Ebola

Well, the first patient to come down with Ebola in America has now led to the first person to contract Ebola in America.  Meanwhile, another 50 people are being monitored to see if they come down with the disease.  Great.  Just great.

The strain of the Ebola virus that is currently burning through much of west Africa, and has now been brought to both Europe and America, has a lethality rate of about 50%.  That is, one out of every two people who catch the virus end up dying from the infection.  The survivors, even though they are immune to reinfection, may have serious long term health problems from the disease.  It’s too early to tell how serious that will be.

Government pronouncements that Ebola was not going to come to this country were, of course, ridiculous.  The latency period of Ebola can be up to 21 days.  That is, from the time the virus gets into your system to the first symptoms appearing can be as little as two days, or as many as three weeks.  Airport screening protocols will not be effective at keeping out people who show no symptoms. 

So a rational person would assume that more infected people will cross our borders.  That’s the bad news.  The good news is that you are not infectious during the latency period.  You can only infect other people once you display symptoms.  After the onset of symptoms, starting with fever and sore throat, you stay infectious until one of two things happens: a) you get better, or b) your remains are cremated after you die.

How bad the US outbreak will be is based on a concept called the Basic Reproduction Number, or R0.  What R0 boils down to is the average number of new people infected by each person with the disease.  With the current outbreak in West Africa, R0 is running about 2.  Each new case ends up infecting two more.  This doesn’t sound so bad, until you realize that the number of patients is doubling about once a month.  So you start with one patient, who becomes two, who become four, who become eight, and so on.  This kind of pattern gets really scary after about ten doublings.

At two to the tenth power, 4096 people are currently infected.  With a periodicity of one month (figure average of 15 days of latency, followed by 15 days of infectiousness), at the end of one year, 16384 people have caught the virus in the last month.  One year later, over 16 million new cases come up at the two-year anniversary of the start of the outbreak.  Six months later, you get a billion new cases in the last month.  If R0 was to stay at 2, within three years half of the world’s population will be dead, and the survivors will all be immune.

On the other hand, if R0 can be kept below 1, than the outbreak dies off.  Given that the first patients to contract the disease in both the US and Europe are health care workers, presumably trained to follow anti-contamination protocols, I’m not as confident about the situation as the CDC’s pronouncements would have one believe.

So let’s review.  Lethal disease?  Check.  You can be infected, and still act normal for a time?  Check.  Death does not make you non-infectious, and indeed makes you more dangerous to the living than ever? Check.  So basically, we’re in the early days of the Zombie Apocalypse.

The NLRB and McDonald's

This week the general council of the National Labor Relations Board, the NLRB, issued a ruling on a case involving McDonald’s.  The ruling was that McDonald’s is a co-employer, along with the McDonald’s franchisees, of the hourly workers at all the restaurants.

“Well, wait,” you might say.  “Don’t the people behind the counter at my local McDonald’s work for McDonald’s itself?  I mean, the company logo is on those caps their wearing.”

Actually, the answer is no.  Most McDonald’s restaurants are owned by small independent businessmen (and women).  They pay the parent company for the franchise.  They agree to follow the rules of the franchisor, and in exchange the franchisor provides operating procedures, brand building, and group buying power.  This is the most common model for the fast food industry.

McDonald’s exercises more control over their franchisees than most.  The parent owns the land under every restaurant, and the franchisees pay rent, which is a major revenue stream for the company.  Also, McDonald’s monitors operations at every store, and sets guidelines for efficiency, throughput, and waste.  Every aspect of operations is covered by the operating rules.  This unusual degree of involvement was key to the NLRB ruling.

However, there are a number of things McDonald’s does not involve itself in.  Like who to hire, and who to fire, or how much to pay people.  McDonald’s does not track the hours of each employee at the restaurant, or calculate payroll.  McDonald’s guidelines might specify how many workers should be there for the morning rush.  But McDonald’s does not decide who is going to be scheduled to work those shifts.

Hiring and firing, determining pay rates, scheduling, and paying employees.  Those are the classic tests for determining who is the employer in a business relationship.  McDonald’s does none of those things.  So why would the NLRB suddenly decide that the case law of the last fifty years was incorrect?

