Tuesday, April 15, 2008

WSJ: Factories Fading, Hospital Step In

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Before I get to the main thrust of this story, yesterday I discussed the weakness that will be coming to the casino business (or already has in Atlantic City!) but mentioned Las Vegas as the next to be hit... well it is starting this morning with news of 400+ job cuts at MGM Mirage (MGM). Not to worry though, the casino market will be coming back "in 6 months" when the economy screams higher...
  • Las Vegas casino operator MGM Mirage (MGM) has said it is cutting 440 jobs, the Wall Street Journal reported on Tuesday, signaling the effect of a slowing economy on the casino industry.
  • A significant part of the cuts will be made in Las Vegas where MGM Mirage owns 10 properties, the report said, quoting the casino operator's spokesman Alan Feldman. "It's no secret: Business levels are down," Feldman was quoted as saying in the report.
Now on to the main part of the post - a very interesting story in Wall Street Journal this morning on the changing face of our economy - I've bemoaned this move to a "service economy" where all we do is circulate the same dollars from 1 person to another (while the Fed prints more money) therefore making us all feel more rich. But it's simply transfers of the same paper from 1 person to the next - not bringing in money from the outside. In a recent blog entry [Apr 2: The Underemployment Rate is Rising] I mentioned how more and more jobs in this country are now government or healthcare. Which is ironic because to cut the national debt and try to become solvent we should be cutting jobs in these 2 areas - so it's a catch 22, worry about the near term and keep inflating jobs into these 2 sectors? Or worry about the long run costs and try to streamline these 2 sectors? You know the answer - we kick the can on everything in this country and will worry about the long term another day. I wrote

Last point, we have 2 huge bureaucracies - federal government and healthcare. To keep the government from going even more insolvent we should in theory be cutting jobs from these 2 white elephants. Healthcare costs spiral out of control and we hire more people - I believe healthcare is now 16% of GDP. But how do you cut costs without cutting jobs? Thats the other dark secret - most of our recent gains in jobs are either government or healthcare related. So how do you fix the long term problems in either? Chicken or egg? They are sapping our national wealth away by their huge excesses/costs BUT they also provide the main job growth as well.

So again, this is my beef with our economy - most jobs are simply transfer of paper money (that is produced in ever inflated amounts) from 1 person to another - you wash my car, I'll walk your dog, you cut my hair, I'll fix your drywall hole... it's a zero sum game. But as the Fed creates more paper out of thin air we all feel "more rich". As inflation ramps... so it's a mirage of a wealth effect - that is the "service economy" in a nutshell. Is it any wonder our booming markets are agriculture? coal? - things people outside the country actually want and need? That actually brings money INTO the country - but as a % of economy its shrinking by the decade. So we can create another 10K paper pushers. Eventually the government (local/state) will push back since it cannot support this job creation - but the federal government can go on creating jobs forever since the only issue it creates is more debt. And as we all know - that is not a problem to the people running the country. As for healthcare, well it is now headed for 20% of all GDP (16% currently). On it's way to 30-40% in at current pace of growth in the not too distant future. So 1/3 or more of our GDP will simply be "servicing each other's medical needs". So combine that with federal government, defense, and you have a triple play of the vast majority of our GDP in 15-20 years.
  • In this aging manufacturing region, where old-line industries like paper factories are falling away, health care has emerged as the employer of last resort. Between 1998 and 2007, the Bangor metropolitan area (pop. 150,000) lost about 3,700 jobs in manufacturing, but gained 3,500 jobs in health care. For many residents in Bangor, the hospital is replacing the mill as the passport to the middle class. For others, it means lower wages and fewer opportunities to advance.
  • This trend extends nationally, and it could help blunt the effects of the faltering U.S. economy. Demand for health care tends to stay strong during recessions. Cash-strapped consumers are more likely to cut back on new appliances or cars than emergency-room visits.
  • Indeed, while the number of manufacturing jobs nationwide fell by 48,000 in March and by 310,000 over the past 12 months, health-care employment rose by 23,000 last month and is up 363,000 jobs on the year, according to the government's most recent data.
  • Yet health care is more likely to be an economic driver in many towns and cities -- especially if a Democrat is elected president. Sens. Obama and Clinton support overhauling the nation's health-care system to cover millions of people who are uninsured -- and that could increase health-care spending, which now accounts for 16% of the gross domestic product.
  • There are downsides to health care's ever-increasing role. A community that relies on health jobs can end up with a weaker economy, one overly dependent on government programs like Medicare and Medicaid. Greater inequality is a risk, too. In health care and other service industries, there tends to be a wider income gap between what the highest- and lowest-paid workers earn than there is in manufacturing. Surgeons can have salaries in the high six figures, while personal-care attendants often make little more than minimum wage.
  • In the late 1980s, according to calculations by the Economic Policy Institute and the Center on Budget and Policy Priorities, liberal think tanks in Washington, incomes of Maine families in the best-off fifth of earners made 5.4 times as much as those on the bottom, on average. By the mid 2000s, average incomes of the best off were 6.3 times those at the bottom. Most states saw even greater widening of income disparities.
  • The health-care boom has also upset the economic balance in this sprawling, largely rural state. When manufacturing drove the economy, well-paying factory jobs were spread throughout Maine's rural and urban counties. But higher-paying health-care jobs are concentrated in urban areas.
  • In 2005, the average health-care wage in Maine's rural counties was $26,841 a year, $10,000 less than in the urban counties. Statewide, the average wage for all jobs was $32,393.
  • Today, Mr. Arsenault works at a hospital in Lincoln, about 50 miles north of Bangor, setting up the operating room and handing instruments to surgeons during surgery. He makes about $16 an hour, $5 less than in his last year at the mill. (typical example and if you multiply it by millions of people moving from "old economy jobs" to "new economy service jobs" it adds up)
  • One concern about the health-care industry is its heavy reliance on government money. In Maine hospitals, Medicare and Medicaid together accounted for 59% of gross patient revenues in 2006, according to the American Hospital Association. Nationally, those two government programs accounted for 55% of gross patient revenues. (so really, half of healthcare is government)
  • That could leave the state vulnerable as the government and employers try to pare health-care costs. Faced with a budget crunch, Maine legislators cut $46 million out of the state's Medicaid budget for the 2008 and 2009 fiscal years. Because of the cuts, the state will lose an additional $92 million in federal matching funds. The Maine Department of Labor estimates that about 5,000 jobs could be adversely affected by those cuts.
  • After six months of classes at Eastern Maine Community College, he became a certified nursing assistant, a job that paid just $7.75 an hour, half of what he was making at the mill, and with no benefits.

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