Wednesday, March 22, 2017

Save, Save, Save

One of the most difficult things for human beings to do is to save for tomorrow.

We are hard wired to live for today. For most of our existence, that is just what we did. We set out in the morning to hunt and gather what we needed to survive for that day. We did not worry about tomorrow until tomorrow came.

This mindset was also reinforced by the limits of technology. Many things could not be easily stored. You used it as you acquired it. It was not until refrigeration was developed that it was possible to store many items for future use.

All of these limitations also made the older members of the tribe a potential liability to the group. If someone could not produce what they required to be sustained on a daily basis, it placed additional pressures on everyone else.

You worked until you dropped. Retirement was not an option. Therefore, it was not given a thought.

This was the reality of human existence for thousands and thousands of years. It is hard to break brain patterns that evolved over that length of time.

It was not until the 20th century that retirement was seriously considered. Of course, since it was evident that voluntary saving would be difficult for most people to accomplish, retirement saving was done for them. Employers initiated pension plans and put money away for employees with the promise of a monthly payment after they retired. Social Security followed a similar model which taxed employee wages with both employer and employee paying equal rates with the promise of a defined benefit in retirement

It was not until the 1970's that defined contributions plans started to gain attention. It is now the principal means for private sector employees to plan for retirement beyond Social Security. Why did this occur? Employers simply did not want to continue to carry the risk of promising a fixed future income benefit in retirement to employees. In a pension plan, if financial returns do not meet expectations, the employer must make up the shortfall. Employers shift that risk to employees with a defined contribution plan.

Of course, the shift to defined contribution plans was not all bad for employees. Any excess investment gains inure to the benefit of the employee. In addition, a defined contribution plan is also portable. The assets are yours so if you change jobs (which more and more employees did beginning in the 1980's) they benefited from the portability features in those plans.

For those employees who put money away for retirement beginning in the late 1970's and 1980's, who are retiring today, there has never been a better period to build wealth. It was difficult to lose no matter if you invested in stocks or bonds over the last 35 years.

Stocks (as measured by the S&P 500) have advanced at an average annual compound growth rate of 11.4%. An investment in ten year T-Bonds has compounded at 7.7%. These are both well above the average returns for the period 1928-2016 which has seen average stock returns of 9.5% and bonds 4.9%. (All data from datasets.)

Therefore, if retirement investors have had such favorable tailwinds at their backs why do most Baby Boomers have such paltry retirement nest eggs?

They simply have not saved anything close to what they should have saved. See discussion above for why that is.

This chart gives you an idea of how little most Boomers have saved for retirement.

Credit: Todd Campbell, The Motley Fool

To put those numbers in context, a middle income worker who is retiring will generally need approximately ten times their final income while working (in addition to the Social Security they will receive) in financial assets in order to be reasonably confident they will not run out of money during retirement.

Higher income earners will need a considerably higher amount of retirement assets in that Social Security will replace less of their final income. 15 times final income is a more reasonable target.

If you think 10 or 15 times your pay in savings sounds like a lot, consider the fact that those savings may have to sustain you for 20, 25 or 30 years in retirement based on current life expectancies.

As sobering as these numbers are, the future looks far, far bleaker for the children of those Baby Boomers who are now planning for their retirement. A recent research paper in the Journal of Financial Planning by David Blanchette, Michael Finke and Wade Pfau titled "Planning for a More Expensive Retirement" shows that the tailwinds that Boomers had for retirement planning is turning into severe headwinds for Generation X-ers and Millennials.

Those headwinds are principally caused by how expensive stock and bond prices are today compared to their historical averages and will likely be further exacerbated by increasing life spans.

It is substantially more expensive to buy investment income in the modern era than it was in the past. What is most unusual about asset prices in the 21st century is the simultaneous high valuations on risky assets and low yields on safe assets. Safe asset prices were near the low yields of 2016 in a number of historical periods, but these were generally associated with a flight to safety from risky assets (and low price/earnings ratios on these risky assets). The high prices of both stocks and bonds in 2016 are a historical anomaly that is consistent with increased demand for all financial instruments.

The average amount an investor paid for $1,000 of corporate earnings since 1881 was $16,671. Today, an investor must pay $27,812. Since 1927, investors needed an average of $19,802 to buy $1,000 of income from a 10-year Treasury bond. In 2016, an investor needed $42,373 to buy $1,000 of bond income at a 2.36 percent yield. If Treasuries reverted to their historical average of 3.5 percent, the value of a bond portfolio with a 10-year duration would fall by 11.4 percent. The impact of a rise in either interest or dividend income will not prevent investors from facing the consequences of a low-return environment.

What does this mean for those planning retirements today?

You need to save enormous sums of money to meet any realistic retirement goals because investment returns simply cannot be counted on to provide the same boost to retirement assets as they have in the past.

Of course, as we have seen from the discussion above, Baby Boomers have not met those goals despite having the advantage of outsized investment returns. They did not save enough. How much saving is going to be required according to the researchers in the low return environment we find ourselves in today?

Roughly speaking, the retirement savings rate would need to almost double over what historical returns would suggest are target savings goals.

For example, a 30-year couple earning $100,000, needs to increase their retirement savings rate from 8.5% to 14.3% in a low return environment. If that couple waits until age 35 to begin saving, the annual savings rate needs to be 16.8%.

Of course, these same individuals are paying off student loans, trying to save for home purchases and beginning to take care of children who like to eat and have clothes on their backs.

The next two generations have a very, tall challenge in front of them with theses additional retirement savings requirements while also paying the future taxes that will be required to make interest payments on $20 trillion of federal debt as well as funding the Social Security and Medicare of their parents.

Their parents could not come anywhere close to what they needed to save. How will these younger generations do it?

I have no idea other than save, save and save some more.

There is no other option than to live well beneath your means today in order to sustain yourself in the future. It is no more complicated than that. It is just hard to do. There is no free lunch. There will certainly be no free lunch in the future.

Saving is not in our nature. However, in the world we live in today there is little choice

Tomorrow will be here before you know it.

Save. Save. Save.

Thursday, March 16, 2017

Student Loan Assets and Liabilities

Unemployment has been falling. The stock market has been rising. Why are student loan defaults soaring?

There is an incredible $1.3 trillion in federal student loans outstanding owed by 43.4 million Americans.

To put that in perspective, there is about $1.1 trillion owed on auto loans and $1.0 trillion on credit cards according to the most recent Federal Reserve data.

For further context, student loans are actually the largest financial asset that the federal government has. It may be a liability to the student but that loan is an asset to the federal government. Almost half of the financial assets of the federal government are student loans?


The growth of that "asset" was astronomical after 2010 when all student loans were put under the control of the federal government and all private lenders and banks were removed. 20 years ago it was negligible.


On $137 billion of current student loan debt, the borrower has not made a payment on the loan in the last 9 months which is the general rule used to consider the loan in default.

Generally, only about a third of student loans are being paid back on time. A recent study of the Federal Reserve Board of New York found that 10 years after graduation, an average of only 38% of the original balances on student loans had been repaid. A standard 10-year loan amortization schedule should have seen these loans all paid off.

Some other background on student loans from a recent report from the Consumer Federation of America.

  • Average amount owed is $30,650 per federal student loan borrower. Average amount owed per borrower continues to tick up, rising 17% since the end of 2013, when borrowers owed on average of $26,300.
  • $137 billion in default. For federal loans originated by financial institutions (FFEL) and the US Department of Education (Direct), a total of $137.4 billion in balances were in default, a 14% increase from 2015. This cumulative level of defaulted balances includes loans which defaulted in previous years. Defaulting on a federal student loan comes with severe consequences. Borrowers can face seizure of their tax refund, garnishment of their wages, and an inability to pass employment verification checks.
  • 1 million Direct Loan defaults in 2016. In 2016, 1.1 million Federal Direct Loan borrowers defaulted.

