Federal Subsidies Spur Massive Fraud

By Chris Edwards of Cato.

"One of the problems with federal hand-out programs is that individuals take advantage of them and scam artists outright loot them. You see this in programs such as Medicaid, Medicare, school lunches, earned income tax credits, housing aid, student loans, and farm subsidies.

Daily Beast writer Evan Wright has the appalling story of Christopher Bathum, who looted addiction-treatment funds made available by the Obamacare law. The law required addiction-treatment funding by Medicare, Medicaid, and private insurance companies.

Addiction is, of course, a huge problem, but to me Wright’s article indicates that the wrong solution is throwing federal money and mandates at it. The costly Americans with Disabilities Act also played a role in Bathum’s scam.

Here are excerpts from Wright’s excellent story:

He’s a convicted sexual predator who targeted women in his care. Soon he’ll be tried for an alleged $176 million insurance fraud. He’s an exceptionally bad person, but as a businessman he was fairly typical of rehab operators in America’s $42 billion-a-year treatment industry.

His name is Christopher Bathum. Until his arrest in 2016 he ran Los Angeles-based Community Recovery, among the fastest growing rehab chains in the nation. Starting with a single treatment center in 2012, Bathum grew Community Recovery into two dozen facilities in California and Colorado, with 400 beds, medical clinics, a testing lab and a Hollywood art center and café, where patients could work and express themselves creatively.

… The most astounding aspect of Community Recovery was its price. It was free, sort of. Some were charged ten or twenty thousand dollars to enter. Many others were given scholarships. Though it turned out Community Recovery bought insurance policies for patients without telling them. To those desperate for help or a place to sleep, the details of how they got in hardly mattered. It was free enough.

The Affordable Care Act made sweeping changes to the recovery industry, which went into effect in 2012. After decades of denying coverage, insurance companies were required to pay for treatment, and at rates comparable to coverage for major illnesses. The net effect for addicts was that virtually anyone could get a policy, and it would cover up to about $3,000 per day for the first 30 days of treatment, or roughly $100,000 a month. To rehab owners, addicts, no matter how broke or hopeless, suddenly were gold mines, potentially worth up to $100,000 if they could wrangle them into treatment.

The recovery boom was on. Community Recovery was one of hundreds of new rehabs that opened in Southern California. So many popped up that the hundred-mile stretch of coastline from Orange County to Malibu was nicknamed “Rehab Riviera.” Similar booms took place in Florida and in the more ski-friendly parts of Utah. While Affordable Care made it possible to get treatment in any state, apparently many addicts when given the choice would rather try to get sober in scenic areas than in fly-over places like Pittsburgh or Omaha.

… Community Recovery was a luxury rehab for the people. Many patients lived in hilltop mansions with pools and spas. It abounded with fun activities—surfing, hiking, yoga, paintball fights, go-kart racing, zip-line adventures, and (pseudo) Native American healing sessions that Bathum led in smoke-filled teepees.

… In late 2015 LA Weekly reporter Hillel Aron published an astonishing exposé. It revealed that Bathum never finished college and faked his persona as a psychotherapist. Prior to running rehabs, Bathum had been a pool-cleaner. He had four felony convictions for committing fraud on eBay. He had a major drug problem, meth and heroin. A few weeks before Aron’s story ran, Bathum had overdosed in a Malibu motel while shooting drugs with patients. There was a photograph of Bathum being loaded into an ambulance during his overdose. Aron unearthed a lawsuit filed by a former patient from Seasons in Malibu who claimed Bathum offered her drugs in exchange for sex. Patients from Community Recovery stepped forward to say Bathum had sexually assaulted them.

Some told their stories on 20/20. Bathum went on 20/20, too, and gave an absurd, seemingly methed-out interview in which he denied their allegations and claimed the photo him overdosing at the motel was a simple case of identity theft.

All of it should have led to the immediate shut-down of his rehab. Hundreds of patients remained in his care. Authorities did nothing.

