A Better Capital Gains Tax

Taxes on long-term capital gains have fluctuated in recent years, with rates as low as 0% (for lower income groups) and as high as 28%. At the end of 2010 capital gains rates will likely revert to 20% after being at 15% for several years. While long-term term capital gains enjoy a tax break, short term capital gains (on positions held less than one year) have long been taxed at marginal income tax rates. While dividends have more recently been accorded the same tax breaks as capital gains, interest payments continue to be taxed as marginal income.

Capital gains tax breaks are designed to encourage investors to invest in the economy for the long term, thereby promoting economic growth. As currently structured, the capital gains tax break doesn’t really achieve this, as it simply rewards investors that hold a position for more than one year. The law does not distinguish between investments in startups or IPOs and in purchases of existing equity shares. With regard to real estate, the law encourages the tax-free flipping of properties via 1031 transactions, but does not reward investors who improve their properties.

Rather than subsidizing investments in existing shares and property, shouldn’t capital gains tax breaks attempt to promote new investments? This could be easily accomplished by lowering the capital gains tax rate to 0% for all new capital investments, irrespective of investment duration. A new capital investment could be defined as an investment in which the target company directly receives the proceeds of the investment. Investments in IPOs, secondary offerings, startup companies (including angels and VCs), and real property improvements would qualify, while purchasing of existing shares and real estate would not.

A 0% tax rate on new investments would incentivize real investment in the economy, rather than encouraging simple tax-related shuffling of existing investments. In order to offset deficit impacts, traditional capital gains tax breaks could be reduced or eliminated. Moving to a system in which new investment is incentivized would tip American finance away from the casino mentality of recent years, and back towards its original purpose: investing in promising companies for profit.

Posted on by praveenghanta 2

Fuel Efficiency: Modes of Transportation Ranked By MPG

Building on a previous post on the energy efficiency of various foods, I decided to create a list of transportation modes by fuel efficiency.  In order to compare vehicles with different passenger capacities and average utilization, I included both average efficiency and maximum efficiency, at average and maximum passenger loads.

The calculations and source data are explained in detail in the footnotes. For human-powered activities, the mpg ratings might appear high, but many calculations omit the fact that a human’s baseline calorie consumption must be subtracted to find the efficiency of human-powered transportation. I have subtracted out baseline metabolism, showing the true efficiencies for walking, running, and biking.

For vehicles like trucks and large ships which primarily carry cargo, I count 4000 pounds of cargo as equivalent to one person. This is roughly the weight of an average American automobile (cars, minivans, SUVs, and trucks).

The pmpg ratings of cars, trucks, and motorcycles are also higher than traditional mpg estimates, since pmpg accounts for the average number of occupants in a vehicle, which according to the Bureau of Transportation Statistics is 1.58 for cars, 1.73 for SUVs, minivans, and trucks, and 1.27 for motorcycles.

List of Transportation Modes By Person-Miles Per Gallon (PMPG)

Transport Average PMPG Max PMPG
Bicycle [3] 984 984
Walking [1] 700 700
Freight Ship [10] 340 570
Running [2] 315 315
Freight Train [7] 190.5 190.5
Plugin Hybrid [5] 110.6 350
Motorcycle [4] 71.8 113
Passenger Train [7] 71.6 189.7
Airplane [9] 42.6 53.6
Bus [8] 38.3 330
Car [4] 35.7 113
18-Wheeler (Truck) [5] 32.2 64.4
Light Truck, SUV, Minivan [4] 31.4 91

[0] I used these conversion factors for all calculations.

[1] Walking: A typical person expends roughly 75 calories to walk a mile in 20 minutes. An American burns about 30 calories just to exist for 20 minutes, so the net expenditure for walking is 45 calories per mile. One gallon of gasoline contains roughly 31,500 kcal, so 45 calories is 0.0014 gallons of gas. Thus the average American has a walking efficiency of 700mpg. This estimate is higher than that given elsewhere – the crucial difference is that you have to subtract out baseline metabolism, since an American consumes over 2100 calories a day just to stay alive.

[2] Running: The calculation is similar to [1]. Here we assume a 6 minute/mile pace, which burns 1088 calories per hour, or 109 calories per mile, and 100 net calories per mile. 100 calories is 0.003 gallons of gas, for a fuel efficiency of 315mpg.