How will these loans ever be paid back?

At the same time this report on student loans was coming out, I came across this story where Goldman Sachs estimates that there are over H-1B foreign workers in the United States filling jobs that require college educations. Goldman's number does not include another 470,000 foreign college graduates that are here on various temporary work visas according to a study by the Economic Policy Institute. Of course, every job filled by a foreign worker is one less job for an American college graduate who has to pay their student loan debt.

If Goldman’s estimate of almost one million H-1Bs is combined with the EPI’s estimate of various other skilled white-collar visa programs, then the government data shows that U.S. companies employ roughly 1.4 million lower-wage college-graduate temporary workers in the United States. The imported workers are not immigrants, citizens, legal residents or green card holders, but are supposed to return home after several years.
Companies have used them to fill enough outsourced jobs to fully employ nearly all Americans who graduated from college with skilled degrees in 2015 and 2016. This population of white-collar temporary workers has pushed many established U.S. workers out of jobs, partly because none of the visa programs require that Americans be hired before foreigners.
If those American college students took Economics in college and understand supply and demand, these numbers may explain why good jobs are harder to come by, the pay in those jobs is not as good as it should be and the student loans they have to pay loom larger and larger in their lives.

The irony is that a lot of the Millennials who are burdened with student debt loved Obama and can't stand Trump.

Blue collar voters finally got the message about what illegal immigration and one-sided trade agreements had done to their standard of living. They rejected the Democrats and voted for Trump in 2016.

When will the college-educated, student loan burdened Millennials realize that their future standard of living is just as much at risk due to ill-considered federal policies?

More importantly, when will the federal government realize that its student loan "assets" are at risk due to its own immigration policy?

Trump gets it. I am not sure how many more on Capitol Hill do. Without question, there is not one Democrat that does. Of course, when it all comes tumbling down they will have an answer.


They always have an answer having to do with someone else's money.

Tuesday, March 14, 2017

Don't Take Grant For Granted

Following up on my last post in which I wrote about Natchez, Mississippi, I thought I should republish this blog post from 2012 in which I wrote about Ulysses S. Grant. It was Grant's successful battle campaigns in Missouri, Kentucky, Tennessee and Mississippi that brought the little known General to President Lincoln's attention.

Grant was a billing clerk in a store in Galena, Illinois at the start of the Civil War. Three years later he was the Commanding General of the Union Army. Eight years later he was President of the United States. President Lincoln never even personally met Grant until March 2, 1864, when he promoted him to Lieutenant General in charge of the entire Union Army.

Grant was actually one year younger than Barack Obama was when he took the oath of office as President. He was also younger when he took office than Paul Ryan is today.

That is pretty incredible when you think about it. One of the reasons that Grant seems like he was so much older is that he had effectively lived four lifetimes before he ever became President. Grant had literally seen it all in both his personal experiences and in the decisions he had to make as a leader.

Comparing the life experiences of a Paul Ryan or Obama to Grant would be like comparing a 6-year playing T-Ball to Mike Trout.

Paul Ryan has it hard because he has to figure out a way to repeal and replace Obamacare?

Compare that to what Grant's responsibilities were at Shiloh, Vicksburg, the Battle of the Wilderness or Petersburg.

Barack Obama saved us all from another Great Depression?

Compare that to what Grant did in the aftermath of the Panic of 1873 in standing up to the bankers and bureaucrats.

It is worth reading again.

Where is our U.S. Grant?
(originally published December 26, 2012)

I just finished reading Jean Edward Smith's biography of Ulysses S. Grant.  He was a remarkable man. There is little doubt that if it were not for Grant and Lincoln we most likely would not have saved the Union. Grant was also a very underrated President.

What struck me most in reading the book were the vast differences in life experiences when comparing Barack Obama to U.S. Grant before they were elected President of the United States.  Grant was actually one year younger (age 46) than Obama when he took office.  However, Grant seemed to have had three lifetimes of experiences before he ever set foot in the White House.

Born in Point Pleasant, Ohio in 1822, from an early age Grant had an enduring affinity for horses. He had an uncanny ability to train horses and his riding skills were unsurpassed.  When he was at West Point he was considered one of the greatest riders ever at the Academy. It was about the only area in which he excelled at the U.S Military Academy.  He finished 21st among 39 who graduated in 1843.  He ranked 28th in infantry tactics.

He saw combat in the Mexican-American War in which he was away from home (and his fiance, Julia) for almost three years. He married Julia in 1848 and stayed in the Army only to be ordered to California in 1852. Julia was 8 months pregnant with their second child and could not make the long trip to San Francisco which entailed a steamship voyage from New York to Panama, an overland trek across Panama and another steamer to San Francisco.

700 soldiers and their dependents embarked on the journey but only about half made it to San Francisco two months after they left New York.  A cholera epidemic ravaged the group as it transgressed Panama. All twenty children younger than three died on the journey. While most of the orderlies refused to care for the sick because of their fear of contracting the disease themselves, it was Grant who undertook the nursing of the ill himself.

Grant spent another two years in California without his wife and family. In his spare time he dabbled in numerous side business ventures attempting to make enough money to bring his young family to live with him. The California Gold Rush was in full swing and everyone seemed to be cashing in on the action in some way. Everyone but Grant.

Grant lost money on almost every venture he attempted. His loneliness and bad luck eventually led him to rely too much on the bottle.  He resigned his officer's commission (many speculate he was forced to resign because he was drinking on duty) and headed home without enough money in his pocket to make the entire trip home to St. Louis which entailed retracing his previous path across Panama and by ship to New York.

He arrived in New York City with no money, and not even sure that his wife would want him to return to her parent's home in St. Louis.  He borrowed money from an old friend to pay his hotel bill in New York and waited to hear from Julia.  He eventually had to ask his father for the train fare home and a letter arrived from his wife welcoming him home with open arms.

Grant was 32 years of age when he left the Army. He spent the next four years working a 60 acre farm near St. Louis on land that his wife had received from her father as a wedding present. He never succeeded at farming.  Most of the money he made was selling cords of wood he would cart into St. Louis. He eventually had to look for work in St. Louis. He tried real estate and other jobs but he was not successful in any endeavor in the world of commerce.  He could not afford to have his family with him in the city and lived in a boarding house during the week. He walked twelve miles on Saturdays to see his wife and children and walked twelve miles back to St. Louis each Sunday. 

In 1860, at age 38, he eventually faced the inevitable, swallowed his pride, and asked his father for a job. His father had a leather business that had prospered over the years and he operated a half dozen retail outlets in the upper Mississippi River valley.  He gave Ulysses a job as a billing clerk and collection agent in his Galena, Illinois store.  Grant moved to Galena about one year before the start of the Civil War.

With this background you begin to see how incredible the story of Ulysses S. Grant is. Within four years of his move to Galena to take a job as a billing clerk, he was General of the Union Army. Within eight years he was President of the United States.

What made Grant successful?  First, he was not afraid to engage.  Except for Grant, most of the Union's field commanders were unwilling or unable to take the fight to the enemy. Grant knew that to win you had to be on the offensive.  Second, he led from the front and was cool under fire.  He took reversals in stride and often looked to take a disadvantage and turn it into an advantage.  Third, he was unassuming, honest and considerate.  Grant always put his country and men first.  He was as honest as they come and he always treated his enemies with the utmost of respect.

It is indeed sobering to read about the life and times of Grant and compare that life and experience to Barack Obama and other political leaders of today.  Men like Grant were tested in ways and manners so far removed than what we have in our leaders today that it is no wonder we find us where we are today.  We can't maneuver around a fiscal cliff?   What is that compared to the Battle of Shiloh or Vicksburg?

