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The Wall Street Journal ran an article yesterday based on a longer study by the Brooking Institute on the trend of the average age of businesses in America aging:

“Why it’s worrying that U.S. Companies are Getting Older”

“Older firms are increasingly controlling the largest market share in different sectors of the economy, according to a paper by the Brooking Institution’s Robert E. Litan and Ennsyte Economics’s Ian Hathaway. By 2011, the portion of U.S. businesses aged at least 16 years reached 34%, compared to 23% in 1992. Moreover, those mature companies went from employing only 60% of private-sector workers in 1992 to employing nearly three quarters of the private-sector labor force in 2011.

The report attributes this trend to declining entrepreneurship, among other reasons. The rate of new business creation in the U.S. has been constantly shrinking in the past three decades. “The decline in new firm formation rates had occurred in every U.S. state and nearly every metropolitan area, in each broad industry group, and in all firm size classes,” the authors explain.

Moreover, it has become more difficult for younger companies to survive and compete with the bigger ones. Business failures are more frequent and likely among start-ups, which may account for the fall in business creation after the 1990s. The economy has grown more advantageous for incumbent firms and less helpful for fledgling ones.

The authors argue that younger companies are crucial to attaining a healthier economy as they have had the largest contribution to past “disruptive and thus highly productivity enhancing innovations” across different sectors ranging from airplanes and automobiles to computers and internet search.

“If we want a vibrant, rapidly growing economy in the future, we must find ways to encourage and make room for the start-ups of the future that will commercialize similarly influential innovations,” said the authors.”

 The first chart shows that more businesses close than open, which includes start-ups which fail. Nearly 90 percent of all businesses fail within 10 years. The second chart shows a specific breakdown by industry.

 

 

 

This is not difficult to understand: new business face the inherent challenges of promoting a brand of a product or service in the face of well-established, existing brands. Why try something new when the old version works for you? Then you add in the high tax rates, high energy costs regulation compliance costs, all sorts of entry fees (examples include taxi medallions and occupational licenses), and new laws pushed by the old businesses, mainly larger firms, which drive out the smaller competitors who cannot keep up with the ever-increases taxes and regulations, and the result is that fewer and fewer people even consider starting up a new business, and those who do are more likely to keep the size small enough to handle the taxes and compliance requirements  manage rather than spend energy trying to grown the business or make it more profitable. This is a significant reason why most of the new start-ups are companies which do not need a lot of energy use or space, such as a tech start-up where one only needs a computer with the right programming and internet access and which can be done from an apartment or coffee shop. The problem is that not everyone knows how to, or is capable of, learning to code and managing a computer-based business. On the downside there are fewer start-ups in other sectors of the economy like construction and manufacturing which can offer good-paying jobs needed for many working Americans. Start-ups provide people with job opportunities and can create new ideas which make civilization’s progress better for more and more people. Just imagine a world with no light bulbs, automobiles, or commercial internet access, for example.

The short- and medium-term implications is that this is a disaster decades in the making. Fewer competitors in a particular sector means less choice, which inevitably leads to higher prices and a lower quality product or service because the incentive to be better disappears if either a) you do not have competition or b) if you can simply lobby the government’s elected and unelected officials to devise ways to limit or defeat the competition’s ability to challenge the “established” brands. The resulting weakness in economic growth then fuels the “need” for stimulus dollars, tax credits, and subsidies to keep certain businesses competitive, rather than allow the private marketplace to decide what is valuable and what is not. But even in this way we are only taking money from those who produce and redistributing the wealth to those who are well-connected or who are in the business those in charge of the money deem “sustainable business.”

This is what cronyism does to the economy: it will enrich the well-connected and wealthy while making prosperity harder and harder for an increasingly few people. We are past the debate as to whether cronyism harms economic growth; the question is if and when the majority of people will recognize the problem and stand with organizations like CRI in opposing cronyism and the devaluing of the dollar.