[3] Bicycles: Bicycling at 10mph requires 408 calories per hour, or 40.8 calories per mile, which is 32 net calories per mile. This yield an mpg rating of 984, higher even than walking!

[4] Automobiles: The Bureau of Transportation Statistics has done the heavy lifting for us, calculating BTU per passenger-mile for cars, light trucks, and motorcycles. For cars, the latest (2008) data point is 3501 BTU / passenger-mile, or 0.028 gallons per passenger-mile, which equals 35.7 pmpg (BTS assumes 1.58 passengers on average, so this equates to 22.6 mpg). Using the same BTS data, average pmpg for light trucks is 31.4, and for motorcycles is 71.76. For max pmpg, we use a max passengers of 5 for cars and trucks, and 2 for motorcycles. To do this calculation from the BTS data, we first divide the avg. pmpg by the avg. passenger count, and then multiply by the max in each case.

[5] 18-Wheelers: For 18-wheel rigs, BTS data shows an average diesel mpg of 5.1. This equates to a gasoline mpg of 4.6, using 125,000 btu / 138,700 btu as the gas / diesel energy ratio. The weight limit for trucks on most roads is 80,000 lbs, of which 55,000 might be the max load given a truck weight of 25,000 lbs. To convert load to passengers, I assume 4000 lbs per passenger, since that’s roughly the weight of a passenger vehicle. A 50% (average) loaded truck counts for roughly 7 passengers, and a full load counts for 14. Using these factors, average pmpg is 32.2 and max pmpg is 64.4.

[6] Plugin-Hybrids: With the exception of the Prius Hymotion conversion, plugin hybrids like the Chevy Volt have yet to reach market, and have not yet had a final mpg designation. Consumer Reports achieved 67 mpg with the Hymotion Prius, though Hymotion and many owners claim 100 mpg is possible. Using 70 mpg, and adjusting this by the 1.58 average passenger count, the Hymotion Prius has an average pmpg of 110.6, and a maximum pmpg of 350.

[7] Trains: While all trains have similar underlying efficiencies, passenger trains in the US are much less efficient in practice because of poor utilization. BTS calculates Amtrak efficiency at 1745 BTU per passenger-mile, which equates to 71.6 pmpg. Amtrak traveled 267 million car-miles in 2007, which equals to 16 billion potential passenger miles if the average car holds 60 passengers. In 2007 Amtrak consumed 10.5 trillion BTU of fuel, or 659 BTU per available passenger mile. Amtrak’s max pmpg is therefore 189.7 (if somebody would just ride it).

Freight trains consume 328 BTU to move a ton one mile. Using 4000 lbs of freight equals one passenger, this equals 656 BTU per passenger-mile, or 190.5 pmpg.

[8] Buses: At average passenger loads, buses achieve 3262 BTU per passenger-mile, or 38.3 pmpg. Per BTS data, buses average 6.1 diesel mpg, or 5.5 gas mpg. With a full load of roughly 60 passengers, a max pmpg of 330 is possible. The huge difference in average and max pmpg implies that buses are usually almost empty – perhaps smaller mini-buses should be used by more fleets.

[9] Airplanes: Airplanes flying domestic routes average 2931 BTU per passenger-mile, or 42.6 pmpg. The overall domestic load factor in 2008 was 79.6%, so at max capacity a plane might achieve 53.6 pmpg.

[10] Ships: In a previous post I found that shipping over water (by barge) costs one-third of shipping by rail. This implies that water based shipping is also roughly triple the efficiency in energy terms, since energy is one of the key cost drivers in transportation. This provides a rough estimate of 570 pmpg. According to this post, the world’s largest container ship travels 28 feet on a gallon of residual fuel oil (149,690 BTU or 1.2 gallons of gas). This equals 0.004 mpg. Per Wikipedia, the ship can carry 11,000 14-ton containers, or 77,000 passenger-equivalents using our 4000 lb conversion rate. Thus pmpg is 340 for this ship.

Posted on by praveenghanta 110

The ROI Payback of Tossing Incandescents For CFLs

After moving into my current home, I discovered that the previous owners had left dozens of light bulbs for the various fixtures in the house. I was happy to know that I wouldn’t have to restock for a while. In the interim, compact fluorescent light bulbs have become inexpensive, and LED bulbs have begun to become economical as well. While I have realized for some time that CFLs are a good investment with a short payback period, I have yet to replace my bulbs. At some level, it feels wrong to throw out all those light bulbs. What is the real return on throwing out a working bulb and replacing it with a CFL?

