Obamacare Is Still Dangerous For Democrats

We only have six months until the Obamacare health insurance exchanges are available for enrollments. Most of the provisions of what I call the "Unaffordable Care Act" go into full effect on January 1, 2014.

I think it will be very interesting to see this play out.

As an outside observer who knows a good deal about the health insurance marketplace, I would have serious concerns if I were the Obama administration and the Democrats.  This is one that can't be blamed on Bush, the right-wing Republicans or the Tea Party if it does not go well.  And there are many ways it could go wrong.

Credit: Reliapundit.com

There are three big areas where I think things could go very wrong for Obama and the Democrats.

• Exchange Chaos 
• Sticker Shock
• Economic Armageddon

Exchange Chaos

The first question I have is whether the health insurance exchanges will be ready and will function as intended?  I believe there is a good chance that the entire process could be chaotic and confusing for the public.

The fact is that the information technology challenge to establish the exchanges is considerable.  This challenge has become even more pronounced since so many states have decided to forego establishing their own exchange and have delegated that responsibility to the federal government.

Therefore, the federal government is tasked with creating on-line healthcare exchanges in over half of the states.  Those exchanges must be availalble online in less than six months and have interfaces built with the IRS, HHS, SSA, Medicare, Medicaid, Insurance companies and the like. They must be able to indentify the participant and be able to determine that individual's eligibility for coverage based on where they live as well as the amount of federal subsidy for the coverage.  It is a monumental task and if that system is not already being tested right now I don't see how it could operate smoothly.  See this Michael Barone column for a sense of what has to be done from an IT perspectivve.  Here is another Barone column that calls this an impossible endeavor based on comments from a 35-year IT industry veteran.

“Wow, what can go wrong here? Let me assess this based on my years of experience in this industry. The federal government is going to build 50 exchanges, using a data hub that doesn’t exist physically and in fact, the design hasn’t been solidified, and must be accessible to a variety of data processing technologies that range from archaic to old.

Each of the 50 states have different eligibility rules, and with a significant number of states opting out, the federal government now has to learn the intricacies of each state’s Medicaid eligibility models which then scale to different applicability rules for different members of a given family. The thousands of pages of bureaucratic rules that will drive requirements haven’t been completed yet, and those requirements are needed to drive design not only for the application programs, but for the entire processing architecture. The issue of network, processor, and storage performance has to be decided, modeled and tested.

In addition, an early draft of the online application that must be filled out to apply for health insurance in the state exchanges is 61 pages!   Does government ever do anything in a simple way?  The application form even asks the applicant if they want to register to vote!  After all, if you are a Democrat you need to make sure you can keep getting people to vote for what they think is free stuff. 

How much is all of this IT and other development work costing the federal government?  Who knows?  However, to give you idea, California alone has already received $909 million in federal grants to help it establish and open its individual state exchange.

So where’s all the money going? A big chunk is going to the infrastructure and information technology components—building out the website and database technology necessary to manage the law’s subsidies and facilitate enrollment in the exchange-based health plans. But a lot of it is just going to marketing and enrollment. As Laszewski notes, the state is launching a two-year, $250 million marketing campaign intended to get people to sign up for the exchange. The state is also paying 20,000 part-time "enrollers" $58 an application for each person they sign up. In contrast, California Blue Shield serves 3.5 million members with just 5,000 employees. 

If you think I am offbase on where this could be headed consider this report from The New York Times yesterday.  This tells me that there are big systems problems and this may not be the end of the story. 

Unable to meet tight deadlines in the new health care law, the Obama administration is delaying parts of a program intended to provide affordable health insurance to small businesses and their employees — a major selling point for the health care legislation.

Tight deadline?  It has been over three years since Obamacare was signed into law.  These small business healthcare exchanges were a fundamental rationale for the law and the main incentive for these businesses to support the law.  Should we expect other delays?

I thought this comment from Henry Chao, who is the deputy chief information officer for the Centers for Medicare and Medicaid-which is setting up the federal exchanges-was very telling. It tells me that chaos has a good chance of reigning come October.

We are under 200 days from open enrollment, and I'm pretty nervous. The time for debating about the size of text on the screen or the color or is it a world-class user experience, that's what we used to talk about two years ago. Let's just make sure it's not a third-world experience.

If Obamacare gets off to a rough start with the public due to chaos and confusion with the health exchanges this could signal deep problems for the program going forward.  It is hard to recover from poor first impressions, especially if media attention picks up on it.   A compliant Obama-friendly media is not likely to play up any problems, however, if they jump on the bandwagon if things go poorly it will be difficult to turn around the public's perception of the program.


Sticker Shock

The second big area for trouble with Obamacare is with potential sticker shock.  This could cause problems from two perspectives.  First, I believe that a substantial number of Obama/Democrat low-information voters believe that Obamacare is going to provide them free coverage.  What will be the effect when the reality sinks in that this is not the case?

Let's take the case of a 27-year female who makes $35,000 per year.  Under Obamacare she is required to purchase health insurance coverage that is estimated to cost $3,391 per year.  She would be eligible for a government subsidy of just $66.  She would also be responsible for up to $4,167 in additional out-of-pocket costs for the year.

How about a family of four making $85,000?  They would be required to purchase health isurance coverage that is estimated to cost $14,245.  They would be eligible for a government subsidy of $6,170 reducing their net cost to $8,075. They would also be responsible for up to $8,333 in additional out-of-pocket costs for the year.  However, if their annual income increased to $94,000, they would no longer be eligible for any subsidy.  In effect, $9,000 in additional income would cost the family $6,075 in subsidy not to mention the additional tax costs they would pay on that income.  So much for the incentive to work harder.

You can check out all sorts of Obamacare subsidy scenarios with this online tool that was developed by the Kaiser Family Foundation.

Of course, what is the penalty  tax if someone does not buy the required coverage?  For that young female the tax penalty would be the higher of 1% of her income or $95 in 2014 increasing to $325 in 2015.  What do you think she will do?  Pay $350 or pay $3,325 ($3,391- $66 subsidy)?  Of course, if she gets sick she will want to buy the coverage and there is nothing to stop her since the law requires guaranteed issue. 