I found it particularly interesting how Grant responded to the Panic of 1873 in his second term as President.  By the way, when Grant was nominated by the Republicans for President in 1868 he gave but one speech-his acceptance of the nomination-of which he principally just focused on one theme, "Let us have peace".  He conducted no campaign as such.  Similarly, in his reelection bid in 1872 he also never campaigned.  How times have changed!

The Panic of 1873 was caused by "an insatiable desire for money that spawned a speculative boom that skyrocketed out of control.  Banks had lent money recklessly and brokerage houses had marketed securities that were often worthless", according to Smith in the Grant biography.  Does that sound familiar?

In 1873 Wall Street financial institutions started to fall like dominoes.  Grant soon came under pressure from Washington politicians to inflate the currency.  People were hurting as bankruptcies and unemployment soon followed as businesses, farms and factories were lost.  Congress felt that pumping more paper money into the system would solve the problems.  Again, does that sound familiar?
Grant was torn.  Having suffered in the Panic of 1857-that was the Christmas the president had pawned his gold watch to buy presents for his family-he sympathized with the nation's farmers and small businessmen.  Grant knew what it meant to be poor, to try to make a crop, to have a business fail, to be out of a job, and as a last resort to peddle firewood on a St. Louis street corner.  His heart was responsive to those who wanted to pump more money into the economy, yet as president he felt his responsibility was to the nation's future.  Cheap paper money might look like a panacea, but inflation was never a friend to stable government.  The United States would be driven from the world standard, the return to specie-backed currency would be set back, property values would be unsettled, and speculation rekindled.  If Congress could simply print unredeemable paper money to appease popular demand, the nation was in peril.
Congress passed a bill to greatly increase the nation's money supply (this was before the creation of the Federal Reserve). Grant then had to decide whether to sign the bill into law or use his veto

He initially decided to approve the measure bending to the political pressures but as he wrote down his rationale he determined that his reasoning was fallacious.  He vetoed the bill much to the shock and anger of his Cabinet and the Congress.  His veto was upheld and the nation soon moved solidly behind Grant's call for sound money and a stable currency.  The gold standard was resumed shortly thereafter that paved the way for the enormous growth of the U.S. economy in the last quarter of the 19th Century.  By 1900, the U.S. dollar had replaced all other currencies as the international symbol of financial stability. 

Where is our U.S. Grant today?

Sunday, March 12, 2017

War and Peace, Prosperity and Poverty

I had the opportunity to visit Natchez, Mississippi last week. This historic town that overlooks the magnificent Mississippi River speaks volumes about war and peace, prosperity and poverty.

The Mississippi River from the bluffs of Natchez, MS

Natchez once was the home to more millionaires than any other place in the United States. Our guide told us that 19 of the 26 millionaires in the USA in 1860 had homes in Natchez. I could not confirm that exact number in my independent research but this article states that Natchez had half the millionaires in the US in 1850. This history text states that Natchez had more millionaires in 1860 than in any other place in the world.

Whatever the number of millionaires, Natchez was a very prosperous town of around 6,000 people before the Civil War. Approximately 4,000 of those residents were white and 2,000 were black slaves who toiled in the cotton fields surrounding the city which were largely responsible for the wealth in Natchez.

The vestiges of that wealth and prosperity are still evident today as you tour the city and come across as many as 200 antebellum mansions that were built on "king cotton" and the sweat of those slaves.

Speaking of slavery, I thought it was interesting to see this graphical depiction of the slave trade from Africa in the Natchez Visitor's Center. Contrary to what most people probably believe, North America was the destination for a relatively small number of slaves in comparison to the total slave trade out of Africa.

Credit: Natchez Visitor's Center

Only 4% of the Atlantic Slave Trade went to North America.

Over 10 times (42%) that number went to the West Indies.

38% went to Brazil. 6% to Guyana and 8% to the rest of Central and South America.

2% ended up in Europe which you almost never hear anything about.

Slavery left a horrible stain on the United States but this context is almost never mentioned in the history books or by the media.

The inhumanity and randomness of it all is mind boggling. One day you are walking the plains of West Africa and the next you are on a ship to Brazil, Cuba or Mississippi. In that moment your life and those of all your progeny is changed forever. Truly unspeakable.

This is the Rosalie Mansion that we toured. It was completed in 1823 and originally owned by Peter Little who acquired his wealth through cotton and the invention of a power saw that he fashioned from parts off of a steamboat engine.

Rosalie, Natchez, MS

Rosalie became the headquarters of the Union Army during the Civil War after the fall of Natchez in 1862. General Grant selected the house himself due to its strategic position overlooking the river. From the second floor porches one can see eight miles up and down the river on a clear day.

Natchez fell without much of a fight in the Civil War. A solo cannonball lobbed into the city was all that was necessary for the city to surrender. Most of the monied interests in Natchez were against secession in the lead up to the war. After all, war is usually not good for business. That is especially true when most of your markets are in enemy territory. The fact that Natchez was not the site of a big battle is the reason that those antebellum mansions exist today.

Vicksburg, which is up the river, was not as fortunate. Vicksburg was the last Confederate stronghold along the Mississippi River and Lincoln and Grant knew they had to take it whatever the cost. The rebels knew its importance as well. Grant was able to chase the enemy until they were all concentrated in defensive positions in and around Vicksburg. Grant besieged the city for 40 days and cut off the Confederate Army from reinforcements and supplies. Vicksburg and its antebellum mansions paid a heavy price in the siege. The antebellum mansions survived in Natchez but not in Vicksburg. Such is the difference between war and peace.

Nevertheless, Natchez never was the same after the war. Most of the plantation owners went bankrupt during the war. The big money after the war was made by merchants who profited from the rebuilding efforts in the South and those with shipping interests along the Mississippi. Cotton never was the king it once was in the economy.

Those antebellum mansions in Natchez have the same look of grandeur they had when they were built close to 200 years ago. However, the current owners struggle to paint and maintain them and rely on tourists to take a walk back into that bygone era to feed money into the economy.

Driving around the city of 16,000 today, it is poverty you mainly see rather than prosperity. Three large employers (Johns Manville, Armstrong Tire and International Paper) have closed manufacturing plants in the city since 2000 and the effects on the economy are evident.

Without tourism and the health care industry, which is significant in every town in America, the economic future of Natchez looks pretty bleak. It is haunting to see a city that once was so prosperous now struggling to escape the grips of poverty.

There are real lessons to be learned in a visit to Natchez, Mississippi. It gives you a better perspective on the effects of war and peace and prosperity and poverty on human beings. The contrasts are inescapable as you tour that city on the bluffs overlooking the Mississippi River.

Thursday, March 9, 2017

Revolutionary Replacement

I was an early critic of Obamacare and I was also recently very skeptical of Republican efforts to repeal and replace the law.

How can I be so critical of Obamacare but also so skeptical of GOP efforts to repeal it? I might add that I have become even more skeptical of the efforts at repeal since I have seen the GOP bill that would attempt to do so.

I wrote a blog post in 2013 before the Obamacare law became effective that predicted its failure due to its neglect of the realities of the health care cost curve.

Until we recognize the reality of the health care cost curve, the fact that many people will avoid paying for health insurance on their own, and the failure to align incentives and penalties, we will continue to be frustrated with the costs and consequences of our U.S. health care system. Instead of improving a bad situation, Obamacare is only going to make a bad situation even worse.  It's in the curve.  If we really want to do something about health care in this country, we need to first consider the curve or we will continue to see bad consequences.

What is the health care cost curve?

This is a graphic depiction of it from that blog post. The absolute dollar numbers are a little dated but the distribution of the costs across the population are true year after year.

I administered large self-insured corporate group health plans for over 20 years and the same distribution of costs is found in any large group.