I calculated the payback period in days when replacing a 60W bulb with a CFL, assuming $0.1 per kWh electricity and $0.97 per CFL, which is what I paid at Home Depot last weekend [1]. I performed the calculation for a variety of usage assumptions, and this graph shows the results:

CFL Payback Period In Days

The payback on moving to CFLs is quite fast, a few weeks for high usage bulbs, and several months for bulbs used only one hour per day.

The first graph begs the question – how frequently does a light bulb need to be used to justify replacing it with an incandescent? Assuming that a 10% return on investment is desired, that the CFL will last 5 years [2], and that electricity costs $0.10 per kWh, I calculate that you should replace any bulb used more than 9 minutes per day [3].

That’s a pretty low bar, lower than I expected. As CFL prices have dropped, and light quality has improved [4], there aren’t many arguments left for sticking with incandescents. And for the lazy, switching to CFLs will decrease the frequency of light bulb changes, resulting in lower effort as well.

Conclusion: Throw out your light bulbs and replace them with CFLs today. The quality of CFL light output is now pretty close to incandescent, and you are burning money every day you wait!

I replaced roughly 40 light bulbs last weekend, in the middle of writing this post. For the most part it’s worked out – the light quality is decent, but the CFLs still take some time to get to full intensity, and I may have to replace a few that flicker due to dimmers on the switches.

Here is my calculations spreadsheet on Google Docs.

[1] While this was a sale price, CFL prices have been falling steadily and the standard price at HomeDepot.com is still only $1.25 per bulb (see the 12 pack of 60W-equivalent TCP brand bulbs available at this writing).

[2] Many CFLs are warrantied for 7-9 years, and claim 8000-12,000 hours of working life. Five years is thus a conservative estimate, but takes into account the fact that CFL quality control is still an issue, so that some percentage of bulbs will be defective.

[3] The calculations in my spreadsheet are linear with respect to purchase price – if you pay $2 for a CFL instead of $1, then you should replace all bulbs used for more than 18 minutes a day, and so on.

[4] That CFL light quality has improved is my personal opinion – look around on the web, and you will find hundreds of articles disparaging CFL light quality. I think they’ve come a long way, however, and the soft-white (2700K) bulbs available now do an acceptable job imitating incandescent soft-white bulbs.

Posted on by praveenghanta 5

The End of Government Subsidized Medical Innovation

Most Americans don’t realize it, but America’s status as the world’s primary source of medical innovation is heavily government-subsidized. During the healthcare reform debate, many pointed out that America spends over 17% of its GDP on health care, far higher than any other nation, and almost double the average for OECD nations. This high rate of spending on health care has fostered the growth of high technology health care, from pharmaceuticals to biotech, medical devices, imaging equipment and even surgical robots. What would happen if the government were no longer able to spend at such a rate?

Imagine for a moment that America had a purely free-market health care system, with no Medicare, Medicaid, and without tax breaks for health care. The government currently pays for 62% of all health care spending, and without this support, our healthcare system would be much smaller. If a free-market approach to healthcare brought spending down to the OECD average, the US would spend $1.2 Trillion (48%) less on healthcare than it does today [1]. Without Medicare to pay for costly end-of-life care, it’s doubtful that $200,000 per year chemotherapy drugs would find a market, or that anyone would pay full price for replacements on hips implants. In short, a free market health care system would deliver less health care technology to America – though it would still deliver technology that proved itself worthy and affordable to patients.

Of course in the real world government-subsidized innovation isn’t going away – or is it? America’s long term budget problems are driven chiefly by health care spending, as acknowledged by the trustees of Medicare. The Soviet Union eventually went bankrupt by spending 40% of its GDP on defense. The United States is on track to spend 40% of its GDP on healthcare by 2050 [2], with much of that on high tech gadgetry with low marginal benefit, and with virtually all of that money coming from taxpayers. This is obviously not sustainable.

The newly enacted healthcare reform law begins cutting Medicare in earnest, but deeper cuts will be needed to prevent Medicare’s insolvency. These cuts will inevitably mean less spending, and less revenue opportunities for big pharma, biotech, and medical equipment companies. While many other countries already have highly regulated healthcare markets with lower profit margins, pharmaceutical and medical equipment companies have been able to achieve consistent growth by tapping the US market and US taxpayers. Regardless of how healthcare reform plays out, America’s huge and growing debt mean that this situation will come to an end. The golden age of subsidized medical innovation is drawing to a close.