This is exactly what has happened in Massachusetts where 40% of all the healthcare policies issued at the Harvard Pilgrim plan are in effect for less than five months.  Claims on those plans average five to six times the expected actuarial cost meaning people get in the plan when they are sick and get out of the plan when they are not.  The result is the overall cost of the plan skyrockets due to adverse selection which then hurts the people in the plan who play by the rules.

This is the other piece of sticker shock.  The fact is that Obamacare will increase the cost of healthcare thereby making it less, rather than more, affordable.  I wrote about this last week in "The Unafforable Care Act". This is exactly the opposite of what we were told was the objective of the law.  Where will most of these costs fall?  A lot will fall on individuals and businesses who were already doing the responsible thing by having coverage.  These are the people who will be hurt the most as their health premiums increase even faster due to a mix of mandated benefits, higher usage, adverse selection and other effects of Obamacare. 

The Obama administration now admits that costs are going up but they argue that federal subsidies will soften the blow for many.  However, at what cost?   It is interesting to note that the CBO recently raised the estimated cost of the Obamacare subsidies by $233 billion over the next ten years.  This was largely driven by an increase in the average cost of the required subsidies due to higher expected premium costs.

This is a chart that shows how the CBO has consistently been increasing the estimated amount of the average subsidies that will be required as the true costs of Obamacare have become better understood.  The CBO now estimates that 7 million workers will also lose their employer-provided healthcare.  That is double the original estimate.  These people will need to get coverages in the exchanges and the federal government will need to provide the subsidies.




Credit: National Review Online

Sticker shock is also going to be a factor in the public perception of Obamacare.

Economic Armageddon

The final big risk that Obamacare poses to Obama and the Democrats is the effect it is going to have on the economy and the federal budget.  You can get a sense of the potential budgetary effects from looking at the CBO revisions below.  Obamacare is going to be enormously more expensive than was originally estimated.  It is going to make our fiscal problems even worse even though we were told that it would make them better.

The bigger concern is what type of distortions is it going to have on the overall economy.  You have seen above how it could affect the incentives for a family of four whose income exceeds the subsidy level.  There are even bigger effects on businesses.  The law is written in such a way for businesses to avoid hiring full-time workers. If a business grows beyond 50 full-time workers it must provide healthcare coverage of pay a penalty.  The obvious answer for many businesses is only hire part-time workers.

For a real-life look into how a business sees the risks of Obamacare take a look at this excerpt from a prospectus for the recapitalization of a restaurant chain that I saw reported on in PowerLine.  Bear in mind that this is not a political statement, this is a legally-required disclosure on the risks to this business of Obamacare as deemed necessary by its attorneys and accountants.

If you don't want to read the whole excerpt let me summarize-in order to deal with increased costs with Obamacare they are cutting back the number of full-time jobs, they expect even higher health care costs in the future but they will either reduce benefits under the plan or raise menu prices to cover the extra cost.

Although [XXX] already offers health care, there is expected to be an increase in costs associated with the affordable health care act (“ACA,” see “Risks” section). To mitigate this cost, employees that were working more than 30 hours per week, but less than 33, have moved down to 29 hours per week, reducing the “full time” pool requiring health insurance from 1100 to 835 employees. Those full time employees will be offered health care insurance through the Company’s program or may obtain it through the state Exchanges or expanded Medicaid programs. The Company cannot estimate the number of enrollees in the future program but based on several discussions with Health Insurance Agencies and the experience of restaurants in other states instituting mandatory health insurance, many are expected to turn it down or seek other publicly funded options. According to an NFP study of the Company’s health insurance and potential impact of the ACA, the total cost increase to the Company in 2014 is estimated to be $400,000 (or a 33% cost increase) which we have factored into our Projections. We believe this cost will continue to increase as the ACA is modified over the next several years but that most of the impact can be managed through cost reducing the plan or offset through menu price increases. Management does not agree with some in the industry that want to make a political statement by adding a line item to every check. Given their broad menu and ability to control portions, we believe the company has substantial control to raise prices at a time when everyone else in the industry will also try to raise prices or somehow otherwise improve margins.

Replay this scenario thousands of time across the economy and it will have a substantial negative effect.  

Conclusion

The ultimate test of Obamacare is just over the horizon beginning later this year with the open enrollment process.  Obamacare took a real body blow with the 2010 elections but gained new life with the Supreme Court decision upholding the law and it seems to be here to stay thanks to the Obama victory in last Fall's election.  However, I am not prepared to say the final story has yet to be written quite yet. 

I want to see how the public reacts once they really see what is in the law.  If I were the Democrats I would have serious concerns of what that reaction will be once the provisions are really understood and we start seeing the real-life effects.

At the same time, money talks and Obamacare, like all federal programs, is spreading a lot of money around.  Health care companies, technology providers, hospitals and others are already putting that money in their pockets.  Look no further than the pressure that the hospitals and other groups are putting on various governors and state legislatures to expand Medicaid under Obamacare. 

Betsy McCaughey recently wrote that the reality of Obamacare is adding up to a disaster for Democrats in 2014.  I think that is premature at this point.  There is risk from all of the factors I describe but we need to see how this plays out.  I will watch with a lot of interest between now and the 2014 mid-term elections.

Since only Democrats voted to impose ObamaCare on America, there’s no question who voters will blame for this colossal mess. The chances for a new Pelosi speakership are minuscule; we’re more likely to see Republicans win control of the Senate.

The GOP only needs to pick up six Senate seats to do that — and three seats the Republicans will target are in Iowa, Virginia, and Arkansas — the states set to be hit with the highest premium increases in the individual market.

Of course, all that may not be enough to repeal ObamaCare — it may take a few more elections before the will of the people prevails. But the system the Obama health law sets up is so dysfunctional, there’s an excellent chance voters will persevere until they get their way.

It’s not over til it’s over.

My view is that Obamacare is still dangerous for Democrats but it is not time to write their obituary. Money talks and as long as the money keeps flowing, they are alive and well with the voters.  What happens when the money stops is the unanswered question.

Marriage and Money

What is gay "marriage" really about?  Supporters say it is about equality, respect, commitment and love.  I agree that they are all factors.  However, the bottom line is that gay marriage is about money.  Specifically, the money that flows through the hands of the federal government.  Spousal deductions and exemptions.  Social Security and Medicare benefits.  Joint tax returns, disability and survivor benefits.

If it were not for all this money in play, I doubt that we would we have seen two cases argued in the Supreme Court last week.  Marriage would remain in the realm of the religious roots where it began.

