t think we should be too determined to match China’s or Vietnam’s price. A better strategy is to start encouraging manufacturing techniques that don’t depend on labor costs as much as those of the past have.