[1] CMS estimates that 2009 health care expenditures were $2.5 Trillion, or 17.3% of GDP. If this were reduced to 8.9%, the OECD average, health care expenditures would be $1.29 Trillion, almost half of what they are today. While we don’t know exactly what US health care spending would be without government subsidies and programs, we do know that government spending and subsidies would drop by roughly $1.3 Trillion ($1.1 Trillion in direct spending plus $200 Billion in subsidies), leaving a number very similar to the OECD average.

[2] See Figure 4 of this CBO Report for long term health care spending projections.

Posted on by praveenghanta 1

What Happens When The US Can Borrow No More?

In a previous post, I noted that the US can handle a debt load up to about $20 Trillion, even in the absence of rapid economic growth. Unfortunately, we appear to be rapidly headed past that figure, with the White House’s official projection showing that total debt will pass $20 Trillion by 2016 [1], and will rise above $25 Trillion by the end of the decade!

The growth of the federal debt is thus unsustainable, as even politicians now acknowledge. Eventually, bond markets will be unable to consume the volume of debt that America needs to issue in order to continue spending. What happens at that point, when the US can no longer borrow to fund current spending?

Here are the options for 2015, using the assumption that real GDP growth and inflation will both average 2% through 2015, with a resulting budget deficit of $1,014 Billion [2]:

  1. Cut Spending: Spending cuts of $475B will be needed to reduce the budget deficit below 3% in 2015. A 3% budget deficit is generally viewed as sustainable by economists [3]. Budget cuts this size would necessarily have to include cuts to Defense, Medicare, or Social Security, as they together make up 2/3 of the Federal budget.
  2. Raise Taxes: As with spending cuts, $475B in taxes would be needed to drop the deficit below 3% in 2015. Taxes would have to be raised to 21% of GDP to close the gap, the highest total tax burden since at least 1975.
  3. Monetize Debt: Since the start of financial crisis, the Federal Reserve has been purchasing US treasuries in order to keep interest rates down and to inject cash into the economy. The Fed could also bail out government finances by buying the $475B in excess Treasury issuance in 2015, but this is the equivalent of printing money. Such an approach will create inflation, and is unsustainable in the long term.

The federal government is likely to attempt a combination of all three approaches in order to minimize the pain on any one interest group. Inflation will likely rise above its recent norm of 2% as the Federal Reserve quietly injects money into the economy. The federal government’s total tax burden will likely rise to at least 20% of GDP, and spending cuts in the hundreds of billions will be required. The sacred cows of Medicare, Defense, and Social Security will be cut, since there’s little to cut outside these programs. The future looks increasingly to hold higher taxes and less government services, a penance decades in the making.

[1] See table S-14 for the OMB’s debt projections.

[2] The OMB uses rosy economic growth projections (table S-13) of over 4% for most of the years between now and 2015. I use a more conservative 2% for real economic growth and 2% for inflation, for 4% total nominal GDP growth (vs. 5.6% used by the OMB). Using 4%, I estimate GDP at $18 Trillion in 2015, whereas the OMB projects $19.4 Trillion. My lower GDP estimate also lowers projected government revenue proportionally, so that my budget deficit estimate for 2015 is $1014 Billion (versus $752 Billion OMB estimate).

[3] Why is a 3% budget deficit acceptable? Long term real economic growth in the US is around 3.75%, so a 3% budget deficit will over time cause the overall debt to grow more slowly than the economy. As the debt-to-GDP ratio shrinks, interest payments on the debt become easier and easier to pay via the growing tax base.

Posted on by praveenghanta 6

The End Of Employer-Based Health Care?

The employer penalties in the health care law are low enough that many businesses will drop health coverage. This is a blessing in disguise, as it will lower costs in the long run.

The fiery rhetoric on both sides of the health care debate obscured the details of the actual reform bill. Now that it has become law, policy analysts and journalists have been combing through the bill and issuing predictions on whether it will raise or lower premiums, help or hurt businesses, and generally bring or not bring the Apocalypse. The bill will definitely change how health care is paid for in the United States, but perhaps not in the ways many expect. The following analysis shows that it’s possible that the new law will end the system of employer-based health care entirely!