The baseline assumption of the staff at the NLRB is that the best and most natural state of affairs is for everyone to belong to a union where they work.  Anything else is unfair, and possibly proof of a “great right wing conspiracy.”  This is in spite of the fact that union membership has dropped below 7% of the private sector workforce.  It’s not much of conspiracy if everybody is in on it.

Well, it turns out that small businesses with 40-50 employees are really hard to organize.  The business owners tend to fight really hard against unions, reasoning that having a formally adversarial relationship with their employees is both bad for business and bad for their personal financial interests.  From the union’s perspective, a single big target is easier to attack than a lot of small moving targets.  So the Service Employees Union, the SEIU, has lobbied the NLRB staff for favorable rulings.  Since the SEIU shares the same baseline mindset as the NLRB staff, they found a receptive audience.

This ruling will probably not survive the inevitable court challenges.  Still it does make me wonder.  If less than 7% of the workforce is unionized, maybe the conspiracy isn’t among the employers.

Seattle's Minimum Wage Hike

Last week the Seattle City Council passed a massive increase in the minimum wage.  Washington State’s minimum wage was already $9.97, and the Seattle initiative increases that to $15 an hour over three years.  There is a slower phase in for small businesses, but in one of the most controversial features of the new law, franchisees are considered big businesses.

This was clearly done to rope in the fast food industry, one of the major employers of minimum wage jobs.  Most fast food outlets are owned by small businesses that franchise their advertising and operating systems from large corporations.  In many cases the owners are working side by side with the employees that just got a 50% raise, courtesy of the Seattle City Council.

The idea here is that if all the fast food stores have their costs raised at the same time, all of them will have to raise prices simultaneously.  No one will get a competitive advantage.  If labor accounts for 10 to 20% of the cost of fast food, and that cost goes up by 50%, then prices will go up by 5 to 10%.  Profit margins will go down, but overall profits stay the same for the industry as a whole. The hope is that even if prices go up by 5 to 10%, sales will remain constant, keeping employment constant.  You’d pay an extra buck for your Big Mac and fries, wouldn’t you?  Sure you would.  At least, that’s the theory.

This is all riding on an economic concept called price elasticity of demand.  Represented graphically, price elasticity of demand is the slope of the demand curve on a supply and demand chart.  If elasticity of demand is high, a small percentage increase in price leads to a large percentage drop in demand.  If demand is relatively inelastic, even a big increase in price does not lead to a big drop in demand.

An example of inelastic pricing is gasoline, at least in the short run.  When gas prices spike, you still have to get to work, so you grumble, but you also buy the amount of gas for your commute.  The plan is that things will work out the same way for fast food, because, hey, you gotta eat.

There are two things wrong with this plan.  One, even if the price elasticity of demand is low, it is not zero.  With gas, when prices go up, you stop taking unnecessary drives.  You slow down a little, coast when you can.  In the longer run, you trade in for a more full efficient vehicle.  You do all these things to use less of the more expensive product.

The same adjustments will occur when fast food prices go up.  People will brown bag it more, or forego getting a soda with their chicken tenders.  Witness the popularity of dollar menu items if you think people are not sensitive to the price of fast food.

The other problem is that it assumes that businesses will remain static in light of this big addition to their costs.  The rate of investment in labor saving equipment will increase, to minimize even further the labor content in the product.  Equipment that now does not have a fast enough payoff period to be worth doing will make a lot more sense once these wage increases begin to bite.

With lower demand overall, and labor savings a high priority, labor will get squeezed.  The remaining workers will get paid more, but there will be less of them.  But that’s okay, because the displaced workers will just go to …

Actually, the employer of last resort for people with low literacy and no salable skills has been fast food.  Fifteen dollars an hour doesn’t help if you don’t have any hours.  I don’t think this is going to end well for Seattle.

The VA Waiting List Scandal

Eric Shinseki, the retired general who was the head of the Veterans Administration, resigned this week over the scandal regarding waiting times at VA hospitals.  This has been  dominating the news cycle for the last week, but there  has been a focus on the political  maneuvering in the news coverage, and a minimum of discussion about what actually happened that was so bad.

It  turns out that the VA has a  benchmark for the time it is supposed to take between a veteran calling for medical care and the first appointment: two weeks.  Most of the VA medical facilities have been hitting that number in their official reports,  and those reports could be verified by the VA's centralized computer scheduling system.  Congratulations, pass out the cigars.