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Two related stories:

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UD expels Data Centers project as ‘bad fit’

Millsboro poultry plant fight shifts to court

 

The University of Delaware cancelled its proposed contract with The Data Centers LLC to build a new power station to complement a data facility on UD’s campus. The argument became very fierce as both sides accused the other of malicious conduct.

As Dave Stevenson wrote last Fall in “Newark Data Center Not a Choice Between Jobs and Environment” the Data Center would have been cleaner than the alternative, which is for Delaware to import electricity generated from coal-fired power plants from states like Pennsylvania, Virginia, and West Virginia. If Carbon Dioxide emmissions are what worries the anti-Data Center crowd then they should realize that the air pollution generated from the proposed power plant on UD’s campus would STILL be less than what we are doing now, which IS to import coal-generated electricity from Pennsylvania, Virginia, and West Virginia. As Dave wrote:

“Since much of our power comes from generation facilities in western Pennsylvania and West Virginia we average about an 11% transmission line loss. That means we burn an extra pound of fuel for every nine pounds of fuel producing useful electricity. With a power plant on the Data Center site there will be essentially no transmission line loss. In fact, it is environmentalist pushing hardest the idea of distributed generation, power made where it will be used.”

The Data Center would have also created jobs, some temporary like construction and some permanent such as those people needed to staff the data center and the power plant. Overall, while we do acknowledge that The Data Centers LLC made some missteps in defending their positions and in not providing all the relevant information to move the deal forward (which is their own fault) the truth is building a power plant in Delaware is needed in order for the state to lower residential and industrial electrical bills.

 

As for the Allen Harim chicken plant in Millsboro, the same story is unfolding: residents do not want the chicken plant and the allegations of industrial waste and  pollution are being used. The specifics over how to best renovate the land to minimize environmental damage should and absolutely must be worked out, because industry must accept responsibility for its own waste without dumping it (literally) into the private space of others, meaning the public. However, at some point the land should be developed in order for desperately needed jobs in Western Sussex County to be created.

In both “liberal” New Castle and “conservative” Sussex counties, the same situations unfolded: local residents opposed a major development project by out-of-state based corporations on environmental and noise pollution grounds, with residents clearly not wanting this development in their areas of living. Whether residents opposed to the Allen Harim plant will win in court remains to be seen, but if they do win then count those as jobs lost for the state, a state which is still behind pre-2008 job creation levels.

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Governor Markell released his budget for FY2015 and it includes new taxes, including a 10 cent per gallon increase in the gas tax. He also wants to increase taxes on businesses and move money from the Transportation Trust Fund to help offset the deficit.

Where are we going with this?

Much of this increase in spending is unnecessary and there are ways to pay for the spending without new taxes. For example, Delaware could save $90 million a year in the infrastructure category if they simply change their prevailing wage methodology from the state’s prevailing wage survey to the US Bureau of Labor & Statistics (BLS) survey. This is because Delaware’s survey is much more union-friendly and has caused public works projects to see an explosion in spending. The BLS survey includes more businesses and while still union-friendly is much less so than the state’s.

Delaware has $29 million sitting in bank accounts, unspent money collected from the Regional Greenhouse Gas Initiative. This is money polluting businesses pay to the state in order to “offset” their emission of CO2. The idea was that money would be spent on low-income weatherization projects (like installing energy-efficient windows or dishwashers in homes), but in reality most of the money spent was on administrative costs, with very little going to these projects (which had their own problems).

Delaware also makes the cost of business difficult, with electric prices 25% higher than the national average, the state with the worst gross receipts and corporate income tax rate together, and a personal income tax rate which make Delaware uncompetitive with Florida or Texas for jobs; in place the state has to essentially pay companies like ILC and Kraft Foods to keep jobs here. What we need is a natural gas pipeline to lower energy costs, a repeal or at least reduction in the tax rates mentioned above, and more support for existing firms. Delaware was last in the nation in terms of job expansion by existing in-state firms.

Let us hope that the General Assembly decides to move Delaware in a pro job-growth direction and away from punishing the middle class and small businesses of Delaware with onerous taxes and fees which are only encouraging the state to spend more.