Why has government gone to the lengths it has to provide these incentives for marriage and the benefits that go with it?  It is an unrefuted fact, based on several thousand years of experience, that marriage is an essential foundational framework for a well-functioning and stable society.  To be self-sustaining a society needs to reproduce to sustain itself.  This is only possible with a man and a woman.  It is not necessary for a child borne of that union to be raised by these two parents.  Many children do not have this advantage. However, it also seems to be well-documented that children in a family unit that includes a biological mother and father united in marriage, a male and female, do much better than those in single-parent situations, in cohabitation arrangements or in situations with one biological parent and a step-parent.

Marriage has also been shown to individually benefit both men and women and, in turn, this conveys additional benefits to society.  There is more physical security and less violence against women in societies with high marriage rates.  Marriage also benefits men and society in corresponding ways.  Finally, there are significant economic benefits to couples and society as a whole as a result of marriage where both the division of labor and economies of scale result in the more efficient use of human and physical resources.

For all of these reasons it has made sense for societies and government to confer specific incentives and benefits to men and women who marry.  Does this mean that in every case that marriage produces these benefits?  No.  Some couples will not have children. Some unions undoubtedly should have never occurred. However, the broader social good has been well served by the marriage covenant by one man and one woman for thousands of years.

This brings us to the issue of gay "marriage" and whether the argument can be made that government should recognize same sex unions to the same extent as a marriage between one man and one woman.  It could be that these unions would have similar benefits to society.  Research and study might show that children in a household with a same-sex married couple is vastly superior to a single parent or cohabiting arrangements.  It might even show that it provides similar advantages and benefits as with a married man and woman.

This is simply impossible to know right now.  Gay "marriage" is too new.  Its benefits and advantages to society have not been time-tested over thousands of years.  In fact, the first country (the Netherlands) that legalized gay marriage did not do so until the year 2000.  It is utterly untested.  If there were new-born children placed in that environment they have barely gotten to the teen years. It will be many years until the effects of gay marriage on children and society can be properly assessed.

The fact is that the very early evidence on gay "marriage" is that it has caused an accelerating decline in overall marriage rates in the countries where it has been made legal.  In effect, it has devalued marriage and the number of out of wedlock births has increased fairly dramatically.

Therefore, why would government provide equivalent incentives and benefits for something that is really nothing much more than a social experiment at this point?  In particular, the government of the United States of America that can't currently afford its current Social Security, Medicare and Disability programs which use actuarial assumptions that only assume heterosexual marriages.  If you broaden the eligibility for these programs, you also increase their long-term costs compared to today.  Where is this money going to come from?

I know that there are many who would say that individual rights should control over dollars and cents.  It's a fair point.  However, if those advocates really believe this then they should be prepared to scale back the existing benefits under Social Security and Medicare to pay for the extension in the definition of marriage to gays.  Thus, for example, if the long-term costs of these programs will increase by 4%, benefits for those currently eligible should be cut by 4% to keep these programs in balance.  If people really believe this is about equal rights it should follow that other monetary rights and responsibilities should be balanced as well.

Of course, gay marriage advocates argue that if the federal government provides "married" status to gay couples it would actually be beneficial to the federal government's budget.  They cite a 2004 study by the Congressional Budget Office that it would actually lower the deficit.  The study states that this is principally because of two-income gay couples being pushed into higher married tax brackets and fewer people on food stamps, Medicaid and other social programs.  These "savings" offset higher Social Security and Medicare costs.

I think this study is highly suspect for the obvious reason that human beings rarely do anything against their self-interest.  Those who would pay more in taxes will be less likely to marry and pay the "marriage penalty". Those who will benefit from government benefits will be more likely to marry.  You can take that to the bank.

Look no further than the plaintiff in the challenge to the Defense of Marriage Act case to see what I mean.  Elizabeth Windsor, 83, brought the case because she stands to recoup $363,000 in estate taxes that were paid on the estate of her deceased "spouse" when she died in 2009.  Money talks and people walk to that talk.

What I find most interesting is the rush to judgment on this issue.  In that regard I particularly liked the questions that Justice Alito and Justice Scalia asked in the Supreme Court arguments on the constitutionality of the ban on gay marriage in California passed by the voters in that state.

Justice Samuel Alito

Same-sex marriage is very new. I think it was first adopted in The Netherlands in 2000. So there isn't a lot of data about its effect. And it may turn out to be a — a good thing; it may turn out not to be a good thing, as the supporters of Proposition 8 apparently believe.

But you want us to step in and render a decision based on an assessment of the effects of this institution which is newer than cell phones or the Internet? I mean we — we are not — we do not have the ability to see the future.

On a question like that, of such fundamental importance, why should it not be left for the people, either acting through initiatives and referendums or through their elected public officials?

Justice Antonin Scalia

When did it become unconstitutional to exclude homosexual couples from marriage? 1791? 1868?  When the 14th Amendment was adopted?

What is really important to remember here is that there is a U.S. Constitution and that document has a mechanism that allows it to be amended if it is necessary. In that Constitution there is also the power of the Congress to change the Defense of Marriage Act.

There is absolutely no way that the U.S. Supreme Court should be overturning a constitutional provision of the State of California (which, by the way, was passed by a vote of the people after the California Supreme Court had miraculously found a right to gay "marriage" in the state constitution that no one else had found for over 150 years.)

What is so wrong with following the Constitution? I wrote about all of this in 2011 in "Making Amends With The Constitution". There is a process in place in our Constitution if we want to change the rules. It is not easy but it was not supposed to be easy if we were to carefully protect the rights of the majority and also assure that minority rights are also respected. It is instructive to look at what I wrote at that time.

Article I, Section 8 of the Constitution provides that Congress has the power to lay and collect taxes.  Nevertheless, the income tax law of 1892 was ruled unconstitutional because it was considered outside the power of Congress.  The 16th Amendment was ratified in 1913 to allow it.

There was nothing in the Constitution signed by the framers that precluded women from voting.  All references in the document were to people, not men.  However, the culture and custom was generally for only males to vote.  Nevertheless, it took the 19th Amendment in 1920 before it became the law of the land.  Interestingly, 15 states (beginning with Wyoming in 1870) granted women the right to vote before adoption of the 19th Amendment.  Since voter eligibility was an issue left to the states (in that it was not specifically enumerated in the Constitution by the Framers) women in these states voted in both state and federal elections before 1920.

