Current Commentary

Senate healthcare bill:
Mandates and penalties to force and coerce the healthy into subsidizing the unhealthy

The Senate version dropped the public option, but it looks as if the Senate also dropped the low income exemptions on the $750/individual, $2250/family fine for not buying insurance. There will, however, be some aid or subsidy to individuals making less than $43k/year and families of 4 making less than $88k/year. People over those limits must either buy insurance (with no subsidy), or they will pay a fine.  There is no mention of what is an allowable policy, but it appears that the House version would specifically disallow high deductible, low premium policies -- the very kind of policy that results in the most efficient use of healthcare.

The strategy is to coerce young, healthy individuals into subsidizing old, unhealthy individuals with big insurance companies serving as the middle man.  It’s not grandma and grandpa getting the shaft.  It’s the 27- to 50-year-olds who make over $43k/yr and are either going uncovered or are opting for a high deductible/low premium “disaster plan.”

What's below is excerpted from Rick Newman's US News & World Report story. My commentary is in italics:

Required coverage (the "individual mandate"). American citizens and legal residents would be required to have health insurance, or pay a fine. For an individual, the fine would be $750 per year or 2 percent of household income, whichever is greater; for a family, the maximum fine would be $2,250 per year or 2 percent of household income. The fines would go into effect gradually, starting in 2014. The House bill is similar, with exemptions for certain low-income people.

Force and coercion.  So much for free will.

Employer obligation. Companies with more than 200 employees would be required to enroll their workers in a health insurance plan, with no ability for employees to opt out. Companies with more than 50 but fewer than 200 workers would not be required to offer insurance, but if they didn't, they'd have to pay a fee of $750 per employee each year (with some variations). Companies with fewer than 50 workers would not have to offer insurance or pay any fees. Those rules would go into effect in 2014. The House bill would place similar requirements on employers, but with a different way of determining which companies are required to offer insurance.

While I lack the data to calculate the precise employer labor cost increase, this is inarguably an employer labor cost increase.  Increasing employer labor costs at a time when 1/10^th to 1/5^th of the country is counterproductive.

Subsidies to help pay for coverage. In general, government subsidies would help cover the cost of insurance for individuals earning as much as 400 percent of the poverty level. (In 2009, the poverty level for an individual in most states was $10,830; for a family of 4, it was $22,050. So an individual earning less than $43,320 or a family of 4 earning less than $88,200 would qualify for some aid.) The House bill has a similar income threshold for subsidies, but a different formula for determining how much the subsidy would be.

The bottom half of wage earners will get some sort of subsidy; the top half will get no subsidy.

Insurance for high-risk patients. People who can't get traditional coverage on account of a pre-existing medical condition would be eligible for insurance under a new "national high-risk pool," with rates comparable to those for the general population. The pool would go into effect quickly--within 90 days of a bill becoming law. The House bill has a similar provision, with different ceilings for allowed premiums and deductibles.

A much higher cost pool that will charge premiums comparable to everyone else. So who pays for it?

Lifetime limits. Insurance companies would no longer be allowed to cap the amount of lifetime benefits or cancel coverage, unless the patient defrauded the insurer. Those rules would go into effect in 2010. By 2014, there would be tougher limits prohibiting annual caps on benefits, in addition to lifetime caps. The House bill has similar provisions and would go a step further by severely restricting insurance companies' ability to deny coverage on account of pre-existing conditions.

Again, who will pick up the increased cost, and what will be the increased cost?

New taxes. To help pay for increased coverage, a number of long-standing tax credits and deductions would decline, while taxes on some other benefits would increase. One of the most prominent changes would be a tax on "gold-plated" health insurance plans that provide lavish benefits but are expensive; the threshold at which the surtax would kick in would be $8,500 for an individual's annual premium and $23,000 for a family's. There's a lot of fine print, however, and some people with gold-plated plans would probably end up exempted from the tax. The House bill doesn't tax gold-plated plans, but raises funds through an additional 5.4 percent income tax on individuals earning $500,000 or more per year, and families earning $1,000,000 or more. All of these new taxes are controversial, creating more flash points for negotiators.

This is a misdirection, a smoke & mirrors play so that we focus on the tax increases on millionaires but lose sight of the fact that the penalty fines for not complying with the mandates are a tax on those with incomes starting at $44k/year.

Tuesday, December 15, 2009

How the banks pay back TARP:
borrow at 0% and lend at 3+%

How are so many banks (and note that it's only the big banks like Wells, Bank of American, and Citi) able to pay back their bailout money only a year after being on the verge of bankruptcy?

The answer is simple: Borrow at 0%, and lend at 3-4%.

From whom did the banks borrow? From the government (technically from the Federal Reserve System, a member-owned non-government agency, but since the Fed effectively has the power to coin money, the Fed is acting as a government entity). 

To whom did the banks loan the money? To the government, in the form of risk free US treasuries paying 3-4%. 

Yes, it really is that simple. Yes, it really is that corrupt. Yes, that's why most average Americans continue to suffer even as Wall Street's biggest problem is how to hide record bonuses from public ire. Yes, Obama was talking tough on 60 Minutes last night. Yes, the bankers came away smiling after meeting with him today. 

Two questions for discussion: 

1. In the interests of transparency, should we allow the Treasury to print money and thus eliminate the Fed > member bank > Treasury smoke and mirrors game?

