Wednesday, March 29, 2017

A History Lesson

A people without the knowledge of their past history, origin and culture is like a tree without roots.
                                                                                                        - Marcus Garvey 

If this is true, then we have many trees without roots today when talking about the history of the U.S. federal budget.

President Trump and OMB Director Mick Mulvaney recently released their proposed outline for the 2018 federal budget which includes plans for $1.1 trillion in spending in the next fiscal year. And that is just for what is called discretionary spending.

Yes, that is $1,100,000,000,000 of your tax dollars and borrowed money that is being proposed to be spent on so-called "discretionary" items like Defense, highways and roads, the FBI and other things. That is only 30% of the federal budget. The other 70% is considered mandatory non-discretionary spending which includes Social Security, Medicare, Medicaid and interest on the federal debt. Trump has not proposed touching even one cent of this.

Defense and Non-Defense Discretionary Spending Makes Up Only 30% of Federal Budget
Credit: Center for a Responsible Federal Budget

However, to hear and read the reaction from liberals, the mainstream media and, even some Republicans, you would think the world is coming to an end because of proposed cuts to the State Department budget, the EPA, the Corporation for Public Broadcasting and the National Endowment for the Arts. It doesn't matter what it is, there is never enough money when it comes to federal spending.

Therefore, I thought it might be appropriate to provide a little context on the federal budget for those less rooted in its history.

Fortunately, I came across an excellent visual history of the federal budget that was done last year by Max Galka on

Let's start with spending. From our nation's founding until the middle of the 20th century (a span of over 150 years of our country's history) annual spending generally never exceeded 10% of GDP except in the case of war. Until FDR brought us the "New Deal", spending was actually pretty consistently around 3% per year.

Since 1980, spending per year has averaged 20% of GDP.

The following chart shows where that money has been spent. There was practically no money spent on entitlement programs like Social Security, Medicare and Medicaid until 1950. These items now account for over one-half of federal spending.

In addition, until 1930, all government non-defense expenditures amounted to less than 1% per year. That number today is about five times as large. We somehow survived without a massive federal bureaucracy or funding for NPR, the National Endowment for the Arts and a host of other programs.

For most of our history, 3/4 of all federal spending went to just pay for defense and interest on the federal debt.

Although there is a lot of talk about our $20 trillion of federal debt, a surprisingly small part of the budget today is going to pay interest on that debt due to historically low interest rates. However, as interest rates rise in the future (and they will) , you can readily see from this chart how other items in the budget are going to be at significant risk (or future taxes will need to be increased).

Speaking of the federal debt, this chart shows debt as a percentage of GDP.  Historically, debt was taken on to finance wars (including our War of Independence). It then gradually receded in subsequent years. However, beginning in 1980, we started to consistently live beyond our willingness to pay for it currently.

The current trend is unsustainable and never could have occurred but for the low interest rate environment we have been in. It will end. The only question is how much pain will accompany the end of this trend. It is guaranteed to hurt someone, and most likely everyone.

Let's turn our attention to the revenue side of the budget.

Just as all of the debt we have taken on could not have been accommodated without declining interest rates since 1980, spending would not have exploded without vast increases in federal revenues.

The engine for those revenues has by and large come from the federal income tax that was not adopted until 1913 and did not really become a major revenue source until World War II. Today personal income and FICA taxes account for 80% of all federal revenues. The corporate income tax represents 11% of federal revenues.

Despite all the angst you hear about Trump's potential border-adjustable tax proposal, it is interesting that the United States relied almost exclusively on tariffs and excise taxes for revenues for its first 130 years.

It might be of particular interest to our real estate mogul President that a significant source of revenue for the federal government from 1820-1860 involved land sales. In fact, one year in the late 1830's half of the federal government's revenues came from land sales.

This might explain why President Trump signed a bill authorizing $19.5 billion in NASA spending that will provide continued support of launches by commercial companies and deep space exploration, as well as the International Space Station and initial planning for a Mars mission.

Perhaps if we can get to Mars and claim the planet as our own, the federal government could then sell off the land much as we did in the 1800's land rush west.

Failing this, we can expect many tough choices ahead of us in future budget discussions. Whether Bert and Ernie continue to get taxpayer support will be child's play compared to some of the tough questions I see lying ahead of us. (By the way, PBS only gets 15% of its budget from the Center from Public Broadcasting although the Democrats make it seem as if the proposed cuts by Trump would decimate Sesame Street and PBS).

These charts should provide a little better perspective and context about our budget history as well as hinting at a few of the challenges lying ahead to balance the budget and pay our debts.

Consider yourself now firmly rooted in the history of the budget of the United States of America.

Sunday, March 26, 2017

Born in the USA

Last month I wrote about the Medicaid situation in California. In that post I cited the fact that 50% of the children in California are on Medicaid and half of the births in California last year were paid for by Medicaid.

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

It seems that I was too harsh on California in that post.

I just came across this data on Medicaid births by state. It seems that California is just average when it comes to the percentage of births that are paid by Medicaid in the United States of America.

In fact, in 24 out of the nation's 50 states, at least half of the babies born during the latest year of record were paid for by Medicaid.

In New Mexico, almost 3 out of 4 babies are paid for by Medicaid to lead the nation in this ignoble ranking.

What surprised me was Wisconsin being tied for 4th place with 64% of its births being covered by Medicaid and Ohio with 52%. Those states beat out New York (51%) and California.

I return to the obvious question again.

How has a welfare program for low income individuals, that did not even exist until 1965, come to cover half of the births in our country?

And this question leads to other questions.

Is our economy so poor that half of the people having babies in this country are in poverty?

What effect is illegal immigration having on Medicaid? (If you look at the highest percentage states for Medicaid births they are generally states with high percentages of illegal immigrants).

Are the Medicaid eligibility requirements too broad?

Are poor people having that many more babies than those with more money?

Is the Medicaid program actually providing an incentive for the poor to have more babies since the rest of us our paying for it? My daughter just had a baby. She has good employer coverage but with a high deductible health plan it cost her and her husband more than $5,000 in out of pocket costs to have the child. Compare that to a Medicaid mother. Who is more likely to have the next child?

I don't have the answers to these questions but someone somewhere needs to be looking into the answers.

This is most particularly important right now considering the fact that Medicaid funding is so critical to the issue of repealing Obamacare. Without the massive expansion of Medicaid, the repeal of Obamacare would be infinitely simpler to do. As I have written before, it is not easy to take free stuff away from anyone. Any reform also creates winners and losers and the losers are always more vocal than the winners.

In fact, in 2008, before Obamacare expanded Medicaid, approximately 40% of births were already covered by Medicaid nationally. That number has grown dramatically to the one in two it is today.

You have to also keep in mind that each baby born and paid for by Medicaid is also more likely a child that will continue to be on Medicaid in the future until they are grown and are on their own. The sad reality is that they will more than likely also be on Medicaid as adults.

Such is the system we have created with all the best of intentions. However, we seem not to have considered the system of perverse incentives that perpetuates the problem.

I am tired of the questions. I would like some answers.

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. Everyone would access to a health account funded by the government for routine expenses. 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 will  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 the open ended cost liability that the carrier assumes if there was a catastrophic claim. 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 the failure to have health insurance, could see liens on future pay (or federal benefit payments) enforced by the federal government. Such payments could be imposed 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.