The Kaiser Foundation has produced a nice summary of the law, including employer requirements:

  • Employers with less than 50 employees face no penalties.
  • Employers with more than 50 employees that provide no health care coverage must pay a tax of $2000 per employee (with the first 30 employees being exempt)
  • Employers with more than 50 employees that do provide care may have to pay a tax 0f up to $2000 per employee if  their employees use the new health care exchange subsidies.

Given these requirements, what are an employer’s options?

  1. Drop Employee Coverage: A company drops its health care plan, paying the $2k per head tax and leaving employees to buy their own plans. The company will save $10,000 per employee on average given the average cost of health insurance [1], and will also save by eliminating benefits administration expenses. The company could give each employee a $9000 raise and still increase profit by $500 or more per employee [2]. Employees will be mad about the loss of benefits, but not too mad as they can get coverage on the exchange using their new income and potentially subsidies.
  2. Keep Employee Coverage: The company will face the administrative burden of supplying vouchers to some employees who would like to opt out, of complying with minimum benefits requirements, and will potentially still have to pay $2000 in fines per employee if its health care plan is deemed insufficient. The company’s use of benefits as a recruiting tool will be diminished once benefits can be obtained on the health care exchange.

Looking at the alternatives, why wouldn’t a company drop its health care plan? Particularly for employers with middle-income employees (who may qualify for federal subsidies), it makes more sense to drop health care coverage and raise wages than it does to continue the status quo. While the employer-based health care tax deduction still exists, for many families its appeal will be neutralized by subsidies available in the new health care exchanges. And since all Americans will be guaranteed access to insurance starting in 2014, benefits will no longer be the employment draw that they are today.

The health care reform bill will thus reduce the share of employer-based healthcare in the US market. This is an excellent change for a couple of reasons: first, it breaks the link between employment and health care, providing more stability to all Americans; and second, it slowly weans Americans off the employer health care tax deduction, which contributes significantly to health care cost inflation. Ironically, the bill’s writers did not intend it to be the demise of employer-based health care. But if this trend does accelerate, the bill may be successful in controlling health care costs. [3]

[1] The average employer contribution for a family insurance plan was $9860 in 2009, according to Kaiser Foundation research. With health care inflation averaging above 4% in recent years, this will rise to roughly $12,000 by 2014. If an employer chooses to pay the $2000 penalty rather than buy insurance for an employee, it can thus save $10,000.

[2] An employer could cancel insurance, saving $10,000 per employee, and then give each employee a $9000 raise. Payroll taxes (7.65%) would add another $688 to this sum, leaving a net profit of $312 per employee if an employer took this approach. Benefits administration expenses would also be eliminated, however, and these savings could be significant. Eliminating a single $40,000 salary HR position at a 200 person company would save another $200 per employee, for instance. So a net profit of over $500 per employee is quite possible – the actual profitability of the move would depend on how much of the health care savings the company chose to pass on in the form of higher wages for its employees.

[3] Why will the shift from employer to direct purchased health care coverage lower costs? First, when you spend your own money, you are more likely to be judicious about it. Second, when tax deductions are replaced with tax credits, the cost inflation effect will drop, since a deduction rises with every additional dollar spent, while a credit does not.

Posted on by praveenghanta 4

How Much Can America Borrow?

From a fiscal stability standpoint, the US can manage a national debt up to around $20 Trillion – but paying those debts off will require huge spending cuts and tax increases.

How much can the US government borrow before it becomes a bad credit risk? How much can the government borrow before it has to resort to inflating its way out of debt rather than simply paying off the bills? On the surface, the US government does not appear overly leveraged, as analysts point to the fact that public debt is only 60% of GDP. But is this a realistic way to look at America’s debt situation? Let’s look at America’s fiscal situation through the eyes of a loan officer, and see how it fares.

1. What is the US Government’s income, its current debt, and debt-to-income ratio?

Here is the US government’s revenue over the last three years: 2007: $2,568 Billion, 2008: $2,524 Billion, 2009: $2,105 Billion

The federal government’s total debt as of 03/21/2010: $12,661 Billion

The US government’s current debt-to-income ratio is 6.01. Using the US government’s best income year (2007), its debt-to-income ratio is 4.93. In the best circumstances, an individual might be able to borrow up to a ratio of 4.