… Bathum’s rehabs operated under a perverse legal loophole: he ran them as unlicensed “sober living homes.” As such, they were protected by the Americans with Disabilities Act, which included an obscure provision that gave recovering addicts status as a protected class. Their inclusion as a protected class was done to prevent neighborhoods from discriminating against recovering addicts who wanted to live together in “sober living homes.” Such homes were defined as places where no medical treatment or therapy could be offered. But since the Americans with Disabilities Act prevents state agencies from inspecting sober living homes, it’s nearly impossible to know what’s going on inside them.

… His behavior was outrageous, yet Bathum exemplified a unregulated industry. The Affordable Care Act poured money into an already broken system. Industry revenues jumped from slightly more than $20 billion to about $42 billion today."

Navarro’s Freight Train of Fallacies

By Donald J. Boudreaux.

"Here’s a letter to the Wall Street Journal:

Editor:

Peter Navarro’s “A Tariff Issue on Which Free and Fair Traders Can Agree” (May 29) is a train freighted only with fallacies. Here are three.

First, free-trade economists do not “insist” that tariffs result in less employment. In reality, free-trade – that is to say, competent – economists recognize that tariffs, although they shift workers and resources from more- to less-productive uses, have no effect on the overall employment level.

Second, Mr. Navarro leaps heedlessly from an accounting identity to a false economic conclusion when he writes that “imports don’t contribute to gross domestic product.” It’s true that the value of imports is not directly included in GDP. But because at least half – and on some calculations nearly all – imports are inputs into domestic production, increased production efficiencies made possible by lower-priced imports do indeed contribute to a higher GDP.

Third and most fundamentally, Mr. Navarro writes as if, when assessing international trade, exports are benefits and imports are costs. Yet this assessment is backwards. To anyone who disagrees with me and agrees with Mr. Navarro, I hereby offer to accept from you as many automobiles, consumer electronics, household furniture items, and other real goods and services as you wish to give to me and I promise to give to you in exchange nothing but pieces of paper on which I’ve scrawled the face of George Washington."

Modern Monetary Nonsense

By Kenneth Rogoff. He is a Professor of Economics and Public Policy at Harvard University.

"Just as the US Federal Reserve seems to have beaten back blistering tweets from President Donald Trump, the next battle for central-bank independence is already unfolding. And this one could potentially destabilize the entire global financial system.

A number of leading US progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates. Prominent supporters of this idea, which is often referred to as “Modern Monetary Theory” (or MMT), include one of the Democratic Party’s brightest new stars, congresswoman Alexandria Ocasio-Cortez. Although their arguments have a grain of truth, they also rest on some fundamental misconceptions.

Fed Chair Jerome Powell could barely contain himself when asked to comment on this new progressive dogma. “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” Powell insisted in US Senate testimony last month. He added that US debt is already very high relative to GDP and, worse still, is rising significantly faster than it should.

Powell is absolutely right about the deficit idea, which is just nuts. The US is lucky that it can issue debt in dollars, but the printing press is not a panacea. If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either. If that country tries to dump a lot of it on the market, inflation will result.  Even moving to a centrally planned economy (perhaps the goal for some MMT supporters) would not solve this problem.

On Powell’s second point, that US debt is already high and rising too fast, there is far more room for debate. True, debt cannot rise faster than GDP forever, but it may do so for quite a while. Today’s long-term, inflation-adjusted interest rates in the US are about half their 2010 level, far below what markets were predicting back then, and far below Fed and International Monetary Fund forecasts. At the same time, inflation has also been lower for longer than virtually any economic model would have predicted, given current robust US growth and very low unemployment.

What’s more, despite being at the epicenter of the global financial crisis, the US dollar has become increasingly dominant in global trade and finance. For the moment, the world is quite content to absorb more dollar debt at remarkably low interest rates. How to exploit this increased US borrowing capacity is ultimately a political decision.

That said, it would be folly to assume that current favorable conditions will last forever, or to ignore the real risks faced by countries with high and rising debt. These include potentially more difficult risk-return tradeoffs in using fiscal policy to fight a financial crisis, respond to a large-scale natural disaster or pandemic, or mobilize for a physical conflict or cyberwar. As a great deal of empirical evidence has shown, nothing weighs on a country’s long-term trend growth like being financially hamstrung in a crisis."