*Note:This article will be updated when further details about the FY2015 budget are revealed.

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By now, many of you, especially those of you who live or work in New Castle County, are aware that Bloom Energy has been, over the last year or so, collecting fees from Delmarva Power ratepayers but not disclosing the cost to consumers; nowhere on people’s utility bills will you see any surcharge for Bloom Energy, though you have already been paying it. The cost? Over $1 BILLION in subisidies from both Delaware taxpayers and Delmarva Power ratepayers, combined. From the original article:

”      Delmarva and Bloom admitted electric ratepayers would be stuck paying above market prices for power. They said it would be worth it because of claimed economic development benefit of jobs at a new fuel cell factory, offsetting higher future electric prices for conventional power, the avoided cost of buying renewable energy credits, and environmental benefits. Two years down the road our predictions are coming true:

·         The cost will be at least three times expected and could go to a half billion dollars over the twenty year life of the project
·         Overall economic development potential will be one third expected and the Delaware solar industry has been decimated by the offsets in Solar Renewable Energy Credits
·         Environmental benefits would have been eight to ten times higher if a conventional natural gas power plant had been built and electric rates would have gone down instead of up”
Some are trying to argue that CRI and those who oppose the Bloom Energy deal are not giving the company time to develop its business model and hire the workers they promised to do. The problem is not just that they are behind; that would in of itself be the least of the problems. CRI has doubts there is any work going on at all in the plant, and an attempt by the News Journal’s Aaron Nathan to visit the site to inspect the plant was denied. Why would Bloom Energy not want Aaron to visit? It’s not like the facility was off-limits to outsiders. Secretary of DNREC Colin O’Mara was allowed to walk into the plant and announce that Bloom Energy was still on schedule to complete its stated objectives of operating their Delaware plant on schedule. Keep in mind the News Journal editorial board still supports the Bloom Energy deal, so it isn’t like Bloom is showing their facility to a hostile entity.
We hope our elected officials learn a lesson and realize that gambling with taxpayer money, even in the name of “investment in the future” “jobs” and “green energy” is not a smart idea. Had Bloom been required to have competed with other companies for the technology (Fuel Cell Inc. is suing Governor Markell and five members of the Public Service Commission for not giving other companies a chance to bid on the contract) and focused more money and time on building the facility and not lobbying, they may have been able to succeed. Instead, as CRI believes, Bloom will begin construction of their fuel cells in Delaware and then realizing the cost it would need to keep the operation going, will cease operations in Delaware and move them elsewhere.  As Dave wrote in “The Bloom Prophecy”:
“The first 6 megawatts of a 50 megawatt power supply contract with Delmarva Power can come from Bloom’s California manufacturing facility.  We expect Bloom will deliver the first 6 megawatts and then will pull out of the contract and abandon plans to manufacture in Delaware so the funds can be invested in India or elsewhere in Asia.  It makes no economic sense to build a manufacturing plant for one large order for fuel cells to be utilized by Delmarva Power.

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Jessica Kuperavage, CRI’s newest intern, has some thoughts on what is making healthcare so  expensive. The big problems is that people who pay little or nothing at all for health services are more likely to use them since there is no penalty for doing so. This is one reason why emergency rooms bill heavily for using their services: the idea is to cut down on people using the emergency room so the ER is saved for emergencies. Government involvement in healthcare also negatively affects the cost.

Why is Healthcare so Expensive? Understanding the Cost/Service Disconnect

One of the contributing reasons for the cost of medicine and medical services is the result of the fact that the people receiving the services – patients – are not directly paying for them, but are instead contributing a co-pay for a service that is largely paid by their insurance companies.

The disconnect between services and costs has consequences for the price and practice of medicine. Among them are the following: medical fees escalate, patient consumption of medical goods and services escalate, and medical innovation escalates.

Medical fees escalate: Insured patients and Medicaid/Medicare recipients often do not compare costs between medications and medical care providers. The information is difficult to obtain, and comparing costs is not a priority when immediate care is required. Furthermore, patients do not have the incentive to compare costs when a third party will cover a significant portion of the bill.