The reality is that most people have very little in healthcare costs in a given year.  A handful of people will have enormous costs.  A few will have very large costs.  The majority will have almost no costs.

For example, the bottom half of a population will only consume about 3% of the costs of the group.

The top half will consume 97%.

The top 5% will consume 50% of the total health care costs.

The top 1% will consume 20% of the total costs.

This is why most people will gamble if left to their own devices faced with expensive health care insurance. They will simply not part with their money today against the chance that they might get sick tomorrow. That is basic human nature.  Live for today and think about that other stuff tomorrow.

In fact, most people will pay no more than 20% of the true cost of health insurance without showing significant resistance to its cost. It is not a coincidence that many corporate plans (and even Medicare Part B premiums) charge 20% of the full cost of premium to the enrollee.

This is why Obamacare failed to attract the young and healthy to its risk pools. The insurance costs too much (even with generous subsidies) for the young. In fact, almost every Obamacare enrollee is getting substantial subsidies. Total cost last year= $56 billion and people still complained about the cost. Of course, Obamacare made the insurance even more expensive for this group by mandating all sorts of costly benefits while also requiring premiums for older, sicker Obamacare enrollees to be no more than 3 times the cost for younger enrollees. The actuaries would set that number at 5 times.

On the other hand, Obamacare was a great deal for the 5% or 1% who consumed most of the healthcare. And they made it even easier by allowing those people to wait to enroll until after they got sick with very limited penalties.

The GOP effort will not be materially different from what I have seen. It will improve some things at the margins but it is still not considering the health care cost curve and its consequences in its design as well as aligning incentives in relation to human behavior.

What type of plan should the GOP consider? It needs to be revolutionary and it probably has to go where the GOP would not be expected to go by proposing an across the board tax to fund some of the costs.

It starts first with the concept of the federal government assuming the role of providing some level of catastrophic insurance or being the reinsurer for private carriers for those with large claims costs. In effect, you take 20-50% of health care costs and you fund them nationally. These are costs that anybody in our society may have to shoulder and almost no one is able to do so without some type of insurance coverage.They become costs by and for the "public welfare".

That federal coverage might attach at a level of $100,000, $250,000, $500,000 or some other level of claims in one year by one person. Private coverage would only have the liability up to that amount. It is a cost/benefit question of where you set that level and how much revenue is needed to fund this cat coverage.

Due to the fact that this type of coverage would benefit everyone it should also be financed by a general broad-based tax. That is the only way to do it if we want some type of universal health care coverage.  Everyone should contribute to the cost of the coverage as everyone has the potential to benefit. In this way it would be much like Social Security and Medicare. This avoids the problem of people deciding they will not buy the coverage on their own. They will be automatically enrolled in catastrophic coverage where the costs can most affect the risk pool for the rest of us. (see the cost curve above)

If it is desired to provide coverage for routine medical care it should be done with some type of health savings account amount that would be provided to everyone annually. For example, $500 per year that could be used for routine care and which could be rolled over to subsequent years if it was not used. This provides an incentive for people to use their health care money prudently.

Private insurance would only be used to fill the gap between the annual amount and the level of catastrophic coverage. This should bring the cost of insurance premiums down significantly.

Private insurance could also be used creatively to fill that gap. Some plans might offer  comprehensive coverage which would be very expensive. Some might offer very limited coverage and be cost effective. There could also be income-based deductible plans to benefit the poor or the federal catastrophic coverage could have lower attachment points for those with lower incomes to lower the gap insurance coverage costs for these groups.

If you don't think this would have a large effect on insurance premium costs consider my personal experience in shopping for health care coverage for Mrs. BeeLine who needed a short-term policy for less than 6 months between expiration of group coverage and the start of her Medicare coverage.

An Obamacare policy for her cost $805/month. A catastrophic plan with a $1 million limit (still generous for 6 months) cost $173/month. A big difference in the cost is that open ended cost liability that the carrier assumes. Of course, Obamacare regulations under the Obama administration made it illegal to buy the limited plan even though it perfectly fit my wife's needs. The irony is that the "catastrophic" plan actually had a lower deductible and out of pocket costs than the Obamacare plan. That is how bad Obamacare really has become.

Private insurance would not be required but those who used healthcare services and could not pay due to failure to have health insurance, the federal government would enforce payment through liens on future pay (or federal benefit payments). Such payments could be enforced up to a healthy percentage of an individual's future income or benefits. This would be a necessary penalty to insure there was an incentive to buy insurance currently.

Obamacare is not structured anything like what I am suggesting and the GOP should not be trying to fix it with anything resembling it. It will be nothing more than Obamacare Lite as many are already calling it. The GOP should truly be repealing and replacing it.

Obamacare is the opposite of what a well thought out national health care policy should be in almost every respect. It assumes that healthy people can be convinced to voluntarily sign up and pay for health insurance. This has proven to be a fallacy.

It tries to focus coverage on low end services by providing a lot of free stuff like preventive exams, contraception services and the like.

It does not use a broad-based tax but rather taxes select people or groups (medical device manufacturers, high incomes etc) to fund the free stuff making it nothing more than a gigantic redistribution scheme. 

It does not do anything to try to align incentives to make sure people have some "skin in the game".  In summary, it has done very little to address the biggest problems in health care---high costs, affordability and access.

There is a way to repeal and replace Obamacare.

A revolutionary plan along the lines I am describing has some elements that both Republicans and Democrats should like. There are also elements that both would dislike. That tells me that it is probably a sensible replacement approach.
It just will take some revolutionary thinking to do it.

And some political fortitude.

Unfortunately, neither seem to be in evidence in Washington today from what I can see.

Wednesday, March 8, 2017

Sex, Style and Substance

Did Hillary Clinton lose the Presidential election because she was a woman?

Did her sex help her or hurt her?

What about Donald Trump's direct, brash and assertive style? Could a woman act that way and win?

What about substance? How could a man with supposedly no substance defeat a woman who supposedly had so much of it?

These are questions that political scientists and pundits have been asking since Donald Trump defeated Hillary.

I came across two recent studies that looked at these questions and which provide some interesting insights on why Trump won.

The first was a fascinating re-creation of the Presidential debates. After watching the debates, Maria Guadalupe, an associate professor of economics and political science at INSEAD, wondered how might the perceptions of the two candidates change if the genders of the two candidates were switched?

She pictured an actress playing Trump, replicating his words, gestures, body language, and tone verbatim, while an actor took on Clinton’s role in the same way. What would the experiment reveal about male and female communication styles, and the differing standards by which we unconsciously judge them?
Guadalupe reached out to Joe Salvatore, a Steinhardt clinical associate professor of educational theatre who specializes in ethnodrama—a method of adapting interviews, field notes, journal entries, and other print and media artifacts into a script to be performed as a play. Together, they developed Her Opponent, a production featuring actors performing excerpts from each of the three debates exactly as they happened—but with the genders switched. Salvatore cast fellow educational theatre faculty Rachel Whorton to play “Brenda King,” a female version of Trump, and Daryl Embry to play “Jonathan Gordon,” a male version of Hillary Clinton, and coached them as they learned the candidates’ words and gestures.

The assumption going in was that Trump's aggressive, arrogant style would never be tolerated in someone of the fairer sex. Further, Clinton's substance and preparedness would be even more convincing in a man.

The ethnodrama was performed on January 28 in front of two standing room audiences in Washington before what were audiences drawn from academic circles. Based on the audience, you can guess the political leanings and biases that came with them to the performance.

The real surprise at the end of the evening was that the expectations the audience brought with them that night were totally upended. Many came to realize why Donald Trump won. "Trump" was more authentic, more likeable and connected themes betters with the audience. "Clinton" was plastic, all her responses seemed staged and rehearsed, and there really was not much substance at all in "her" answers.