The point here is pretty clear to me. There was a time when the Constitution meant something. It was respected for what it was. So were the limitations that were carefully crafted into the document by the Framers. Even when there was pretty compelling language in the Constitution to bend it to the "current times" it was ruled out of bounds. Has something been lost?

Was it designed to change with time? Of course. That is what the amendment process is for (Article V). The Framers in their wisdom also considered this carefully. They did not want it amended for some passing fancy. Nor did they want a small majority to change the key foundations of the governing document to the detriment of a significant minority. Therefore, 2/3 of both the House and Senate can come together and propose any amendment. They do not even need the President to concur. Alternatively, 2/3 of the states can come together and call a convention to propose their own amendments and bypass Congress completely. If the amendment is ratified by 3/4 of the states it is adopted as part of the Constitution.

If the American people want a federal government with expansive power they can have it. They can allow gay marriage. Or ban it in all 50 states. They can require everyone to buy health insurance or anything else.  They can ban assault weapons or ban abortions from coast to coast.  There is a way to do it.

It just does not seem that these types of powers exist with the President or Congress with any reasonable reading of the Constitution. At least, this has been the interpretation for most of our history. Nor does it seem to be within the power of a handful of judges to suddenly discover fundamental rights that have somehow been hidden in the Constitution for over 200 years and start applying them to 308 million citizens by fiat.

That is why there is an amendment process to the Constitution. It is hard and it was meant to be hard.

Look at this map and tell me if there is any way that the federal judiciary or the federal government should be doing anything about the subject of gay "marriage"?  This issue should be completely out of bounds for the federal government right now.  Each state can decide.  That also allows us to see the effects of gay "marriage" on society.  If it truly adds value, time will tell. However, the risk is too big should it devalue an institution that has been the cornerstone of successful societies for thousands of years.

I am all for equal rights.  I have no problem with domestic partner legislation on the subjects of transfer of property, hospital visitation rights and the like.  However, when it goes beyond "rights" and moves into "benefits" it is a different issue.  

There simply is no "right" to government benefits or money.  The government discriminates on this subject all the time.  For example, ExxonMobil and Solyndra both produced energy (or at least Solyndra attempted to.)  However, the federal government decided there were greater benefits to society from "green" energy than with fossil fuels.  Solyndra and other solar and wind companies got benefits that ExxonMobil did not.  That was discriminatory.  Lehman Brothers went bankrupt and the Bank of America was bailed out.  That was discriminatory. The same goes with the Internal Revenue Code.  There is line after line where one person or corporation gets a benefit that someone else does not.  The rationale is that there is a governmental or societal benefit in doing so.  It is discriminatory to those that don't get the benefit but there is supposed to be a larger public purpose.

My view is that before gay unions are to be provided government benefits it must be shown that there are demonstrated benefits to society in order to justify these additional costs.  We are not there yet from everything I have seen.  If you look at the map of the United States this is also the overwhelming opinion of the vast, vast majority of the states in this country.

My personal opinion is that I am doubtful that a beneficial case will ever be made for gay "marriage" if if we look at the lessons of history.  Any society that has openly adopted homosexuality has inevitably fallen apart.  However, I am always open to new information and new facts.  Just show me the facts before you expect to see any government benefits or money.

In the meantime, allow each state's citizens to decide.  Not the courts.  That means that California's ban on gay marriage should be allowed to stand.  If the citizens want to amend that out of their Constitution and replace it with a new right, let them do it.  At the same time, if a group wants to attempt to ban gay marriage in the United States then there is a way to do that as well through Constitutional Amendment. That is what America is all about.  It is not supposed to be about nine Supreme Court justices finding things in the Constitution that no one else has found in over 220 years.

The Unaffordable Care Act

Does your homeowner's insurance pay if the water heater needs to be replaced?

Does your car insurance pay for oil changes?

Of course not.  If these things were covered by insurance the costs of these insurance coverages would be astronomical.  People buy insurance for large, unexpected costs to protect their assets and savings.  The basic principle of insurance is that it allows a large number of individuals to pool and share risks so as to protect the group from unexpected losses that only some would likely incur in any one period.

Therefore, homeowner's  insurance is there to protect you from the catastrophic impacts of a fire or tornado that could totally destroy your home.  It is not designed to pay for a furnace that needs to be repaired or replaced.  The same is true for auto insurace.  It is there to pay for damage caused by a hailstorm or being rearended on the freeway but it does not pay to repair or replace a transmission.

When health insurance was first introduced it followed the same general principles of all insurance.  In fact, most early versions of health insurance were actually called hospitalization insurance.  Coverage only was provided if you ended up in the hospital and were exposed to the risk of the high costs associated with a hospital stay.  Doctor visits, x-rays, drugs and the like were not considered within the purview of health insurance.

Those were much simpler times.  Health care costs were also much cheaper.  In 1965, the average cost of a one day stay in the hospital was about $45.  Yes, you read that right-$45! By 2002, that cost had increased over 28-fold to $1,289.  Today that cost is around $4,000 per day. 

Inflation since 1965 has pushed prices up by about 6.4 times.  Therefore, adjusted for inflation, a day in the hospital should only cost about $288 today.

Should you not believe how much hospitalization costs have changed here is a copy of the hospital bill for the birth of my wife.  The total bill was $82.56 for four days in the hospital for mother and daughter in 1952.

First and foremost, health insurance costs have increased dramatically because underlying healthcare costs have increased.  You can see from the above what has happened with hospital costs.  New technology, drugs, tests and treatments also have also pushed up costs over the years.

In addition, there has been a continuing trend in using health insurance to cover more and more and more costs.  Routine doctor visits, physical therapy, mental health visits and the list goes on.  The end result is that health insurance looks less like the traditional model of insurance, which is to protect people from catastrophic loss, and has become nothing more than a model designed to transfer costs to a third party.   Health insurance today has little to do with sharing the risks of the people in the insurance pool.  It really is about creating a pool where the risks and costs are transferred to a third party (an employer or the federal government) that is completely removed from the process.

It probably should not come as a surprise that the explosion in health care costs in this country began in 1965-the year that Medicare and Medicaid took effect.  This is when the traditional health insurance model began to break down and the third-party pay system took over.  This chart shows health care spending in the United States from 1900-2012.