2. What is the loan-to-value ratio for funds that the US government is borrowing this year?

The US government expects to borrow $1.56 Trillion this fiscal year. The majority of the money is being spent on Social Security payments, Medicare, Medicaid, and Defense. Virtually none of the expenditures will be in tangible investments of any form. If we assume (generously) that $100 Billion of the deficit spending will be invested, the LTV of this year’s borrowing is 15. Most individuals need an LTV of 0.9 or less to get a home loan.

3. What is the US Government’s Total Debt Service Ratio? What percentage of revenue is spent on interest payments?

In 2009 the government spent $187 Billion on interest payments, for a TDS of 8.9%. The government’s interest payments are extremely low because lenders are currently willing to lend the US government money at interest rates near 0%. If, hypothetically, interest rates went up to 5%, the government would have to pay $633 Billion in interest, 30% of 2009 revenue.

4. How does it add up? How much can the US borrow?

The federal government’s DTI and LTV would be unsustainable for any private borrower. However, since individuals and governments have been willing to lend the US money at close to 0%, the US has been able to comfortably cover its debt service thus far. As the federal debt balloons that may begin to change.

Let’s assume that US government debt average yield rises to 5% (closer to historical average), and that debt service should not exceed 40% of revenue. Using the government’s highest annual income ($2.57 Trillion in 2007), this means that interest payments should not exceed $1027 Billion per year. If the average interest rate is 5%, this means that total debt carried at that point would be $20.5 Trillion.

While the US might be capable of borrowing $20 Trillion, at that point only 60% of revenue would be available for government programs. Since the government is currently spending 180% of revenue on programs, it’s unlikely that it would be able to reduce spending on government programs by almost 70%. It’s most likely that a combination of taxes, spending cuts, and inflation will have to be used to keep debt at sustainable levels at that point.

Posted on by praveenghanta 7

Do Doctors Really Lose Money on Medicare?

The media often reports that doctors are dropping Medicare patients because they are “losing money on Medicare.” Given the vagaries of the Medicare fee-setting process, it’s definitely the case that certain medical procedures are under-reimbursed, and that others are over-reimbursed, creating winners and losers within the medical profession. More generally, do doctors really lose money by simply seeing a Medicare patient for an office visit? This American College of Physicians blog post claims that is the case.

It’s possible to perform some simple calculations to check the veracity of this claim. Assume that a doctor sees 16 patients a day for half an hour each, for 8 hours of patient time per day. With two hours of overtime work that makes for a 10 hour day, or 50 hours per week. That’s busy, but not an uncommon workweek for many professionals in the US. If the physician works 48 weeks per year, 5 days a week, that’s a potential 3840 patient visits a year. Assuming a 10% vacancy rate in appointments, whether due to cancellations, additional vacation, or otherwise, this leaves 3456 appointments per year.

Medicare reimburses office visits at around $85 per visit [1], though precise reimbursements vary by region. At $85 per visit, a primary care physician seeing nothing but Medicare patients could expect to receive $293,760 in annual reimbursements. Subtracting out the physician’s annual overhead provides an estimate of the physician’s salary. According to this physicians’ overhead spreadsheet, 50% is a good target for a primary care physician’s overhead. Overhead cannot fall below 100-150k for most physicians, as many expenses are fixed. This would leave our example physician with net income of roughly $147,000 annually.

This isn’t a terrible income, as it’s more than triple the average American income, but it is slightly less than primary care physicians’ average pay nationwide. These numbers do show conclusively that it is possible for a family practice physician to make a living on Medicare patients alone!

While Medicare reimbursements may be sufficient for a primary care physician to make ends meet, what is the situation with Medicaid reimbursements? Medicaid pays significantly less than Medicare, with reimbursements averaging roughly 60% of Medicare. This implies that Medicaid would pay less than $50 for an office visit. If our example doctor saw only Medicaid patients, they would gross $172,800 in annual reimbursements. Unfortunately, overhead costs tend to be fixed, so the doctor would still have around $147,000 in overhead, leaving a net income of only $26,000! This helps explain why only 40% of doctors nationwide will accept all Medicaid patients.

With hard work, it is possible to make an extraordinary living even from Medicare and Medicaid reimbursements. I know a family practice physician who works incredibly hard, seeing patients 6 1/2 days a week for 10-12 hours a day, and averaging close to 40 patients a day! He lives in a poor community with many Medicaid patients, but his patient volume (due in part to his efficiency, seeing a patient every 15 minutes) makes up the difference since overhead is relatively fixed. By having over 12,000 appointments a year, this doctor is able to take home roughly half a million per year, likely in the top 1% of all family practice doctors nationwide. While this cannot be expected of all doctors, it is possible to make money while serving the poor on Medicaid!