Many were shocked to find that they couldn’t seem to find in Jonathan Gordon what they had admired in Hillary Clinton—or that Brenda King’s clever tactics seemed to shine in moments where they’d remembered Donald Trump flailing or lashing out. For those Clinton voters trying to make sense of the loss, it was by turns bewildering and instructive, raising as many questions about gender performance and effects of sexism as it answered.

Read a summary of the whole study as reported at It says a lot, in particular about the way we all alter facts in order to conform them to our own biases. For many, Trump was a total buffoon with no substance, no style and was a horrible man to boot before he ever entered the race. Therefore, they saw nothing beyond that as the campaign unfolded. On the other hand, Hillary could do no wrong. She was the smartest, most qualified, woman of substance to ever walk the earth. They could not see her obvious shortfalls when they were in plan sight.

Strip away the woman part and there ere was not much left of Hillary to appeal to voters.

Repackage Trump as a woman and he seemed to become much more insightful, intelligent and interesting.

A complete reversal of the expectations the researchers had before conducting the study.

You can view a video excerpt of one of the rehearsals here to see it for yourself.

The second study is from the Wesleyan University Media Project which measured the extent each Presidential candidate spent on discussions on policy in their advertising messaging.

The conclusion of the study was that the 2016 Presidential race featured  "one candidate who almost ignored discussions of policy." In other words, there was almost no substance in any of the advertising the candidate did to explain their policy positions.

Can you guess which candidate that was?

This is the chart the study used to demonstrate that "Clinton's campaign was devoid of discussions of policy in a way not seen in the previous four Presidential contests."  A picture is truly worth one thousand words when you look at the Clinton campaign compared to other Presidential election runs.

$845 million was spent on television advertising in the 2016 Presidential race, including the primaries, Clinton spent almost three times as much on advertising as Trump did. However, almost none of it explained anything about what Hillary Clinton would do as President. Almost everything she aired was a personal attack on Trump or an attempt to personalize her poor image. There was nothing of substance for voters to grasp on to with Hillary.

Compare that to Donald Trump where he was crystal clear on what his important policy positions were.

You can read the full report here. 

It continues to confound and confuse me how the Democrats want to spend all their time trying to blame Russia for Hillary's loss when the answer is right in front of them. Style and substance matter a great deal to voters and Clinton had little of both. Being a woman was simply not enough. In fact, is it not ironic that Trump as a woman looks as if it would have delivered an even more devastating loss to Hillary.

And the Democrats are still talking about her as a candidate in for New York's mayoral race this year or the Presidency in 2020?

Is it any wonder the Democrats are in the position they are right now?

Sunday, March 5, 2017

What's A Grandma?

Mrs. BeeLine and I have reached a certain age and station in life that grandchildren are a frequent topic of conversation in our circle of friends and acquaintances.

Before we were grandparents we often heard friends proclaim things like, "My grandson is extremely advanced for his age" or "My 3-year granddaughter has an excellent singing voice" and chuckle to ourselves. Yeah, their grandkids must be from Lake Woebegon. They are all above average.

Of course, now that we are grandparents, we are now just as guilty as anyone else when talking about our grandchildren. However, we are careful to qualify all of our statements with something like this.

"We are not saying this just because he is our grandson, but Junior is very insightful for his age.


"Our granddaughter has extraordinary eye to hand coordination. You don't see many 2-year old kids who can catch a ball like that and I am not just saying that because she is ours."

Guilty as charged.

It really is true that being a grandparent is the one thing in life that is probably vastly underrated.

Of course, as grandchildren enter your life, so does the question of what those future holders of our federal debt are going to call you.

I have noticed that among Baby Boomers it is decidedly out of the norm to just be old Grandma and Grandpa. Baby Boomer women in particular don't seem to want to be called Grandma. It might have been fine for their Grandmother but it is decidedly not cool for a toddler calling out to "Grandma" at the local store.

Just as the baby name business has become big, so has the grandparent name business.

Mrs. BeeLine spent some time thinking about this topic before our first grandchild was born and decided that BeeBee would be a good name for her. She asked me what I wanted to be called. She was not pleased when I said "I don't care what he calls me. Grandpa is fine."

I was told I was no fun. I already knew that. After all, I write a blog that spends a lot of time on analyzing the problems in the world and in our nation. How much fun can I be?

Mrs. BeeLine ultimately decided that I would be called "BeeBop". She thought that was "fun" and went together well with BeeBee.

My reply was that she was probably right that the name for me made some sense from a 60 year old's perspective, but we were ultimately going to be dealing with a babbling 12 month old as the final arbiter. The kid was going to decide in the end whether he was going to put up with "BeeBop".

Four grandchildren later BeeBee has survived. When they visit our home they even refer to it as visiting the Beehive.

However, BeeBop was not so lucky. As I predicted, our first grandson had other ideas on what he was going to call me. BeeBop might have been suggested to him but what came out of his mouth was BubBub.

NO. I am not a Bubba. I am a BubBub. Of course, that has already been shortened by the oldest grandchild to Bub. BeeBee is sometimes called Beeb.

What other grandparent names are out there? It seems the possible names are endless.

I hear  Nini, Nana, Nonna, Gigi, Mimi and Mamaw quite a bit among my grandmother friends.

Pappy, Poppy. PaPa, PeePaw, Papaw and Hoppa are a few grandfather names among friends.

There are still a few grandma and grandpa or gramms and gramps out there, but not nearly as many as there used to be.

It does make you wonder if we are coming to a point when someone in kindergarten refers to her grandma and all the other kids will not know who she is talking about?

What do you do if you want to come up with your own special grandparent name? actually has a list of hundreds of names for you to consider. It is even organized into categories---traditional, trendy, playful, international, celebrity.

As an example, here is the list of trendy grandmother names.

If you are really serious about it, you can buy "The New Grandparents Name Book" by Lin Welford. It even gives you ideas on how you can create a custom grandparent name just for yourself.

Mrs. BeeLine could have written that chapter on custom names. It seems that BeeBee is not on any of the lists of Grandma names that I have seen. She truly gave herself a custom name for the unique grandmother she is.

BubBub is not on the list either. Another custom name. However, my grandson came up with that one on his own.

Perhaps my grandson could have written that chapter as well.

Of course, I am not just saying that because I am his grandfather.

Wednesday, March 1, 2017

Two Bad Nights, One Good Night

One truth I have learned over the years is that no matter how bad things are going for you, someone has it much worse.

One other truth is that you need to stay humble. You may be on the top of the heap today but it doesn't take much to quickly bring you to the bottom tomorrow.

Both of these truths were on full display on separate nights this week at the Academy Awards presentation Sunday night and in President Trump's speech to a Joint Session of Congress last night.

The Oscar ceremony was marred when the wrong envelope was given to Warren Beatty who was presenting the Best Picture award along with Faye Dunaway. As a result, LaLa Land was announced to be the winner as the Best Picture of the year when Moonlight was the actual Academy Award winner.

The mistake seems to have been made when Brian Cullinan, the PricewatershouseCoopers accountant charged with tabulating the results, provided a duplicate envelope to Beatty for the Best Actress award that was given minutes before to Emma Stone, rather than the Best Picture envelope.

Cullinan is no lowly bean counter. He is the managing partner of the Southern California/Nevada/Arizona practice of PWC with almost 30 years of experience with the firm. He is also on the US Board of PWC.

Here was a man at the top of his profession. The partner in charge of the Academy of Motion Picture Arts and Sciences. The man in charge of counting the ballots for the Oscars. One of only two human beings on earth (the other being his fellow partner Martha Ruiz) who knew the Oscar winners before they were announced at the ceremony.

All of it blew up for him in a matter of seconds. He and Ruiz and have been terminated from ever working for the Academy again. PWC remains the accountant for the Academy for now but that is under review.