We were told when Barack Obama first ran for President that he was going to do something to make health care more affordable.  I remember something about reducing the average family's cost of health care by $2,500 per year.  I also remember something he signed into law called "The Affordable Care Act".  You might know it as Obamacare.

Obamacare is upon us and it will largely take effect in 2014.  The non-partisan Society of Actuaries released a report this week on what we can expect to happen to health care premiums as a result of Obamacare. The news is not good for most Americans.  This independent group of actuaries predicts that Obamacare-driven changes could drive up underlying health care costs by an average of 32% due to mandated benefits, increased use of medical services and other provisions in the law.  My state of Ohio is expected to see an 81% increase in costs!

What does HHS Secretary Kathleen Sebelius have to say about the increases?

"Some of these folks," Sebelius said, referring to those hit by ObamaCare's price spikes, "have very high catastrophic plans that don't pay for anything unless you get hit by a bus. They're really mortgage protection plans, not health insurance."

Investor's Business Daily says it better than I can.  Obamacare is the exact opposite of what is needed to   control health care costs and make it more affordable.

Sebelius has it exactly wrong. It's precisely those catastrophic plans that are real insurance, which in case anyone has forgotten is supposed to protect against unforeseen costly events, not pay $20 doctor visits.

What Obama and company are trying to force down everyone's throats isn't insurance, it's massively expensive prepaid health care.

Too bad for those who'd rather buy real insurance and spend their money on something else.

The problem is that ObamaCare's push toward comprehensive "insurance" coverage will only fuel health care cost inflation.

Back in 1960, people paid almost half the nation's health care tab out of pocket. By last year, that figure had dropped to just over 10%, with the rest paid by government health programs or increasingly generous, tax-subsidized workplace health benefits.

That, in turn, has pushed up health spending, since it looks to consumers like they're getting something for virtually nothing.

By driving out-of-pocket spending for health care down even further, ObamaCare will only succeed in driving up costs for everyone.

Perhaps we should stop calling it Obamacare and just start referring to it as "The Unaffordable Care Act".

A Relatively Short Post

One of my favorite quotes is by Samuel Clemens (Mark Twain) who wrote to a friend...

"I didn't have the time to write a short letter, so I wrote a long one instead."

He was so right.  It is much more challenging to write or say something in a succinct and concise manner than in long form.

That is why I enjoy good quotes when I can find them.  The really good ones convey a lot in just a few words.  You don't need volumes to impart wisdom if it is done right.

From my experience the best quotes seem to come from what I consider to be some of the smartest people in history.  Perhaps that is why they were considered so smart.  They conveyed a lot in a few words.  People like Jefferson, Franklin, Edison, Churchill and Einstein.

These are a few quotes from Albert Einstein I came across this week that demonstrate that he was much more than a great scientist.

Consider these quotes which would all qualify for my Quotation Hall of Fame.

"What is right is not always popular and what is popular is not always right."

"We can't solve our problems by using the same kind of thinking we used when we created them."

"If you can't explain it to a six-year old, you don't understand it yourself."  

"Strive not to be a success, but rather to be of value." 

"Two things are infinite: the universe and human stupidity; and I'm not sure about the universe." 

"The hardest thing to understand in the world is the income tax." 

"When the solution is simple, God is answering."  

Credit: Time Magazine

One more on the theory of relativity as explained by Einstein...

"When you are courting a nice girl an hour seems like a second.  When you sit on a red-hot cinder a second seems like an hour.  That's relativity."

I hope that it seems like only a second ago that you started reading this BeeLine post.

The United States Bank Deposits Tax

The  bank deposit tax that the European Central Bank (ECB) wants Cyprus to levy on its bank depositors in return for a financial bailout of its banks has sparked a lot of outrage.  The proposal would have resulted in a 9.9% tax on large deposits (over 100,000 euros) and a 6.5% tax on smaller deposits (less than 100,000 euros). It has also raised the question as to whether such a tax could ever be initiated in the United States.  Most say it could not happen here. 

The fact is that we already effectively have a United States Bank Deposits Tax.  It is the Zero Interest Rate Policy (ZIRP) of the Federal Reserve.

In Cyprus, depositors have recently been getting an interest rate of 4.66% on their equivalent of a one-year certificate of deposit.  That compares to a .26% average annual yield that U.S banks are currently paying on a one-year CD.

The average rate for CD's in the United States since 1984 is 4.09% which is not far off of the current Cyprus rate.  This chart gives you an historical perspective of CD rates since 1984.

What I find interesting is the almost universal outrage about the ECB's attempt to tax the Cyprus bank depositors to pay for the bail out of their banks while the same thing has been going on in the United States with the ZIRP policy with nary a peep from anyone.

The bank depositors in Cyprus have been earning what historically has been considered a fair return on their savings and now the ECB wants to impose a tax on the savings deposits.  In Cyprus, depositors have had the ability to make a return on their savings of almost 5% before the tax is imposed.  In the United States, due to the Fed's ZIRP, the depositors are getting almost nothing.  There is no need for the deposit tax because, in effect, bank depoistors have already been paying for the bailout of the U.S. banks with the foregone interest on their savings.

In the final analysis, there is almost no difference between what is being done with United States bank depositors compared to what is proposed in Cyprus.

What I find most interesting is the vastly different reactions to the two scenarios.  There is outrage over Cyprus but almost total acceptance in the United States (and other countries that have adopted ZIRP) of what could be considered a 4% indirect tax on bank deposits.

Why is that?

I believe the answer lies in how the human brain sees things.

It is generally very hard for the human brain to process anything but direct effects.  We have a hard time in dealing with one-offs, especially when it comes to money.  It is easy to understand when money has been taking from me directly.  It is harder to understand when I end up in the same place but the money was taken from me in an indirect way even if I end up in the same place.

The best example of this is how inflation can erode the value of money.  I cited the work of Daniel Kahneman, Richard Thaler and Jack Knetsch on this subject in my post "The Money Illusion" two years ago.  KTK did a lot of research on the subject of "fairness".  When did people think something was fair or unfair.  I think their research explains a lot about the different reactions we are seeing between Cyprus and the United States ZIRP.

One survey question in the KTK research presented these facts to individuals.