[1] This link provides example reimbursement amounts for pediatricians in Colorado based on both Medicaid and Medicare schedules. While reimbursement varies by type of procedure and geography (Medicare bases reimbursement in part on local costs), $85 seems appropriate based on this data. Physicians are sometimes able to bill multiple codes for a single visit, increasing their potential reimbursement.

Posted on by praveenghanta 73

List of Foods By Environmental Impact and Energy Efficiency

Which foods have the smallest (and largest) energy footprint, thereby having the most environmental impact? While most people probably realize that meat products have a larger energy and environmental impact, the degree of difference isn’t immediately clear. How much difference does it make if you’re a vegetarian, or if you’re almost entirely carnivorous? The following list provides a rough estimate of the energy required to produce different kinds of foods, in order from least to most energy intensive:

Table 1: List of Foods By Energy Required to Produce One Pound

Food Energy (kWh) to Produce 1 Lb
Corn [1] 0.43
Milk [2] 0.75
Apples [3] 1.67
Eggs [4] 4
Chicken [5] 4.4
Cheese [2] 6.75
Pork [6] 12.6
Beef [7] 31.5

Table 2: Energy Efficiency of Various Foods (Measured as Food Calories / Energy Used in Production) [8]

Food Calories / Lb Energy Efficiency
Corn 390 102%
Milk 291 45%
Cheese 1824 31%
Eggs 650 19%
Apples 216 15%
Chicken 573 15%
Pork 480 8.5%
Beef 1176 4.3%

The data above indicate the huge difference in energy required from one end of the food spectrum to the other. Roughly twenty-five times more energy is required to produce one calorie of beef than to produce one calorie of corn for human consumption. Dairy products are actually fairly energy efficient, as they are very dense in calories. Vegans may indeed be able to boast that their diets use 90% less energy than the average American’s, and even those who eat only eggs and dairy can lay claim to significant energy efficiency.

At the same time, food production and consumption amounts to only about 10% of first-world energy consumption, so even the most parsimonious eater can reduce their total energy footprint by around 9% through diet alone. The big culprits remain transportation, heating, and cooling, and while diet modification can help, energy conservation efforts should focus most heavily on these areas.

[1] It’s possible to estimate the energy involved in corn production very accurately, since corn energy intensity has been closely scrutinized by both proponents and critics of the corn ethanol industry. This Berkeley study compares energy intensity estimates from two sources, one pro and one anti-ethanol. Using an average of the two studies’ data yields an estimate of 30,000 BTU energy consumed per gallon of ethanol produced. From the same study, about 2.75 gallons of ethanol are produced per bushel of corn, which means that one bushel of corn required 82,500 BTU. One bushel of corn is 56 pounds of corn kernels, so one pound of corn kernels requires 1473 BTU for production. This is equivalent to 0.43 kWh.

[2] For milk, the estimates provided in Without The Hot Air Chapter 13 are utilized, with this conversion used for fluid ounces of milk to weight. The estimates for cheese are also taken from the above chapter, with the numbers simply proportionally adjusted from kg to pounds.

[3] From Table 3 in this study in Nature, we see that the annual energy input for a hectare of apple trees is 500,000 MJ, or 56,230 kWh at 3.6 MJ per kWh and 2.47 acres per hectare. According to this article, 800 bushels of apples per acre appears normal, which is 33600 lb of apples at 42 lb of apples per bushel. This equals 1.67 kWh per pound of apples.

[4] Here are the estimates for eggs, taken from Without The Hot Air page 77. Using a standard of eight eggs to a pound, convert from metric to English measures and arrive at the 4kWh estimate.

[5] Chicken is examined in detail on Without The Hot Air page 79, and I use that estimate, converted to kWh per pound.

[6] For Pork, I use McKay’s estimates from page 77, and convert them for each animal. McKay estimates that a 65kg human burns 3kWh per day, or 0.0462 kWh / kg / day = 0.021 kWh / pound / day. McKay uses a pig lifespan of 400 days, and thus notes that if you want to eat a pound of pork every day, 400 lb of pig must be alive at any given time (one pound for each day, so that the rate of pig production matches the rate of consumption). McKay further estimates that only two-thirds of an animal can be used for meat, so we actually need 600 lb of pig to generate one pound of meat per day. 600lb * 1 day * 0.021 kWh / pound /day = 12.6 kWh for a pound of pork.

