Pittsburgh is a Symbol of the Industrial Decline of the United States

In 2009 it was voted the 29th most livable city in the world by The Economist newspaper.

This week it will host the G-20 summit of world leaders.

With all those politicians in town that should help to knock it down a peg or two in the ‘most livable’ stats.

It’s the US city of Pittsburgh in the state of Pennsylvania.

Incidentally your editor has never been to Pittsburgh, and the odds are we never will. Further, we don’t know anyone who’s ever been to Pittsburgh either. Or if they have, they’ve never admitted it.

Pittsburgh is probably one of those places where people are “from” rather than where they’re “going to.”

That certainly seems to be the case over the last sixty years. According to the US census, the population peaked at 676,806 in 1950. By the time of the 2000 census the population had dropped to 334,563.

The US Government estimates the population has dropped further to 312,819 in the last nine years.

Whether it likes it or not, the city of Pittsburgh is a symbol of the industrial decline of the United States.

That symbol is shown perfectly by US Steel, whose home town is Pittsburgh. A company that currently employs less than one-sixth the number of people it did at the end of World War II. In fact, US Steel was once the largest employer in the Pittsburgh area.

Today that honour is held by a different type of company – the University of Pittsburgh Medical Centre (UPMC).

UPMC currently employs 50,000 people.

What a contrast. When the US was the industrial engine room of the world economy, the city of Pittsburgh was twice the size and its leading company employed over 300,000 people.

That was until it was destroyed by government interference and regulation, and union incompetence. Their combined actions made the US steel industry uncompetitive against foreign industry.

Now, the biggest employer is a hospital. A service that is supposed to be of use to the population but instead sucks ever greater amounts of money directly and indirectly from US taxpayers.

You see, as a not-for-profit organization, the UPMC doesn’t have to make a profit. You may think, “Well, that’s good, hospitals should be run for the public good, not so fat cats and shareholders can profit from the misfortune of others.”

It’s a noble thought, and you wouldn’t be alone in thinking it. But it’s exactly the reason why healthcare costs have spiraled, and will continue to spiral out of control.

And if US President Obama manages to shove through his public health reforms, the writing truly will be on the wall for the US economy.

If they thought they had problems with public expenditure on social security and medicare now, wait until they unleash a fully underwritten public health service on their taxpayers.

But remember, the current US health system is not the free-wheeling free-market system everyone believes it to be.

We wrote some time ago about this. Every time health is discussed in Australia the politicians, unions (including the AMA) and other pressure groups rush to tell everyone about the disaster of following the US down the path of a private healthcare system.

What they conveniently forget is that the US healthcare system is no more private than the Australian system.

As we wrote in Money Weekend back in June:

“It’s a little known fact, but government and non-profit hospitals make up over 80% of the hospital system in the United States. Private sector for-profit hospitals only account for about 15% of the market.”

Could the 15% rump of private hospitals really be the reason for healthcare costs being so unaffordable? Of course not. It’s the presence of the government and the distortive presence of ‘compulsory’ employer health insurance which causes the problems.

If Obama gets his way, the health system in the US will become even more expensive and unaffordable than it already is.

We have the same problem here with the Medicare Levy, the Medicare Levy Surcharge and private health care.

If you earn above the threshold then you’re ‘forced’ to buy private health care. If you don’t then you are charged the Medicare Levy Surcharge. Either way you pay. So you may as well go private so you can choose where to go.

The insurance companies know this and therefore there is no incentive for them to reduce their fees below the amount of the surcharge.

In effect it’s a cartel between government and private health insurers that rips hundreds and thousands of dollars from Australians every year. In a truly private system you would not be forced to buy insurance and therefore the insurance companies would have an incentive to be competitive.

This competition would needless to say, lead to lower premiums. Or maybe no premium at all. Perhaps some families would choose not to be insured. After all, if you’re a healthy family, odds are you only have a small chance of needing medical attention.

They may be happy to take the risk of being uninsured, or just pay-as-you-go in the event of being admitted to hospital. Again, in a free market system, competition among hospitals would ensure prices are kept low.

But, for the not-for-profit hospitals in the US, the absence of a profit motive means they just spend virtually every dollar that comes in the door. There is no incentive to keep charges down. That’s a free-kick for the suppliers of medical equipment like General Electric and Siemens, firms that sell millions of dollars worth of technology to hospitals.

And it’s a free-kick to doctors and surgeons. What incentive do they have to cut their fees when they know the hospital doesn’t have to worry about making a profit? Between government programmes and tax-free employer health insurance, odds are they are going to get plenty of business whatever they charge.

Anyway, we’ve gone off on a sidetrack here. Back to Pittsburgh…

If French President Nikolas Sarkozy has his way then another ‘wonderful’ example of idiotic policy will make it onto the G-20 agenda.

It’s the “Tobin Tax.”

Nope, it’s nothing to do with funerals or death.

Instead, the Tobin Tax is another madcap idea from the followers of Keynesian economics. Although in this case the actual concept can’t be pinned on John Maynard Keynes himself. It’s an idea developed by one of his devotees in the 1970s.

The Tobin Tax is doubtless an idea the assembled politicians will love. The very fact that it has the word ‘Tax’ in the name makes it an almost guaranteed starter.