The only problem is that it has now emerged that administrators were cooking the books.  Either they used special techniques to report zero waiting time in the computer system, no matter how long the patient actually waited, or else they maintained two sets of books.  There was a paper list of people who had requested an appointment.  Then, when an appointment  actually became available, the patient would be taken off the paper record  and added to the computer system.  Voila!  The computer shows that nobody waits too long for an appointment.

Some of the senior VA administrators collected bonuses for (falsely) hitting their performance benchmarks.  That is fraud, plain and simple, and some of those guys need to go to jail.  Being federal GS employees, however, that is unlikely to happen.  They will claim that they were not directly doing the scheduling, and had no knowledge of the book cooking.  "I'm shocked, shocked to discover that gambling is going on in this establishment."

And that is at least partially true.  There are literally thousands of schedulers in the VA system, most of whom are low level employees (low level Federal employees, which means their pay and benefits are better than their counterparts in the private sector).  Lots of them were actively involved in cooking the books, even though they weren't getting bonuses for it.  Why?

Incentives come in two flavors, positive and negative.  Positive incentives are raises and bonuses: you did a good job, so here's a pile of money for you.  Negative incentives are the bad things that happen if you don't hit your targets.  It can include losing your job, but a negative incentive does not have to be so harsh to be effective.  Merely the desire to avoid a whole lot of unwanted attention from higher up is a powerful motivating tool.  "Your wait times are too long, so we're going to come in and audit you to see what you are doing wrong.  Every day.  Every stinking day."  Yeesh!  It doesn't take too much of that and you'd want to game the system too.

You especially want to game the system when you are given a no win scenario.  To shorten wait times, you need more resources.  But the VA was not given more resources.  You can do a lot with attention to efficiency and productivity improvement, but there are limits to what even the best managers can squeeze out of a system.  Given a game where being honest led to negative incentives, every time, and gaming the system led to being allowed to do your job with minimal interference, it's not hard to understand  why this situation arose.

If you ask someone to lie to you, don't act surprised when they do what you've asked.

When demand exceeds the supply of scarce resources you always need an allocation mechanism for the supply.  In a market based system, price is the allocation tool.  Some individuals get resources because they can pay a higher price.  Other individuals who cannot pay the price go without.  There are other allocation mechanisms.  You can use a lottery, and rely on chance.  You can use subjective criteria, like appealing to a connected decision maker ("It's not what you do, it's who you know.").  Or you can do what the VA did, and stretch out waiting times, even if only unofficially.

The real issue with the VA is that fans of single payer health care system in this country have been holding out the VA as a shining example of what socialized medicine can do.  "The VA gives great medical care, at a lower cost than the private sector, and see, the wait times are comparable with the best of the private sector.  The rest of the health care industry should be run just like the VA."

It has now been exposed that was a lie in a muumuu.  It's a big fat lie.  The VA may be more cost effective than the private sector, which is great, as long as you don't mind that some of your patients are going to die before they get seen.  That we've had this lie pushed on us is the real scandal.

Climate Change Today

This week the White House released a new report on anthropomorphic climate change, AKA global warming.  Unlike previous reports, this one stressed that climate change has already begun to impact society, in a negative fashion.  droughts and storms are getting more frequent and severe, imposing real costs on us.

As a check on this, I went back and looked my insurance premiums of the last few years.  The insurance industry has extremely sophisticated systems for measuring risks and losses, and a lot of skin in the game to be sure they get it right.  My insurance premiums have experienced a modest increase, but nothing like the skyrocketing increases I should have seen if costs associated with climate change were really climbing rapidly.

It is not that I do not believe the basic science behind climate change.  Levels of CO2 in the atmosphere are rising rapidly, and are well above historical levels.  Higher levels of greenhouse gases mean more heat is retained from the suns's radiation.

But if we  are truly on the verge of calamitous changes in planetary weather patterns, as some would have us believe, than we all have to make radical changes to our lifestyles.  And to enforce those changes, we have to accept an equally radical expansion of government power.

Tax credits for hybrid cars and compact florescent bulbs are not gong to cut our carbon footprint in half.  It will take gas and food rationing, restrictions on the amount of living space per person, and strict limits on climate control.  We are really talking about shifting to a low energy society, where the limits of what we can do will be defined by the limits of muscle power, instead of machine power as we have today.