Indeed, it was a very bad night for Cullinan.

How did it happen? Cullinan was human.

He appears to have been star-struck. He seems to have been more concerned with snapping pictures of celebrities back stage than focusing on his duties. He was distracted and did not pay attention to the job at hand.

The brain is not good at multi-tasking. We are all guilty of it trying to do it. It does not work very well. Brian Cullinan will pay a big price for thinking he had it all under control.

Here is a picture of Oscar award winner Emma Stone that Cullinan must have taken in the minutes he should have been making sure he was handing Beatty the correct envelope. It was posted to his Twitter account at 9:05 pm local time.

Ironically, this was the the exact time (9:05pm) that Warren Beatty was opening the wrong envelope on stage. You can see that in this close up of Beatty as he pulled the slip of paper out of the envelope. The closeup below is from the ABC feed that was shown the next morning on Good Morning America. The envelope reads "Actress In A Leading Role."

Credit: ABC Good Morning America

A very bad night.

The Democrats also had a very bad night last night during President Trump's speech to a Joint Session of Congress.

They have been reeling ever since another bad night (November 8, 2016) and they appear totally unable to come to grips with the reality of their situation.

Of course, eight years ago they thought they were riding high and could do anything they wanted. They made it a habit of telling anyone and everyone at that time, "Elections have consequences. Get over it."

They seem to be having trouble getting over it. It seems to be even harder for them to "get over it" since they were so sure that Hillary would utterly destroy Donald Trump.

In fact, last night it appeared that they are having difficulty even recognizing that they are still Americans. It was a difficult to find any applause from any Democrat on anything that Trump had to say.

Nancy Pelosi having a bad night last night

I can understand why they might not be jumping up and applauding a call for the repeal of Obamacare or Trump's "Make America Great Again" campaign slogan but couldn't they get behind calls for a middle class tax cut, supporting our police, honoring a fallen Navy Seal, improved infrastructure spending or plans to create more American jobs? Those don't seem to be Democrat or Republican, or conservative or liberal issues, just American issues.

The Democrats were sitting on their hands even as President Trump made a clear attempt to reach across the aisle as he appealed to those things we share as Americans.

"We all bleed the same blood. We all salute the same flag. And we are all made by the same God."

Perhaps it was the reference to God. Or the flag. I don't think anyone could disagree with the fact that we bleed the same blood.

All in all, it was a very bad night for Democrats who just have no idea of how to deal with a Trump presidency. They seem to be so blinded by rage and revenge that they seem to have lost touch with reality. They seem to no longer comprehend anything beyond politics.

On the other side of the ledger (or lectern as it were), last night was a very, very good night for President Donald Trump. Many of his critics in the media even had to admit that Trump looked very much the part of President of the United States last night.

More importantly for Trump, his message was able to be viewed and heard directly by the American people without the typical mainstream media or social media filter that is added.

Powerline had a very good summary in this regard in their post about last night's speech.

Anyone who saw the speech will have a difficult time denying in good faith that the speech was presidential. And by giving such a presidential speech, Trump has probably made it difficult for his opponents, including those in the media, to sustain the hysteria that has threatened to engulf his presidency before it could really get started.
Those who watched the speech have to ask themselves whether they believe the media or their own eyes and ears. For President Trump, that’s a very good night’s work.
Two bad nights. One good night.

Stay humble, President Trump. It can and will get worse. However, stay the course. You are on the right track.

Monday, February 27, 2017

Vitriol and Volatility

Anyone who lives near the sea knows that it changes daily. It may be glass smooth one day and have raging white caps the next. It is much like the ebb and flow of life. Few things on earth do not have ups, downs and bumps along the way.

You generally also see this in markets, in particular, the stock market. The ups and downs from day to day are referred to as volatility. Volatility is the range by which a security or a market may increase or decrease over a period of time.

Securities or markets that have higher volatility are considered inherently riskier that securities that have low volatility. That applies to both stocks that go up, as well as down, quickly or erratically.

Stock market pricing is interesting because on a day to day basis there is usually not a substantive reason why a stock price moves up or down. Business prospects do not usually change for the good or bad in a day, a week or a month. What moves markets or stocks in the short term are the emotions of buyers or sellers.

I like what legendary investor Benjamin Graham said about the stock market many years ago.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Why is this of interest to me today?

Who are we led to believe every day in watching in the news is the most unbalanced, unreasonable, unhinged, volatile person on the planet?

President Donald J. Trump.

To hear liberals, the media, the political establishment and Hollywood talk about Trump, none of us should have any confidence in our future. Chaos will reign. Calamity is upon  us. Everything and anything about Donald Trump is utterly contemptible.

How is that emotion-driven, voting machine of a stock market reacting to all of this?

Yes, we know the stock market has steadily risen ever since the day after Trump was elected. In fact, the Dow closed today at a record high for the 12th consecutive day. That has not happened since 1987. That says something by itself. However, let's put that aside.

Let's just look at stock market volatility. You would think by watching the news that stock market volatility would be high given the "risky" environment that Trump has created. Investors do not like uncertainty. It is hard to be confident about the future when things are uncertain. Uncertainty and risk should contribute to volatility.

That is why I found this chart in The Daily Shot this morning to be particularly interesting. It shows that stock market volatility, as measured by consecutive days without a 1% intraday move up or down in the S&P 500, is the lowest in well over 50 years.

As of Friday, there had been 48 consecutive trading days without a 1% intraday move as the chart above shows. That is now 49 days since we did not see a 1% intraday move today (February 27).

Stock market volatility has been at historic lows since Trump became President while the political vitriol of his opponents is at historic highs. Rather interesting, isn't it?

If the stock market is a voting machine in the short term, there seem to be a lot of votes out there for what Trump is doing and what he is promising. For all the talk of the "erratic" Trump, the stock market is reacting as if we are sailing on a silky smooth sea.

In the middle of the Pacific Ocean on my TransPacific cruise last August

However, the calm seas we are seeing now are sure to turn rough soon. It is the nature of the world, life and markets that ups and downs are inevitable. I can promise you that rough seas of some sort lie ahead. The stock market will not go up forever. And it will surely bounce around and make us feel as if we are a on raft going over Niagara Falls at some point.

In the long run, the measure of Donald Trump as President of the United States will not be determined by the volatility of the markets, the volume of vitriol directed at him, or Trump's vision to "Make American Great Again".

In the end, everyone will weigh his results.

That is how it should be and how I believe Trump measures himself.

It would be nice to see a few people take a deep breath, save some of the vitriol and see what he can do.

How do I weigh the chances of that occurring?

Sunday, February 26, 2017

Medicaid Math and Myths

One of the interesting insights surrounding the potential repeal and replacement of Obamacare is this telling statement from the junior Senator from California, Kamala Harris.

Let's consider that statistic.

Harris states that 50% of California children are on Medicaid which is referred to as "Medi-Cal" in the state.

The obvious question is how has a welfare program for low income individuals, that did not even exist until 1965, came to cover half of the children in a state?

The next question is how could a state like California, which is totally controlled by Democrats, come to a point that half of its children are so poor that they have to rely on the federal government to such a degree?

It is also interesting to note that over half of the total births in California are paid by Medi-Cal. This graph shows the trends in California since 1977 until 2011. This percentage is undoubtedly much higher today due to the expansion of Medicaid which added 3.8 million people to the program in the state since 2014 (by the way, that is 4 times the number that was originally projected when Obamacare was passed). It would not surprise me that almost 3 out of every 5 births in California are being paid by the taxpayers today.


The Medicaid program is jointly funded by the federal government and the states. The states generally set eligibility standards for their state subject to federal limits and the federal government provides matching funds to assist in the costs.