China's Threat To Restrict Exports of Rare Earth Minerals to the U.S. Is an Empty Bluff

China's 2010 export restrictions on rare earth compounds failed then, and they would fail now

By Ronald Bailey of Reason.

"China is shooting blanks with its threat of a rare earth minerals embargo, the most recent salvo in an ongoing trade war with the United States.

Agence France-Presse reports that, according to various state propaganda sites, the Chinese government may counter President Trump's tariffs by cutting off America's access to exports of rare earth minerals that are used in all sorts of advanced electronics. Rare earth metals are chemically similar and include cerium, neodymium, europium, and samarium. Despite their name, most rare earth metals are similarly abundant as more familiar elements like copper, nickel, and zinc.

"Waging a trade war against China, the United States risks losing the supply of materials that are vital to sustaining its technological strength," the official Xinhua news agency said in a commentary. The state-owned Global Times further warned, "It is believed that if the U.S. increasingly suppresses the development of China, sooner or later, China will use rare earths as a weapon."

While the U.S. Geological Survey reports that China produced 70 percent of rare earth minerals in 2018, there are rare earth minerals elsewhere in the world. What's more, the Chinese government has played this game before, imposing export restrictions on rare earth minerals back in 2010. At the time, I predicted that "new supplies and innovation will ensure that the future of the world's high tech economy will not depend upon the whims of the mercantilist mandarins who steer Chinese industrial and trade policy." By 2016, my prediction had come true.

As a result, the price for the VanEck rare earths ETF, for example, has dropped by more than 85 percent since the fund's inception in 2010. [that is a weighted stock index of companies that mine rare earths]



Also, keep in the mind that the U.S. Geological Survey estimates the value of rare earth compounds and metals imported by the United States in 2018 was just $160 million. Chinese export restrictions on rare earth compounds could cause some short term economic pain, but it would be soon alleviated as miners and innovators turned to exploit the nearly two-thirds of the world's reserves that lay outside of the Middle Kingdom. Those global reserves, by the way, would last more than 700 years at current rates of extraction."

The secret to Sweden’s success has been spending cuts

From Catalyst.

"The US is wallowing in trillion dollar deficits, and if the President’s recently-released budget is any indication, taxpayers won’t be seeing balanced budgets anytime soon. But, believe it or not, the grass is greener in the so-called “socialist paradise” of Sweden, where the budget is in surplus and taxes will soon be slashed. The secret to Sweden’s success has been spending cuts.  Not a concept that either political party is familiar with in the US.

The Nordic country’s flirtation with limited government may surprise some pundits and lawmakers intent on passing Sweden off as a living, breathing progressive manifesto. But conservatives and libertarians are increasingly finding a lot to like as Sweden embraces the principles that made it prosper. For an America that’s bitterly divided and seemingly out of policy reform ideas, maybe it’s finally time to look to our pickled herring-loving friends for guidance.

In fact, so drastic are these reforms that the Swedish government has some explaining to do to parliament. In America, Congress calling officials to testify usually means there was some alleged abuse of power and/or recklessness with taxpayer dollars.

But in this strange nation of 10 million, parliament wants to know why Sweden’s government isn’t spending more money! Bloomberg reports that “the National Financial Management Authority predicted that debt will sink below 35 percent of gross domestic product this year and breach 30 percent in 2021. Fiscal rules stipulate than any deviation of more than 5 percentage points from the 35 percent anchor requires an explanation to parliament.”

This isn’t some fluke engineered by a rogue right-wing government. The current Social Democratic government has run surpluses since 2016, and over the past two decades, surpluses and low deficits have been the norm, while spending has decreased. The International Monetary Fund reports that “Sweden’s national debt to GDP ratio fell from 80 percent in 1995 to 41 percent in 2017.” Keeping a government in surplus requires tough decision-making, and results in inevitable pushback.