To make this happen, we will have to cede wartime powers to the government, and hope that they keep the best interests of the citizens at heart.

A low energy society where we live in un-airconditioned, small houses, with travel restricted to the distance we can walk.  For sustainability's sake, food will be locally grown, so that your diet will be kept to only those items produced within fifty miles.

This basically looks like the lifestyle of a medieval peasant.  Or life in a third world country.

Maybe it is not surprising that so many are so skeptical about climate change.

Tales from Tax Season: Part 1

The tax season is in full swing.  There has been a steady stream of clients for the last few weeks, including a number who came in during January, before the IRS even started accepting returns.  A common theme among many of these early season clients is the mix of desperation and entitlement.  Desperation, because they are flat broke, and they really need money.  Entitlement, because they have been led to expect that the IRS exists to give out money.

Now, I don't know about you, but I have never thought of the IRS as a source of cash.  To me, it has always been the other way around.  But for low income tax filers with children, the tax system is a conduit of funds from people who pay taxes directly to them.

The key to that last sentence however, lies in the words "low income" and "children."  If you have no income, or no kids, the tax system is not an overflowing cornucopia of cash.  This is true of the entire panoply of benefits available from the American welfare state.  However, since they talk to people who are getting big checks, they think they should get a big check too.

This leads to conversations that go a bit like this:

Client: "I hope you can help me out, because I really need a big refund this year."

Me: "Well, let's see.  With your standard deduction and personal exemption, those exceed the amount of money listed on your W-2.  That means you have no taxable income, so you are getting all of your withholding back.  Your refund will be $250, before we subtract our fees."

Client: "Wait, is that all!  That's not very much.  Can't you do any better than that?"

Me: Think: Did you hear me when I said you were getting all of your withholding back?  Say: "Without dependents, you con't get any Child Tax Credit, and only a little Earned Income Credit.  You only had a little withholding taken out of your check."

Client: "So I should tell them to have more withholding taken out?"

Me: Think: Lady, what part of this are you struggling with?  Say: "If you have more withholding taken out, you'll get less money every week, but you'll get it back at the end of the year.  I don't think you are really gaining from that situation."

Client: "It is not much money, but I guess it will have to do.  Can I get that today?"

Me: "Well, the refund actually comes from the IRS.  We are telling people to expect their refund in21 days or less from the date we file their return."

Client: "Twenty-one days!  So you're saying I drove all this way here for nothing."

Me: Think: I drove all the way here.  For this.  Say: "I'm sorry you're disappointed.  But I have no control over the IRS."

Entitlement and desperation is a bad mix.

IRS Schedule H

For the last few weeks I've been preparing to take  the IRS tests to achieve Enrolled Agent status.  This has sucked up most of my spare time and energy, taking away from reading and writing.

But part of getting ready for the first test has entailed having to poke about in some of the obscurer portions of the tax code.  Like Schedule H, for example.  Schedule A is for itemized deductions, Schedule B covers interest and dividends, and Schedule C is for sole proprietorships.  These are the schedules that most people are familiar with.

If you have capital gains, you report them on Schedule D.  Rental income and expense show up on Schedule E, and if you have a farm, you use Schedule F.  I've been trained and have seen all of those on tax returns.  But Schedule H?

It turns out Schedule H is for household employees.  When I first saw this, I thought it was pretty obscure for a test.  I mean, how many people actually have a butler?

However, it turns out you don't actually have to have a staff of full time servants to require this schedule.  If you pay anyone over the age of 18 over $1800 through the course of the year to do work in your home or property, you are required to file Schedule H.  You calculate how much Social Security and Medicare the employee owes, and then you subtract that amount from your refund.

Every so often you hear about a high ranking political appointee failing to pay taxes on a nanny, or a gardener.  It has derailed a couple of candidacies.  I've always wondered why the high powered types who get caught like that didn't just go through an employment agency, like a temp service.  Of course, a temp service adds their markup to the wages and taxes paid to the employee.  So a Schedule H is actually a more cost effective way to go.

So remember: if you hire the neighborhood kid to mow your lawn all summer, make sure he's under age 18.  Otherwise you're cheating on your taxes.

Yeah.  Like we're all quaking in our boots over that one.