A company is making a small profit.  It is located in a community experiencing a recession with substantial unemployment but no inflation.  There are many workers anxious to work for the company.  The company decides to decrease wages and salaries 7% this year.

Notice how this meant that each worker has lost 7%.  62% of respondents deemed this unfair.

Another version of the question had the exact facts but inflation was stated to be 12% and the company was going to limit salary increases to 5%.  

This scenario puts the workers in exactly the same place.  They have lost 7% of the value of their money.  However, 78% of respondents thought this was fair.

The perception of fairness was completely different even though the end result was exactly the same.

The Cyprus bank deposit tax is yet another example of the dangerous times we live in.  Government policymakers will do almost anything to save their own hides.  They will delay, defer, deceive and disassociate all they can.  The ECB policymakers made a mistake here in that they embarked on a direct attack on depositors when they should have settled for an indirect attack.  Why did they just not force the Cyprus banks to a zero interest rate policy and get their bailout money that way?  They totally misunderstood human psychology.

I will close the same way I did two years ago in "The Money Illusion".  The Cyrpus bank deposit tax example is instructive because it shows the sharp contrast on how not to do something as a government policy maker when it is  relatively easy to steal the public blind if you just take the more indirect paths of ZIRP and inflation.

The lesson here for all of us is that we need to be very careful.  Inflation is the easiest policy option for government to solve its debt problems.  It is a lot easier to inflate the currency to wipe out its debts than to take the pain of spending restraint.  It is also the easiest way to hoodwink the public.  It just does not feel like you are losing.  Receiving a 2% social security increase when prices are rising 10% just doesn't seem to feel as bad as having your social security payment cut by 5% when inflation is 2%.   You are actually better off with the 5% cut from a buying power perspective.  However, KTK's research shows what the public will think is "fair" and "unfair".  

The same goes for ZIRP.  People don't like getting 0% on their money when they are used to getting 4%.  However, they haven't taken to the streets in outrage.  They would if they had to pay a 4% tax. It just seems worse to have to pay a 4% bank deposit tax (even if you are also earning 4% interest) than to just get 0% on your deposit.  When you pay something directly you really feel the loss.  

Beware the "Money Illusion" and policy makers who think they are magicians. Watch your wallet.

Hmmmmm, That's Interesting

I always enjoy finding little factoids or trivia that make me go "hmmmmmmmm".

I came across several items over the past week.

First, which country do you think exports the most beef and veal?

The United States, Argentina, Australia or Spain came to my mind.

Wrong.

I never would have guessed India is the world's largest exporter of beef and veal in one hundred years.  I thought that cows were considered sacred in much of India.  From looking at this data they are sacred in India but not so much if they are leaving the country for someone else's hamburger.



Source:  John Mauldin, Thoughts From The Frontline, 3/13/13

John Mauldin points out that at one time Argentina was the world's largest beef exporter.  They have fallen to  #11. Brazil now has a herd of cattle that is four times that of Argentina.  What has happened?  Argentina's socialist government has instituted a series of  price controls and export restrictions since the Peron era in a futile attempt to keep prices low for the masses.  The only result has been that fewer and fewer cattle are being raised as the rewards to the ranchers were taken away.  The only thing that has happened is the entire country has gotten poorer.

The second "hmmmm" moment came when I saw this article about the incoming class at New York City's Stuyvesant High School.  Admission to the city's eight most competitive high schools is decided exclusively by test results on the specialized high school admissions test (SHSAT) that 8th graders take.  28,000 took the test for just over 5,000 open spots in the Class of 2017.

What I found interesting is the demographic breakdown of the admission offers at Stuyvesant that are based solely on the results of this competitive examination.

177  white students
24    Hispanice students
9      black students
620  Asian students

The admissions at two of the other competitive high schools which are also based entirely on the results of the test were similar.

Bronx Science offered admission to 25 black students; 54 Latino students; 239 white students; 489 Asian students; and 3 American Indian/Alaskan Native students.

Brooklyn Tech offered admission to 110 black students; 134 Latino students; 451 white students; 960 Asian students; and 5 American Indian/Alaskan Native students.

To put this in context this is the demographic breakdown of the enrollment in the New York Public Schools.

14%  white
40%  Hispanic
31%  black
15%  Asian

In other words, Asian students make up 15% of the enrollment of the school district but they earned 75% of the spots in the city's most competitive high school.  Hispanics and blacks make up 71% of the enrollment in New York City but only 4% of these students will be a part of this year's entering class at Stuyvesant.  The remaining 21% are white students.

Predictably, when I researched this subject I found that last year a coaltion of educational and civil rights groups brought a federal lawsuit alleging that the SHSAT is racially discriminatory.  It is not clear to me how the test is discriminatory in that Asian students (including many who have parents who were not born in the United States and for whom English is a second language) can do so well and the other ethnic groups can do so poorly.

Might it have something to do with the fact that education is stressed in most Asian homes and these parents expect their students to do well?  See my post from 2011 on Parenting Principles Perspective in which I wrote.

Asians make up 19% of the class of 2013 at Harvard and 18% at Princeton.  By comparison Asian Americans only represent about 4% of the U.S. population.  I walked around the campus of UC Berkeley a couple of years ago and it seemed that every other student was Asian.  According to Berkeleyside, the Fall, 2010 number is 45.7%.  12% of Californians are Asian. I was not far off.

You see the same pattern of accomplishment in music.  If you see a young prodigy on the violin or piano there is a good chance you will see it is someone of Asian descent.

Why is this?

Malcolm Gladwell in his book, Outliers (which I recommend as one my best reads of 2010) attributes it to a "rice paddy" attitude.  Simply stated, tending to a rice paddy is a 360 day, 3,000 hour per year activity.  It is exacting, hard work where effort and dedication make a huge difference in results.  The peasants that tended these rice paddies may be long gone but the culture carries on in their progeny.  Gladwell makes the point that there is nothing that indicates that Asians are naturally any better at math, science or music but each requires hard work, persistence and doggedness.  It is more attitude than aptitude.

You probably have seen what I am talking about.  The other kids are goofing around on the steps to the public library or skateboarding along the sidewalk.  The Asian kids are inside the library with their parents finding another book to read.

I also referenced Amy Chua's book, The Battle Hymn of the Tiger Mother, and cited three main differences in parenting styles between Asian and Western parenting styles that she believes are important.