As a part of a budget deal between the Social Democratic, Centre, and Liberal parties in January, the Public Employment Service will be closing redundant offices across the country and laying off a third of its 13,500 staff members. While staff reductions are always painful, it’s difficult to see why the government is so heavily involved in the job finding market to begin with. The rise of private job-finding companies and countless websites designed to match employees and employers show that markets can help job-seekers better than a government agency ever can.

The Swedish government’s dominance in the healthcare sector may be loosening as well, as physicians complain that the status-quo just isn’t working. Fortunately, private telehealth providers are coming to the rescue, partnering with supermarkets to open up “minute clinics” near grocery store locations. There are currently 8 of these clinics in the country, but a recent $54 million investment by ICA Group (which owns the largest supermarket chain in the country) will result in many more clinics setting up shop.

Health and employment budget discipline will likely pave the way for tax cuts, which will grow the economy and create more jobs for Swedes looking for a fresh start. A draft policy agreement amongst Sweden’s major political parties envisions broad-based tax reform lowering income and enterprise tax rates, and raising thresholds at which people have to start paying higher rates.

There are plenty of taxes to cut. Few politicians are eager to discuss Sweden’s top individual tax rate of 60 percent. Add that to the 25 percent value-added tax and a 22 percent corporate tax, and things suddenly become nearly unbearable for innovators. But at least there’s progress. Individual tax rates are far lower than the 80 plus percent rates that defined the seventies and eighties, and the Swedish corporate tax will once again be lower than the American rate in 2021 (when it drops to 20.6 percent from the current 21.4 percent).

The usual caveats apply to comparing a small homogenous nation to the bewildering behemoth that is the United States. But if left-wing Swedish politicians can boldly cut spending and taxes, the Trump administration and Congress have no excuse."

Deregulation Is the Only Cure for High Drug Prices

By Raymond J. March. He is a Research Fellow at the Independent Institute and Assistant Professor of Agribusiness and Applied Economics at North Dakota State University. Excerpt:

"According to the RegData database, the pharmaceutical and medical manufacturing industry had approximately 10,000 more restrictions than the median U.S. industry as of 2014. These regulations come at a tremendous cost. A producer will have spent between $50 million and $840 million to prepare a drug for FDA approval and an average of $1 billion during the approval process.

Even with the FDA’s lavish patent system, most drugs do not earn their producers profits. A white paper published by the Biotechnology Innovation Organization finds only 20 percent of FDA approved drugs cover their R&D and approval costs. Thus, even if political pressure to lower drug prices worked, many drugs would not be produced at all. It is difficult to see how making prescription drugs unavailable helps patients.

To lower drug prices, we need less regulation. The FDA’s influence in the prescription drug market remains the largest obstacle to deregulation. Policy efforts to lower drug prices which do not address the FDA are treating symptoms instead of the disease. And patients need relief quickly!"

Why Doing Good Makes It Easier to Be Bad

By Abbas Panjwani. He is a journalist at Full Fact, the UK’s leading fact-checking charity. He has previously written for the Sunday Times.

Adam Smith's "invisible hand" suggests that if you follow your own self interest, you will promote the interests of society. I have had some posts on this issue of being selfish vs. being altruistic and if they can actually be separated before. So those links are at the end.

But this article says that if you work in a "socially responsible company" it makes you think that it is okay to do something immoral, that somehow you have earned that right.

Excerpt:

"Oscar Wilde, the famed Irish essayist and playwright, had a gift, among other things, for counterintuitive aphorisms. In “The Soul of Man Under Socialism,” an 1891 article, he wrote, “Charity creates a multitude of sins.”

So perhaps Wilde wouldn’t have been surprised to hear of a series of recent scandals in the U.K.: The all-male charity, the President’s Club, which raised money for causes including children’s hospitals through high-valued auctions, was forced to close after the Financial Times uncovered sexual assault and misogyny at its annual dinner; executives of Oxfam, a poverty eradication charity, visited prostitutes while delivering aid in earthquake-stricken Haiti, and were allowed to slink off to other charities, rather than being castigated for their actions; and ex-Save the Children executives Brendan Cox and Justin Forsyth stepped down from their roles at other charities, after allegations of sexual harassment and bullying toward junior female colleagues resurfaced.