Their only problem is getting it to work.

So, what’s this deathly sounding tax? Well, your editor didn’t have a clue what it was until we did some searching around. It turns out the Tobin Tax is an idea to tax all foreign exchange transactions.

The idea is that if foreign exchange transactions are taxed it will make currency speculation less attractive to evil speculators.

Of course, like most taxes that are designed to stop something, the real consequence is that it will just shift the effects elsewhere.

One of the best comparisons we can think of is with Contracts for Difference (CFDs). You may have seen the marketing of them advertised in the papers and online.

In a nutshell, a CFD is a financial derivative that gives you big leverage to trade in the financial markets. Depending on the provider you could get a $10,000 exposure to a stock, an index, a commodity or even a foreign exchange position by just stumping up no more than $100.

It’s high octane leverage.

If you get it right then you can lock away a tidy profit. If you get it wrong then you can do your dough plus a lot more besides.

What’s this got to do with the Tobin Tax? Not much, except for how CFDs came about.

You see, all this leverage that the regulators are now panicking about was released on the retail investor due to the UK government imposing stamp duty on share transactions.

In the 1980s UK institutional investors decided they’d had enough of paying this tax to the government and so they created a derivative called an Equity Swap. This allowed institutions to just exchange the difference in the price at the end of each day without transferring ownership of the stock between them and incurring stamp duty.

That worked fine. Then some bright spark realized that retail investors would probably like some of the action as well. And so, CFDs were born.

So, not only did the UK government miss out on stamp duty from institutional investors, but it then started to miss out on stamp duty from retail investors. Plus it had the unintended consequence of unleashing a new super high leverage financial product on the financial markets.

Who knows, if it wasn’t for UK stamp duty, maybe CFDs would never have been created.

What about a tax on foreign exchange transactions? There’s little doubt that imposing a tax on foreign exchange transactions will just push the perceived problem somewhere else.

Institutions especially will do all they can to avoid the tax.

Besides, foreign exchange is already available as a CFD. Would foreign exchange CFD trades also be subject to the Tobin Tax?

But again, it doesn’t matter, some bright spark at some investment bank will just create a product that’s skirts around it. Except then it will probably create bigger problems. Most likely the same kind of problems recently experienced with the CDOs, CDSs, and whatever else it was the boffins at Goldmans, Lehmans and the rest came up with.

Except this time the potential for disaster is that much bigger. The foreign exchange market is the biggest and most liquid market in the world.

If the likes of Lehman Brothers and Citigroup were able to create debt derivatives that were many times greater than the actual amount of debt in existence, imagine what they could do with the foreign exchange market.

If you thought the current fractional reserve banking system was a Ponzi scheme waiting to collapse, the potential for the problem to be magnified through the exploitation of the foreign exchange market is mindboggling.

And that’s the thing. It’s not the speculation of foreign exchange that’s the problem. It’s the actual value and stability of the currencies themselves.

Speculators speculate when they think they can make a few dollars. If they spot a situation where they can make a lot of dollars then they’ll gamble big stakes. Remember what George Soros did to Pound Sterling in the early 1990s?

He merely took advantage of a situation to sell the Pound. It wasn’t his fault the Pound was grossly over-valued. You could argue he merely ‘helped’ to revalue it to a more realistic level.

But yet again the speculators are made the scapegoat of someone else’s wrongs.

If the attendees at the G-20 summit in Pittsburgh really want to do something about the speculation and volatility in foreign exchange markets then it is the actual system of fiat currencies that needs to be addressed.

From what we can see, imposing a Tobin Tax is like trying to cool a pan of boiling water by tipping ice cubes into it.

It may have a short term impact, but before long the water will boil again. What will they do then? Tip in more ice cubes probably.

Of course, what anyone with a brain would do is turn off the gas. It may take longer for the water to cool down, but it’s the most effective way of managing it.

Unfortunately, there isn’t a politician alive that would be prepared to do anything that addresses the real problems with the financial system.

Instead the manipulation will continue, both by governments who are afraid to make the right decisions, and by speculators who are simply – and correctly – taking advantage of political foolishness.

Other Stuff on the Markets

The S&P/ASX200 climbed 0.46% on Friday, while on Wall Street the Dow Jones Industrial Average added 36 points. In Europe the FTSE100 added 0.17% and the CAC40 slipped 0.19%.

The price of gold in Australian dollars is trading at $1,158.42, while in US Dollars it is trading at $1,004.35. Silver in Australian dollars is $19.45 per ounce, and in US dollars is $16.86 per ounce.

The Aussie dollar eased versus the US dollar and Japanese Yen, trading at USD$0.8667, and JPY79.22.

Crude oil closed at USD$71.85.

For the biggest movers on the market yesterday click here…

Pittsburgh is a Symbol of the Industrial Decline of the United States, 9.3 out of 10 based on 12 ratings

Tagged as: banking system, Contracts for Difference, Equity Swap, G-20 summit, General Electric, industrial, Keynesian economics, medicare levy, Medicare Levy Surcharge, Nikolas Sarkozy, obama, Pittsburgh, Ponzi scheme, private health care, Siemens, Tobin Tax, US government, US health system, US Steel, US taxpayers, World War II