Western parents are too concerned about their children's self esteem. Chinese are not. Asians assume strength in their children, not fragility. Therefore, they push hard on them and hold them accountable for results.

Chinese parents believe their children owe them something. Many Americans seem to believe that since they were responsible for bringing the child into the world that they owe the child in some way.

Asians believe they know what is best for their children and override their children's own preferences and desires. Chinese parents understand that nothing is fun until you're good at it. To get good at anything you have to work, and children on their own never want to work, which is why it is crucial to override their preferences.

You may disagree with the approach but it is difficult to argue with the results when you look at the enrollment trends at our nation's most competitive schools.  It may be time for the rest of us to take a look at ourselves and start looking for more accountability in our parenting.  Of course, for many children it would be nice just to have at least one accountable parent to begin with.  Simply too many don't even have that. 

Finally, I thought it was interesting that the History Channel's mini-series The Bible attracted 13.1 million viewers and actually topped American Idol's 12.8 million viewers on Wednesday in the weekly ratings.  The Bible does spend a fair amount of time on The Ten Commandants.  What does the Second Commandment say?

“You shall not make for yourself an idol or a likeness of anything in heaven above, or in the earth beneath, or in the waters under the earth. You shall not bow down to them or serve them…” (Ex. 20:4,5a).

Hmmmm, now that is really interesting.  There still may be some hope left.

Velocity Is The Villain

VELOCITY...

When you see this word you may think about a major league pitcher's fastball or the speed of a bullet leaving the muzzle of a gun.

Not many would equate velocity with what ails our economy. However, the "velocity of money" in our economy today may be the best explanation for why we have not seen the economic recovery we would expect this far into the recession that began over four years ago.

What is the velocity of money?

Simply stated, it is the average frequency that a unit of money in an economy is spent or turned over. For example, assume you and I live on an island alone and there is a total money supply of $100. I have the $100 and a pineapple farm. You have coconut trees. I pay you $50 to buy some of your coconuts because I am tired of eating pineapples every day. You get tired of drinking coconut milk and want some pineapple juice so you take the $50 and buy some pineapples from me. We do the same thing every month. By the end of a year we will have created $1,200 of "gross domestic product" from that $100 monetary base which remains static.

From this example I hope you can see that GDP really is a function of both the money supply and the velocity of money in the economy. For an economy to grow it requires an increase in the velocity of money, an increase in the money supply, or both.

If you put it into a mathematical formula it would look like this.

GDP=Money Supply x Velocity

John Mauldin wrote a particularly good piece about "The Velocity of Money" back in 2008 that is worth the read if you are interested in learning more. Mauldin points out that there is no exact way to determine what the right size of the money supply should be in an economy. Ideally, the money supply should be allowed to grow each year by the growth in population, production and population to keep things in balance. We have delegated this responsibility to the Federal Reserve in the United States. If we get too much money supply we will have too much money chasing too few goods (coconuts or pineapples) and inflation is going to be the result. If the money supply is too constrained, deflation is the risk.

This is a chart of the velocity of money that Mauldin had in his article on velocity back in 2008 right before the financial meltdown that began in the second half of 2008. Note that the average amount of money velocity has been around 1.67. 1997 saw the high of 2.12 and lows of around 1.2 were seen in the Depression and right after World War II.

Here is the most recent chart of the Velocity of Money from the Federal Reserve Bank of St. Louis. As you can see, velocity has been dropping almost continuously since 2007 from almost 1.9 to its current level of close to 1.5. We are not yet at Depression levels but we are at levels of velocity that we have not seen in over 60 years.

                                 

      

Compare that chart with the chart of M2 money stock over the last five years.

And for the growth in M2 since 1960.

The lack of velocity of money in our economy is the reason that we are still stuck in the mud despite the fact that the Federal Reserve has been printing money out of thin air in unprecedented fashion. It is also the reason that we have not seen any significant inflation to this point. Chairman Bernanke said at one point that he would throw money out of helicopters if he had to. He has done almost everything but that so far to very little effect.

I wish I had an explanation for the steep drop in velocity. It almost seems as if the more that the Federal Reserve has tried to intervene with its Zero Interest Rate Policy (ZIRP) the more velocity has slowed. Of course, they obviously believe the opposite. They would argue that they need to pursue this course because of the drop in velocity.  If not, the economy might go into a full-fledged depression.

Two conclusions seem certain. First, we will not get a real economic recovery until velocity starts returning to something closer to long-term averages. Second, if velocity turns around, the Fed better be prepared to get some of the money out of system or we are going to see some serious inflation in our future.

Income Inequality and Individual Responsibility

There continues to be a lot of talk about income inequality in the United States and around the world. I have written about it before here and here. There is no disputing the fact that the rich have a higher share of the country's income and wealth than they did 30 years ago. For example, the share of income of the top 1% went from 8.3% of total income in 1981 to 16.9% in 2009.

In my view the largest drivers in this trend have been the impacts of technology and international competition. Technology has put a premium on education and those with the rights skills and education have been able to drive their incomes upwards. Technological advances and increased economic freedom have also affected income equality. People like Bill Gates and Steve Jobs created fantastic new products that increased both productivity and our quality of life. However, the information age spreads money around much differently than the manufacturing age we were in 30 years ago.

Manufacturing spreads income in a much broader swath in an economy. You need to pay a lot of workers to build an automobile. You only need a couple of computer programmers to develop a video game that might sell millions. For example, the Call of Duty: Modern Warfare 3 game that was released in 2011 grossed $1 billion in the first 16 days it was for sale.  Instagram's entire company had only 13 employees when it was sold to Facebook for $1 billion.

International competition has also put enormous downward pressure on the incomes of those with fewer skills and lower education levels as this labor pool is now competing with China, India, Brazil and other emerging economies.  

Therefore, in relative terms, the demand for unskilled labor has fallen while the demand for skilled and educated workers has increased.  These both have contributed to income inequality.

I came across this chart that was developed by the American Enterprise Institute that puts the income inequality issue into a little better context.  Looking at this chart you can see the tremendous impact that demographic factors have on income.  I might add that most demographic factors are choices.  You have no control over when you were born but choices are made on graduating from high school, going to college, marriage, children born out of wedlock and the like.  These choices are also not fixed over a lifetime and certainly are not fixed from generation to generation.  People have the opportunity in this country to change their situation.