2. If the banks don't start lending again, and if this money doesn't make its way from the monetary base (M Zero) to the overall monetary supply (M2) and we don't get hit with a wave of runaway inflation, will anyone have been robbed/any harm been done? I'll wait for commentary before weighing with my answer, but a hint is that it involves the widely accepted false supposition of the evils of deflation. 

Friday, December 11, 2009

Debunking a federal pension myth: It's not a self-sustaining program funded only by members

It was argued to me that federal government pensions are paid by payroll deductions made throughout the employees' careers. While that statement in and of itself is true, it is not the complete truth, and it is not the whole truth, and it does not tell the full story. The full truth is the story of private sector employees subsidizing a benefit that 82% of private sector employees do not receive themselves. 

Current federal government employees contribute 1.3% of their payroll into their pension plan. (Note that I used the word "plan" as opposed to "fund," a detail I will explain in a bit). For reference, Social Security taxes are 12.4%. How do you account for pension contributions being only 1/10th of what SS contributions are, given that average pension benefits exceed average SS benefits? 

The answer is that private sector employees help to pay for public sector employees' retirement benefits. Does the phrase "unfunded liability" ring a bell? There are two types of pensions: 

FUNDED: There is an actual fund/pool of money invested -- an actual lump sum, nest egg of principal that will draw interest and pay benefits. This is the type of pension plan used by the few private businesses that still offer pensions. 

UNFUNDED: This is the plan used by the federal government, most state governments, and Social Security itself. There is no nest egg; there is no lump sum pile of cash. Payments are made from current tax revenues and member contributions. 

The gross underfunding/under contributing of federal government employees is what helps to account for the fact that the average federal government employee makes 59% more in wages alone than the average private sector employ, and a whopping 108% more in combined wages and benefits than the average private sector employee.

Thursday, December 10, 2009

Obama desperately says 'we must commandeer more of the private sector economy'

The actual quote was we "must continue to spend our way out of this recession," but a more accurate way to phrase it would be, "We must divert a greater portion of the economy from the control of many individuals to the hands of a few powerful elites in order to increase the prosperity of the many individuals."  For a fine recent example of the corrupting power of control over so much money by so few people,  consider that 6 million dollars of the first stimulus package went to Hillary Clinton's 2008 pollster:  Mark Penn's firms got millions from stimulus.

Driving this mentality is a core false supposition of Keynesian economics: falling aggregate demand (namely private consumption and investment) must be forcibly confronted by increased government spending.   The truth is that falling aggregate demand is far from our most pressing issue, might actually be the natural cure to our REAL most pressing issue, and even if it were the most pressing issue, commandeering more of the economy under the control of central planning would not be the way to correct it. Every dollar under central planner control is a dollar less that you or I control.  Zero sum game theory applies to most of government spending.

On the contrary, our nation's biggest problem is that we consume far more than we produce, and that is not sustainable. The only question is do we close that gap on our own terms, or will it be forced upon us?

For the better part of the past decade, (trade deficit + budget deficit)/GDP = ~7%. In simple, but accurate terms, this is the amount by which our consumption exceeds our production. It doesn't take a Harvard MBA or an MIT economics PhD to see that such a scenario can't go on for ever, and jamming the government spending gas pedal to the floor is not the way to avoid colliding with reality.

As for the debt, over half of the debt is financed on a one year or less adjustable rate term, and Moody's recently said that the US is pushing the limits of a AAA credit rating. What does this mean in normal speak? It means that we are dangerously close to not being able even to make the interest payments on the debt without politically impossible tax increases that could risk collapsing the economy.

We still have a relatively painless way out of this by growing the real economy and thus growing the tax base and by big spending cuts that would be opposed by few outside the fervent special interests directly hurt by them. However, the window is closing fast:

1. Pursue real pro-growth policy that cuts taxes on bottom earners, exempts small businesses from the employer contributed payroll tax rules, and carrot/stick (similar to how 21-to-drink and 55 mph laws were federalized) state and local governments to dramatically reduce and eliminate regulations that serve as barriers to entry and growth for small business.
2. To pay for the tax cuts in #1, eliminate the $106,000/year earnings cap on SS taxes. As it is now, the SS tax is a regressive tax; when you make over 106k, your rate falls from 12.4% to 0%.
3. Raise the SS retirement age to 71.  The alternatives are dramatic benefits cuts, tax increases, or certain insolvency .
4. Freeze all government spending. No more COLAs/automatic budget increases.  You could probably cut the pay of many government workers since the average federal government worker makes much more money than the average private sector worker -- 59% more in wages alone and 108% more in wages and benefits.
5. Pull out of Iraq/Afghanistan. End US imperialism and the preemptive, Bush doctrine war.
6. End pensions on all government employees aside from physically demanding jobs such as military.  80% of government employees get a pension.  82% of private sector employees do NOT get a pension.
7. Cut Congress' pay from the current $170k annual figure to the US median income for a full-time worker, about $45k. How can a person be expected to make tough budget decisions for the public when he/she has never had to do so in his/her private life?
8. Don't give any more money to Wall Street bankers. They are all looking at a record bonus year, courtesy of those with median incomes of $45k.

Saturday, December 5, 2009

Friday's unemployment figures:
No reason for optimism

This is not the story of a reversing trend that everyone is portraying it to be. It is the story of correcting overstated job losses from the previous two months. The huge positive revision of September and October's BLS reports is what dropped the U6 from 17.5 to 17.2, and aided by 291k people giving up looking for work dropped the U3 from 10.2 to 10.0. Such heavy revisions cast doubt on the accuracy of November's smaller than expected 11k loss.