You might wonder how people who seem so good by occupation could be so bad in private. The theory of moral licensing could help explain why: When humans are good, it says, we give ourselves license to be bad.

In a recent paper, economists at the University of Chicago reported that working for a socially responsible company motivated employees to act immorally. In one experiment, people were hired to transcribe images of short German texts and paid 10 percent upfront, with the remaining payment being delivered if they completed the transcriptions, or if they declared the documents too illegible to transcribe. When they were told that, for every job completed or marked illegible, 5 percent of their wages would be donated to Unicef’s educational programs, the instances of cheating rose by 25 percent, compared to where no charitable donation was offered. Cheating manifested in both workers not completing jobs (taking the 10 percent upfront fee and running) and also workers saying that documents were too illegible to transcribe (and so receiving the full fee).

“The share of cheaters [was] highest when we frame corporate social responsibility as a prosocial act on behalf of workers,” the researchers, John A. List and Fatemeh Momeni, found. When the workers felt a greater sense that their own actions would lead to charitable donations, like Robin Hood, they in turn felt enough license to steal, essentially, from their employer to give to charity. “The ‘doing good’ nature of [corporate social responsibility] induces workers to misbehave on another dimension that hurts the firm,” List and Fatemeh concluded."

Related posts:

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

Labor Income For Top 1% Exceeds Income from Capital

By David Henderson.

"How important is human capital at the top of the U.S. income distribution? Using tax data linking 11 million firms to their owners, this paper finds that entrepreneurs are key for understanding top income inequality. Most top income is non-wage income, a primary source of which is private “pass-through” business profit. These profits—which can include labor income disguised for tax reasons—accrue to working-age owners of closely-held, mid-market firms in skill-intensive industries. Pass-through business profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of pass-through profit as human capital income, we find that the typical top earner derives most of his or her income from human capital, not financial capital. Our approach also raises the overall top 1% labor share in 2014 from 45% to 56%. Growth in pass-through profit is explained by both rising productivity and a rising share of value added accruing to owners.

This is from Matthew Smith, Danny Yagan, Owen M. Zidar, and Eric Zwick, “Capitalists in the Twenty-First Century,” NBER Working Paper No. 25442. The NBER paper is gated, but here’s an ungated version.

Why is this important? Because it contradicts the image of the coupon-clipping rentier who doesn’t work for a living."

Asians benefit from ‘white supremacy and proximity to white privilege’?

From Mark Perry.

"From John Hinderaker writing on the Power Line blog:

The success of Asian-Americans is a severe embarrassment to the race industry. Race hustlers focus on “gaps” between whites and blacks with regard to income and educational attainment, which they attribute to “systemic” racism. But what about the gaps between Asian-Americans and whites? Asians, on average, earn considerably more than whites (see top chart above) and as a group they do better in school (see bottom chart above). Is their superior performance due to “systemic” racism directed against whites?

Presumably not. But then, what becomes of the assumption that “gaps” between ethnic groups must necessarily be the result of racism? There is no answer to this question, which is why race hustlers generally ignore Asians.

John then quotes a New York Post article “DOE-sponsored group said Asians benefit from white privilege” which reported that:

A city Department of Education-sponsored panel designed to combat racism told parents that Asian American students “benefit from white supremacy” and “proximity to white privilege,” an outraged mom told The Post. The comments drew backlash from some parents and Asian activists, but not the Department of Education, which neither denied nor denounced them.

John continues and asks:

What does it mean to be in “proximity to white privilege”? Presumably nothing, other than that statistics relating to Asian-American achievement are embarrassing to race hustlers. And if Asians “benefit from white supremacy,” it must be a weird sort of white supremacy that actually has nothing to do with race. (Which is true, as noted here.)

And concludes:

America’s increasing ethnic diversity will ultimately doom the race hustlers who rely on a black and white world.

MP: And then there are these racial gaps below that the race hustlers never seem to want to discuss, and which could explain the racial gaps in income and educational outcomes."