The lack of a medical free market, combined with direct to consumer pharmaceutical advertising and limited study data available to physicians, can also result in patients being prescribed medications that are expensive, but no more effective than treatments that are decades old and far cheaper. When the bulk of the cost is paid by a third party, such as an insurer, patients are less likely to consider whether a therapy is worth its cost.

Consumption escalates: Patients whose medical bills are paid primarily through insurance or governmental programs make more frequent trips to the doctor. While checkups are an important part of preventive care, more excessive use of medical services yields no patient benefit. According to a report in the Archives of Internal Medicine, the overuse of medical services accounts for as much as 30% of healthcare expenditures between 1978 and 2009. By definition, overuse is the application of screenings or treatments that have no positive health benefit or are more harmful to the patient than helpful.

Some types of screenings, while very common (and very expensive), have little or no positive effect on patient health. For instance, the U.S. Preventive Services Task Force recommends against screening for prostate cancer in men, stating that, due to the slow progression of the cancer and the serious side effects that frequently occur as a result of existing treatments, “many men are harmed as a result of prostate cancer screening and few, if any, benefit.” Prostate cancer rarely affects men’s quality of life or causes death, while treatment for prostate cancer can leave men incontinent and impotent.

While pressure for tests and medications can come from patients, physicians also become more likely to schedule additional health screenings as a means of preventing patient lawsuits. Although it may reduce malpractice claims, this practice is costly and frequently provides no benefit to the patient. Because patients do not pay most of the cost out-of-pocket, they comply with these recommendations for extraneous procedures.

Innovation escalates: Even if there was no inflation in health care costs as a result of reliance on insurance and governmental programs, many common therapies would be beyond the reach of consumers due to high costs. Insurance companies make MRIs and other expensive procedures accessible, and also make new procedures feasible for hospitals to provide to patients.

The influx of funds into health services also helps to drive further research, which can benefit patients. Medical and pharmaceutical research is lengthy, expensive, and only occasionally yields effective new treatments. Pharmaceutical companies offer pro bono expanded access programs, which provide experimental therapies to terminal patients who meet the FDA’s guidelines.

While some benefits occur, disconnecting cost from service causes many problems. Expanding governmental control over healthcare will exacerbate these.

 

Sources:

Baicker, Katherine et al. “The Oregon Experiment: The Effects of Medicaid on Clinical Outcomes,” The New England Journal of Medicine, 368 (2013)

Boodman, Sandra G. “Concern is Growing that the Elderly Get too many Tests,” Kaiser Health News, 12 September 2011 http://www.kaiserhealthnews.org/stories/2011/september/13/overtesting.aspx

“FDA Expands Access to Investigational Drugs,” U.S. Food and Drug Administration, 2009 http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm176845.htm

Goldacre, Ben, Bad Pharma: How Drug Companies Mislead Doctors and Harm Patients (New York: Faber and Faber, Inc, 2012)

Korenstein, Deborah, et al. “Overuse of Health Care Services in the United States: An Understudied Problem,” Archives of Internal Medicine, 172:2 (2012)

Moon, Marilyn, “Confronting the Rising Costs of Healthcare in Medicare and Medicaid,” Generations, 25:1 (2005)

Reidenberg, Marcus M. “PSA Screening for Prostate Cancer,” Weill Cornell Medical College, 11 February 2012 http://weill.cornell.edu/cert/patients/prostate_cancer_screening.html

“Screening for Prostate Cancer,” U.S. Preventive Services Task Force, May 2012 http://www.uspreventiveservicestaskforce.org/prostatecancerscreening.htm

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An excellent op-ed by Michael Barone in the New York Post. The point he makes is that those who voted for the law don’t understand the concept of insurance: to protect you from expensive and unlikely causes. It’s why auto insurance doesn’t cover routine oil changes, but does cover bodily injury and collision. It’s why people buy healthcare policies for ER visits but not routine checkups.
The other point he makes is that businesses who employ lower-skill workers, especially those who are unlikely to work someplace for a long time, are the least likely to pay for a huge premium for employee health care.