This graph from the Department of Health and Human Services provides some context on the massive growth of this entitlement program since its inception in 1965. From no participants in 1964 to a projected 80 million in 2025.

Credit: Department of Health and Human Services
2016 Actuarial Report on Medicaid

Under Obamacare, the states were given incentives to increase Medicaid eligibility with the federal government promising to pay 100% of the additional costs for 2014-2016. This year that subsidy is reduced under the law to 95% and it will phase down to a 90% subsidy in 2020 and and later.

Predictably, Medicaid expansion has been the most popular feature of Obamacare. After all, "free" always has a lot of takers. However, it has come at a cost. Federal money for the expansion was projected to cost $42 billion in 2015. The actual federal cost was $68 billion---62% higher than estimated.

32 states (including DC) elected to expand Medicaid and 19 states did not. The 19 states that did not do so understood that nothing is ever "free".  When the federal government hands out money, strings are always attached. In addition, "free" only lasted for three years with Medicaid expansion. The states that expanded Medicaid now have to pay part of that cost going forward.

For example, in California, the expansion will cost the state an additional $500 million in 201 compared to 2016. By 2020, the additional cost to California is projected to increase to between $1.4 billon-$1.9 billion per year.

For perspective, California is spending over $100 billon for its Medicaid program of which about 63% is paid by the federal government. State spending on Medicaid in California is approaching $40 billion per year. California will collect about $84 billion from personal income taxes this year meaning that almost 50% of its income tax collections are necessary to just fund its Medicaid costs.

68% of births paid by Medicaid in California in 2011 (the most recent data I could find) were born to mothers of Hispanic origin. At least 30% of all births were to undocumented illegal immigrants. 45% of all Medicaid births in the state were to foreign born mothers. All of this data is in this report

All of this spending on Medicaid has had the result of squeezing everything else in the California budget as it has in most every other state budget across the United States.

For example, here is what has happened to state support for the University of California and California State University systems on a per student basis since 1980 as Medicaid costs have taken larger amounts of the state budget.


I wrote about what Medicaid and health care spending have done to my home state of Ohio in this post back in 2014 just as Governor Kasich was ignoring the will of the Ohio people and the state legislature by expanding Medicaid under Obamacare.

From 1970 to 2014, inflation would have increased the Ohio state budget by 6.1x if all spending matched the rate of inflation over those years.

The Ohio budget had, in fact, actually increased by 22.3x over that time---over three times the increase in inflation.

Education spending had increased by 14.5x. Higher than inflation but much lower than the overall increase in state revenues and state spending.

However, health care spending, driven principally by Medicaid, had increased by 66.7x!

Of course, the policy argument made for increasing Medicaid eligibility was that it would assist in keeping costs down for private sector employer and individual health plans by reducing uncompensated care costs. The logic was that these costs ended up being charged to private sector plans and better managing these costs within the Medicaid system would reduce overall costs (lower emergency room visits etc) while moving these costs to the government would alleviate the private sector from bearing these costs.

However, I have seen no evidence that this had been the result in any data I have looked at.

For example, the average single premium per enrolled employees in private sector employer plans in California increased by 28.2% between 2009 and 2015 (the  most recent data available). That is higher than the U.S. average increase of 27.7%. Compare that to the 18.6% increase in private sector costs in Georgia which did not expand Medicaid.

Even when you compare California to two other states with large, immigrant populations---Texas and Florida--who did not expand Medicaid, there is nothing to indicate that Medicaid expansion reduced costs to the private sector. Both those states saw increases of 30%, just slightly higher than California.

In Ohio, the cost increase for private sector employer plans was 39.4%. Compare that to Wisconsin which did not adopt the Obamacare expansion with federal dollars, but did a modified eligibility expansion. Its costs have only risen by 17.1%

All of the private sector premium cost data reference above is from the "Medical Expenditure Panel Survey" which is published annually by the Agency for Healthcare Research and Quality of the U.S Department of Health & Human Services.

It is also interesting to look back at the Congressional Budget Office projections in 2013 right before Obamacare was implemented to put all of this in perspective.

What has Obamacare really done?

It has massively increased the Medicaid rolls and massively increased taxpayer costs at both the federal and state levels while doing little to control private sector health care costs. In fact, Obamacare mandates have massively increased the costs of individual and employer plans. The individual market has been destroyed and it is only affordable to those who receive federal subsidies in the exchanges.

As Obamacare repeal effort are being discussed you are going to hear a lot of statements like those of Senator Harris that are intended to sway public opinion with emotion. Consider the math of Medicaid and see through the myth that the expansion effort has been anything but another redistribution scheme. In the end, Obamacare is more about buying votes than making health care more affordable and available for everyone.

For the Democrats that means taking dependent children and ultimately making them dependent adults who will vote for Democrats in the future. It is on full display in California.

Wednesday, February 22, 2017

The Rocky Road To Repeal

Republicans have been talking about repealing Obamacare since the day it was signed into law in 2010.

It was a principal reason they gained control of the House and Senate in 2010.

It was a principal reason they dominated Congressional races in 2014.

It was a major reason that Donald Trump won the Presidency.

However, talk is cheap in politics. It is easy to talk about what you are going to do. It is difficult to actually do it.

You begin to understand how rocky the road to repealing and replacing Obamacare is when you consider three facts.

1. Obamacare's dictates touched fully 1/6 of the U.S. economy. Something that touches so much cannot be easily undone without risking turmoil. Can something so intertwined in the American economy be unwound easily?

2. There were 1,380 days between the time Obamacare was signed into law and its effective date of January 1, 2014. To put that in perspective, that is longer than the period from the bombing of Pearl Harbor until the surrender of both Germany and Japan in World War II. Despite this enormous period of time, the implementation of the law was still a disaster. If you recall, many provisions of the law were ignored and extended to later periods. Can something that took that long to implement be repealed and replaced in a few months?

3. In my last post, I quoted Daniel Kahneman on the how the human mind reacts to changes and reforms of the kind involved in repealing and replacing Obamacare. "Reforms always create winners and losers, and the losers will always fight harder than the winners." The losers in a repeal of Obamacare are sure to fight harder and shout louder than the rest of us. That you can count on. Look no further than upcoming GOP town halls if you doubt it.

Does any of this mean that President Trump and the Republican Congress should forget  about repealing and replacing this abominable piece of legislation? Absolutely not. In fact, I would argue that the GOP brand would suffer immense damage if Republicans do not follow through on their promise to repeal and replace Obamacare.

To navigate the rocky road ahead it is important to first set the stage and remind the American people of just how big an abject failure this legislation has been by explaining how far it has fallen far short of the promises that were made when it was passed.

That begins by repeatedly reminding the American people of the promises that were made that were not fulfilled.
    • It was not true that family health care costs would be reduced by $2,500 per year.
    • It was not true that everyone that liked their doctor could keep their doctor.
    • It was projected that over 20 million people would gain coverage through the healthcare exchanges in 2016. The actual number was half of this.
    • It was projected that Medicaid expansion under the law would cost $42 billion per year in 2015. The actual cost--$68 billion---over 60% above projections.
    • It was stated that insurers would offer multiple plan options because it would provide them with profitable business. A large number of counties across the country have only one health care plan option today. All but five of the large number of non-profits co-ops that were so widely heralded as an alternative to the profit-driven companies have closed and gone out of business. $2.4 billion of taxpayer money was used to fund these start-ups that is now gone. Billions of dollars of losses have piled up for the "for-profit" insurers.  Most are getting out out the Obamacare exchanges leaving no plan options from whihc to choose. United Healthcare exited most of the exchanges this year, Humana stated they will not participate in 2018, Aetna says that Obamacare is in a "death spiral." 
The Republicans should also not get too caught up with establishing an effective date of the repeal that risks creating turmoil. Yes, they should pass the repeal legislation quickly. However, the effective date might be a few years in the future. After all, it took the Democrats almost four years to implement this monstrosity. It may take a few years to totally unwind it. This may not be popular with Obamacare critics but it is the reality of the situation.