Credit: AEI

The first thing you notice in looking at the chart is those that are in the highest fifth of U.S households have earned that status by working.  In fact, 2.03 is the mean numbers of earners in the top quintile.  There are a lot of two earner households in that top quintile. The lowest quintile only has .44 earners per household.

Only 2.9% of these well-off households have no earners.  These are not people clipping coupons, they are working and earning a living.  On the other hand, 61.7% of those in the lowest quintile had no one in the household with earnings.  No one is going to get rich on government programs.

78.2% of the high income households are married compared to only 16.7% of the poor.

It is no surprise that education stands out as a key demographic factor.  Only 1.8% of the highest earners failed to graduate from high school but 26.9% of the poor failed to get that basic educational attainment despite the fact that a free high school education is available to everyone in the country.  On the other hand, 62.3% of the richest Americans have graduated from college.

As you can see, in most of the selected characteristics there is a direct correlation that corresponds with moving up the income scale whether it is number of earners per household, marital status, work status or education.

In order to address the issue of income inequality in this country we need to spend more time on trying to pull people up from the bottom than by trying to penalize and push people down from the top.  After all, if you look at the data, it appears that most people at the top got there by just doing the right things. Getting a good education, working hard, getting married, avoiding out of wedlock births.

The Brookings Institution has studied this issue and it states that if you want to avoid poverty and join the middle class in the United States, you need to do three things.

1. Complete high school
2. Work full time
3. Marry before you have children

If you do all three, your chances of being poor fall from 12% to 2% and your chances of joining the middle class or above rise from 56% to 74%.

We hear a lot about income inequality and income redistribution from the President. How often do we hear him talk about these three things? It seems that we should be hearing about individual responsibility in equal measure to income inequality if we are to do anything about it.

Spring Forward, Fall Backward

Daylight Saving Time is upon on and I thought I would provide a little perspective on the subject. My first memory of DST is when I was about 5 years old.  We lived just outside of Akron, Ohio and my grandparents lived in Cleveland.  Cleveland was on DST but Akron was not so there was always a lot of discussion about what time is was whenever we planned a visit.  Even to a 5 year old that was very confusing.

This confusion reigned across the United States in the 1950's and 1960's because each locality could adopt, start and end DST as it wanted to.  In fact, on one bus route between West Virginia and Ohio, passengers had to change their watches seven times in 35 miles.  In Iowa, 23 different pairs of DST start and end dates were in effect in one year.

All of this chaos finally led Congress to pass a law in 1966 establishing set rules for observing DST nationally.  This law established DST as the national standard beginning on the last Sunday of April and ending on the last Sunday in October-exactly six months in duration.  However, it permitted any state to exempt itself from DST by passing a state law.  This was later amended to allow any state to make this distinction based on time zones in the state.  This resulted in Indiana (part Eastern and Central time) to split between standard and daylight time until the state finally went to DST uniformly in 2005. Right now Arizona and Hawaii are the only states that do not observe DST.

The main purpose of DST is to make better use of daylight.  DST allows for an hour of daylight to be moved from the morning to the evening.  Since people are generally more active and are doing more outdoors in the evening it has proven popular in many societies around the world.

Today I Found Out provides some of the background on how the idea for DST came about.

Ben Franklin often gets credit for being the “genius” who came up with daylight saving time.  Interestingly though, the letter he proposed something like what we now call daylight saving time and which was eventually published in 1784 under the title, An Economical Project, was actually a witty satire meant to entertain some of his friends, not to be taken seriously on any account. 

The modern day version of DST was first proposed by the New Zealand entomologist George Vernon Hudson in 1895.

The credit though for the modern day DST system is often incorrectly given to William Willett who independently thought up and lobbied for DST in 1905.  He was riding through London one day in the early morning and noticed that a good portion of London’s population slept through several hours of the sunlit summer days.  Willet lobbied for DST until his death in 1915.  Ironically, it was one year later in 1916 that certain European countries began adopting DST.

It has been argued that energy conservation is another benefit of DST since there is more energy consumed in homes with lighting, televisions, computers and appliances in the evening compared to the morning.  After all, if you are able to be outside enjoying the daylight you are not using power inside the home.  In fact, during the Arab Oil Embargo in the early 1970's, Congress moved up the effective date of DST to early March to conserve energy.

A recent study has called into question whether DST actually results in any energy savings today. The increased use of home air conditioning in the warmer evening hours compared to the cooler morning hours may be the reason.

Scientists from the University of California, Santa Barbara, compared energy usage over the course of three years in Indiana counties that switched from year-round Standard Time to DST. They found that Indianans actually spent $8.6 million more each year because of Daylight Saving Time, and increased emissions came with a social cost of between $1.6 million and $5.3 million per year. Commentators have theorized that the energy jump is due to the increased prevalence of home air conditioning over the past 40 years, in that more daylight toward the end of a summer’s day means that people are more likely to use their air conditioners when they come home from work.

Daylight Saving Time is not really necessary as you get closer to the equator as the days and nights are 12 hours each throughout the year.  It is only as you get further away from the equator that you get variations in the amount of daylight during the year.  In summer, daylight hours exceed darkness and the opposite is true in the winter with extremes being experienced the further you get from the equator.

You can see this graphically in this world map that shows which countries have adopted DST at some point compared to those that have never done so.  You can see that very few countries near the equator  are using DST currently.

Credit: TodayI FoundOut.com

By the way, the way I found in researching this post that it is "Saving Time" not "Savings  Time".  Daylight saving time uses the present participle "saving"as an adjective, as in "labor saving device".  I had been saying it wrong for all these years. You learn something new everyday.

I still am confused about one thing.  Since we now have adopted Daylight Saving Time beginning the second Sunday in March through the first Sunday in November each year, it is actually more standard than our Standard Time.  We are using it the majority of the year. Doesn't it than make sense to make Daylight Saving Time the standard and rename Standard Time to Daylight Lost Time?

Enjoy the extra hour of daylight and don't forget to take a nap to make up for the lost hour of sleep.

Credits for the DST facts in this blog post:

http://www.webexhibits.org/daylightsaving/g.html

http://www.todayifoundout.com/index.php/2010/03/its-daylight-saving-time-not-daylight-savings-time/