From the article:

“Wonder what a “skinny” or “low-benefit” insurance plan is? The terms may vary, but the basic idea is that policies would cover preventive care, a limited number of doctor visits and perhaps generic drugs. They wouldn’t cover things such as surgery, hospital stays or prenatal care.

That sounds similar to an auto-insurance policy that reimburses you when you change the oil but not when your car gets totaled.”

For some high-paying jobs in demand, it may make sense to offer a full healthcare package. But for these jobs it does not. Now that health insurance will be required to cover pretty much anything and everything, including routine checkups, expect more part-time workers without employer-sponsored healthcare, which will eventually drive up everyone’s taxes in order to pay for the subsidies the workers will need to buy healthcare on the exchanges. The question is, is this a deliberate intention of the law, or did the people who wrote the law simply not foresee these issues?

Read the full article:http://www.nypost.com/p/news/opinion/opedcolumnists/another_enormous_obamacare_oops_vY4KousCRUXPprm4FgGc2I

 

Read the full article: http://www.nypost.com/p/news/opinion/opedcolumnists/another_enormous_obamacare_oops_vY4KousCRUXPprm4FgGc2I

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2013 is already upon us, and three days in things are headed downhill. Congress just passed a bill to respond to the so-called “fiscal cliff” by increasing EVERYONE’S taxes at least a little bit, and a lot if you have a high income (note: if your money comes from investments and assets, such as Warren Buffett, your taxes will be unchanged). More battles will come up on the debt ceiling, automatic defense cuts, and future budget deals (if any come), and no doubt the partisanship will continue.

Delaware has its own problems to deal with: unfunded pension liabilities, out of control Medicaid spending, bad deals with Fisker and Bloom Energy, education performances moving sideways and not up, and taxes such as the gross receipts taxes which harm business growth. These are just a sample of the issues facing the state. While CRI would like to resolve every major issue within the state, that is not very likely.

Therefore CRI will spend 2013 focusing on three elements: improving education standards, discouraging corporate subsidies, and preventing the state from passing any legislation which pushes single-payer healthcare by abolishing private healthcare insurance.

Education reform will be CRI’s top priority in 2013. There is general consensus that the education system as currently structured is not serving the students well, particularly those in areas like Wilmington and Dover, where parents usually do not have the  financial means to send their children off to private schools, and who cannot be guaranteed a slot in the charter schools due to bureaucratic processes. CRI is calling for legislative actions to allow the money to “follow the student”, where parents have options such as Education Savings Accounts (ESA) that give parents the financial opportunity to choose where they want to educate their child. We hope to inform and engage the public and the legislators into some serious action this year that will give students a big victory for their future.

Our second goal is to reduce, if not eliminate, subsidies for preferred businesses and special interest friends of the government. Bloom Energy and Fisker Automotive are two prime examples of the government handing over “subsidies” for “investment” in these companies, meaning hundreds of millions in tax dollars to give to these companies, money we will in reality never receive payback for. There is no industry in Delaware receiving taxpayer money that can be said to be worth the corporate welfare. Our aim is to educate the public and legislators, and push Delaware to either reduce/eliminate current government subsidies to preferred parties, or else to agree to prohibit future government subsidies via “corporate welfare”.

Our third goal will be to discourage the Legislature from passing any bill which bans private health insurance in favor of “single payer” government. While CRI acknowledges the issues in containing healthcare costs, such as Tort reform, allowing insurance to be purchased across state lines, and using means-tested methods to determine who qualifies for Medicare or Medicaid as opposed to just handing it out to anyone who asks, there is no way the government can raise all the taxes needed to pay for this without destroying job opportunities or sending them out of state. Plus, the government will not be able to manage the insurance aspects of healthcare policy without setting up a massive, inefficient bureaucracy, just like they do with everything else.

What do you think? Are there any goals CRI should work for that are no mentioned above?

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