The fact that repeal is going to occur does not mean that the replacement plan cannot be implemented earlier. Perhaps the replacement plans compete alongside the Obamacare plans for a couple of years. The reality of the health care plan world is that if you want replacement plans up and running for 2018 the legislation needed to be passed YESTERDAY. I see no way there will be much of a chance to offer anything new for 2018 unless legislation is passed by the end of March. If Congress misses that deadline we are looking at 2019 at the earliest for any replacement plans.

It also has to be taken as a given that anything the GOP does is going to be criticized by the Democrats. They are also going to claim that the fact that the GOP is even talking about repeal is causing the demise of Obamacare. That could not be further from the truth, as the facts above show, but that will be the argument from Democrats.

Undoubtedly, the best strategy for Republicans at this point would be to merely step aside and watch Obamacare implode on its own. Sit on the sidelines until it was clear to everyone that it is irretrievably broken. This is not a viable strategy right now. First, the GOP made repeal the centerpiece of its political strategy the last few years. Second, it would simply be irresponsible from a public policy standpoint to see the havoc and harm that such an implosion would do to our health care system.

It is frustrating that the Republicans are not better organized on a repeal and replace plan. Again, it is much easier to talk than do. However, it is a very rocky road ahead to repeal. On this road it is better to be deliberate than rush down the road where a few bumps along the way could send you over the cliff for good.

The good news is that the Republicans are in the drivers seat on Obamacare. They just have to prove that they know how to drive.

Sunday, February 19, 2017

Understanding and Changing Minds

No two people better understood your mind.

Better than your spouse. Better than your mother. At times, even better than yourself.

Who were they?

Daniel Kahneman and Amos Tversky.

It is doubtful that many have ever heard their names.

These gentlemen changed forever the way that economists and others viewed the human mind and the way we make decisions. Until their groundbreaking studies, it was generally conceded that humans made rational and logical decisions with the brain acting like a sophisticated computer.

Kahneman and Tversky showed just how wrong that is. Their research showed in innumerable studies how the human mind errs in systematic ways leading to poor judgments, especially in uncertain situations.

The collaborative partnership of these Israeli-American psychologists is the newest work of best-selling author Michael Lewis. I just finished reading his account of how Kahneman and Tversky came to create the field of behavioral economics in "The Undoing Project."

I first became aware of the work of Kahneman and Tvesky about 15 years ago when I led the Benefits function of a Fortune 500 company.  In that role, I saw first hand how poorly our minds served us at times.

For example, despite the fact that everyone would probably desire (or be required) to stop working some day, when I assumed the Benefits role with my former company, only 50% or our employees were contributing to our 401(k) plan even though there was a generous company match.

In addition, despite the fact that the average employee had less than $500 in medical claims in a year, almost no one elected our high deductible medical plan in which they could save considerable sums in fixed payroll contributions for their coverage and place those savings in a health savings account.

In looking for ways to make our plans more cost effective for my company, and more valuable to our employees, I started searching for better ways to design our benefit plans. That research led me to the work of Kahneman and Tversky.

Everyone knows they need to save for retirement, but few save enough. Why do people ignore the logical response to save so they have money when they are no longer working? Kahneman and Tversky attributed this to what they called "availability bias". We excessively weigh in our minds those memories that are most easily available to us. We need food today. We need a new TV today. We need to take a vacation next month. These emotions outweigh the real needs we are going to have 10, 20 or 30 years from now.

You can see this for yourself in answering this short question that Kaheman and Tversky used in their research about availability bias.

Consider the letter K. Is K more likely to appear as the first or third letter in a word?

The typical person answered the first letter. In fact, they guessed that K was twice as likely to be the first letter than the third letter in a word. Kangaroo. Kite. Knee. Know. All of these easily came off of the top of my mind while writing this.

However, the fact is that K is actually twice as likely to be the third letter of a word compared to the first letter. Ankle. Take. Cake. Ink.  I had to look all of these up. They just aren't as available in the mind.

That is why when we redesigned our benefit plans so that we automatically enrolled everyone in the 401(k) plan as the default option and allowed employees to opt-out of the retirement contribution if they did not want to participate.

The result--92% participation compared to the prior 50%! We also later raised the contribution each year by 1% automatically unless they opted-out of the increase. Each year only 10% opted out. I wondered in my mind how far we could increase these savings increases before we saw a drop-off in participation. It honestly looked as if we could go on forever without any significant numbers opting-out. It takes effort to change and most of us limit our efforts. We don't like change.

That brings us to another bias in the human mind---the status quo bias.

We are extraordinarily loss averse. In fact, Kahneman and Tversky found that losses generally caused twice as much pain to us as an equivalent amount of gain brought us pleasure.

That is why high-deductible health plans were so difficult to introduce to our employees. A potential $500 out of pocket health care bill was more painful than the pleasure of saving $900 in premium contributions.

This is why reforms and changes are so difficult to implement. Look no further than what has happened with Obamacare. First, in the reaction when it was initially being adopted, and now when there is talk of its repeal.

That is also why the Democrats are taking their defeat to Trump so hard and their reactions are so irrational.

Kahneman explained it this way.

"Reforms always create winners and losers, and the losers will always fight harder than the winners."

We are seeing this play out every day in the news. Only the losers show up at town halls conducted by their Congressman and protest in the streets. The winners stay home content with what they won.

Another insight that Kahneman and Tversky developed was the process by which people make decisions. Decisions are often made by making judgments about similarity and about context. These decisions are often made by comparing features and classifications. Of course, since these are important in how decisions are made, they also can be manipulated to make a classification or feature seem more noticeable.

For instance consider this example from the Lewis book.

"If you wanted two people to think of themselves as more similar to each other than they otherwise might, you might put them in a context that stressed the features they shared. Two American college student in the United States might look at each other and see a total stranger; the same two college students on their junior year abroad in Togo might find that they are surprisingly similar; They're both Americans!

This is an instructive insight, especially as it relates to identity politics, most particularly by the Democrat party. They are very intent on grouping people into classifications for purposes of their political agenda---women, African-Americans, Hispanics, gays, etc.

The result of that grouping or classification is to overemphasize differences to the detriment of those similarities that we all share as Americans. It really becomes a divide and conquer strategy.

"Things are grouped together for a reason, but, once they are grouped, their grouping causes them to seem more like each other than they otherwise would. That is, the mere act of classification reinforces stereotypes. If you want to weaken some stereotype, eliminate the classification."

Isn't it interesting that Donald Trump has really focused on one message---"Make America Great Again". He has not focused on any other classification or grouping than that. Trump's issues are not black issues, white issues, women's issues, men's issues or anything else. The issues are those that are shared by all Americans. Jobs. Defense of our country. Crime on our streets. Homeland security.

Perhaps this is the reason he is seen as such a threat by the liberal Democrats. Everything Trump is doing is attempting to eliminate the classification and in so doing also weakening the existing stereotypes that fuel identity politics.

Kahneman and Tversky were psychologists who created an entirely new field of economics. In fact, Kahheman won the Nobel Prize in Economics in 2002. Tversky would have likely won his own Nobel Prize in the same field but for his untimely death in 1996.

Is a real estate business mogul doing something similar in creating an entirely new way of looking at politics?

Trump has changed many minds along the way to being elected. However, as we watch the daily news, he has many more minds that need to change to be successful.

My advice to Trump is the same as it is for you. Understand the way your mind works and those of your fellow human beings. To do that, learn more about the research of Kahneman, Tversky and others who have helped us better understand how our minds works, how we make decisions and how we can be misled.