[7] Beef is calculated exactly as for Pork above, except that a cow lives for 1000 days instead of 400 days. 1000 lb / 0.66 (wastage factor) * 1 day * 0.021 kWh / pound / day = 31.5 kWh for a pound of beef.

[8] Calorie data was taken from caloriecount.about.com, and kcal (food calories) were converted to kWh for energy efficiency calcs. We simply convert the calories in one pound of each food into kWh, and then divide that number by the energy required for production of one pound of that food.

[9] How can corn have an energy efficiency higher than 100%? This means that the energy that human beings put into the process of growing, distributing, and eating corn is less than theenergy provided to the human body by the corn. The hidden factor here is sunlight – corn plants are drawing energy from the sun for free, and storing that energy, which humans later consume.

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How Do We Limit Bank Risk?

President Obama recently proposed a tax on some of major banks’ liabilities to pay for TARP-related (bank bailout) losses, and to reduce risk taking by big banks. While the proposed tax might accomplish the former goal, analysts have opined that it is unlikely to decrease financial risk-taking. Regulation might decrease risk-taking, but it doesn’t resolve the issue of paying for past losses, nor does it establish a reserve for any future risks. Is there a better way to reduce risk taking while simultaneously paying for losses past, present, and future?

Why not consider a financial leverage tax on all corporations? The US has historically encouraged debt, which helped fuel the recent credit crisis. A tax on leverage would help penalize excess risk taking by taxing the very fuel that feeds the fire. While it’s perfectly acceptable for any company to gamble with their own equity, systemic risks are created when institutions bet in the trillions by borrowing dozens of times their own capital. That’s precisely what Lehman Brothers and other investment banks did during the boom years, with leverage ratios well over 40 times their own capital. A tax on financial leverage that increases taxation as a function of leverage would allow companies to take on risk while penalizing the Lehmans that took excessive risk with borrowed money.

How would a financial leverage tax work? The tax rate would be based on the debt-equity leverage of the company, so that the tax rate would rise with leverage. The tax might not apply to the first billion dollars in liabilities, so that it would affect only larger corporations. Assume the base tax rate is 0.03% of liabilities. A large non-financial company with $10B in debt and a debt-equity ratio of 1 would have to pay $3 million in taxes [1]. A bank with $10B in liabilities and $1B in equity would have to pay ten times that amount as a result of its 10x leverage, resulting in a tax bill of $30 million. If the bank lends out 10 Billion with a 3% interest margin, it would earn $300 million in net interest. For this bank, the leverage tax would effectively be 10% of net interest income [2].  On the other extreme, under this tax regime a company like Lehman would have had to pay 1.2% of its gross liabilities, which were in the neighborhood of $700 Billion. This would amount to $8B per year, double Lehman’s 4B net income in 2007 [3]!

The financial leverage tax would make it impossible for banks, corporations, and hedge funds to create the kind of credit bubble they created in the mid 2000s. Funds raised by such a tax could be used to pay off the TARP bailout, and also to fund the SEC and other enforcement agencies. The benefit of this approach is that it could be applied across the economy in a uniform way. Current proposals don’t apply to hedge funds and other highly leveraged non-bank institutions, leaving pockets of risk to grow. Excess financial leverage has fueled almost every major financial collapse in history, and a tax on leverage would directly address this issue.

[1] 0.03% of $10 Billion is 10 Billion * 0.0003, or $3,000,000. In the case of the bank with 10x leverage, this figure goes up by a factor of 10, to $30 million

[2] The St. Louis Fed tracks net interest margins of US banks, and they have been above 3% over the last 30 years, making this a very conservative estimate. A leverage tax of $30 Million would be 10% of the bank’s net interest of $300 Million.

[3] At 40x leverage, the leverage tax in the example given would be 1.2% of gross liabilities. With net interest margins around 3.5%, a 1.2% tax would consume about 1/3 of a bank’s interest. Since a bank’s operating expenses and loan losses often consume more than 50% of net interest, this tax rate would likely cause a bank with this kind of leverage to be unprofitable – which is precisely the point.

Posted on by praveenghanta 2