Showing posts with label Governmental Policies. Show all posts
Showing posts with label Governmental Policies. Show all posts

Thursday, December 7, 2017

Why people have such a low opinion of politicians

A recent Gallup poll (Nov. 2-8, 2017) put Congress’s approval rating at 13%, disapproval at 81%, and 6% with no opinion. The short answer why so many disapprove is that we believe the vast majority are unprincipled.

Principled politicians carry the same core beliefs whether they are in power or out of power.

House Republicans yesterday again demonstrated their that belief in state’s rights applies only when they’re not the ones telling the states how to act. If enacted, the law they passed and sent to the Senate would allow anyone with a legal concealed-carry right in their own state to take that right with them when they travel to states with more restrictive policies. For example. Arizonians, who do not need any permit for their concealed-carry, would be able to conceal their guns while traveling in Maryland, which has a very strict concealed-carry policy.

One might cynically think this vote is a payback to the National Rifle Association, which has been pushing this, for their contributions. That may be, but it also shows the Republican Congress believes it knows better than Maryland what their citizens really need. Funny, how when the Federal Government under Democratic control proclaimed transgender people should be able to use the bathroom of their choice—well, that was gross overreach and an issue that should be left to the states.

President Trump’s shrinking of two Utah national monuments illustrates a lack of principles by both parties. Many Republicans have maintained that states should have free rein to manage national lands “because they know best.” One can and should discuss whether lands acquired by treaty belong to the whole nation or should be deeded to the state in which they belong. Regardless of one’s personal position, Trump has consistently said national lands should be run by and for the states. By that measure, his trimming of the monuments is principled.

However, candidate Trump and Republicans in general decried President Obama’s executive orders and proclamations as unlawful, unconstitutional overreaches of presidential power. Yet once he became President Trump, and with Congressional Republicans cheering along, he has used these same strategies to pursue Republican objectives.

Democrats do not show principles, either. Many Democrats are now decrying President Trump’s “overreach.” Such decisions should be left to Congress they now say, ignoring their eight years of approving President Obama’s use of executive power to achieve his agenda.

Elections should, of course, have ramifications. Those who support the policies put in place during the Obama administration will not look favorably on Republican changes. They should have done a better job of electing their candidates. To decry the mechanism of power now that they don’t control the levers is not defensible.

However, Republicans have learned nothing from the mistakes Democrats made in unilaterally passing legislation with sweeping national consequences. Democrats pushed through Obamacare without soliciting expert opinion on all the consequences. The public did not like it then, in large part because Democrats never brought them into the process; Democrats overstated some and never clearly explained other benefits (remember “nobody will lose their insurance”?), and they never admitted to the costs.

The Republican tax bill process has done them one better on all these counts. Only 32% of people approve the plan, while 48% oppose it, and 20% don’t know enough to do either.

Republicans universally decried Democrats for pushing through “Obamacare” without bipartisan input—and have sunk even lower with their tax bill by rushing through a 500-page bill with repercussions that affect every individual in the US.

The process is deeply flawed. It has been said that people would be sickened to see how either sausage or legislation is made. Making last-minute changes and pulling all-nighters didn’t work well when we were in high school and college, so why does Congress think their constituents would applaud this approach to running the country? Politics, as Bismarck said, is the art of the possible and requires compromise.

Last January, Senators Grassley and Lee introduced an amendment to the constitution to require the Federal government to have a balanced budget. Without the new tax legislation, we are running budget deficits of a half-trillion dollars a year. Both senators voted for a tax cut that will increase Federal debt by over a trillion dollars. In the House, multiple balanced budget amendment bills have been introduced and co-sponsored by Republicans who voted for the tax cut.

Kudos to Senator Corker who did take a principled stand against increasing the deficit and voted against the bill.

No principles. No respect. No solving the enormous financial problems facing our country.

To quote Trump: “So sad.”

Monday, December 4, 2017

Republicans Lie to Themselves to Justify Tax Cuts

The only selling point Republicans have left to justify their tax law is their oft-stated belief that it will spur growth and EVERYONE will benefit. Unfortunately, the nonpartisan Congressional Budget Office (CBO) and the overwhelming majority of macro economists do not agree with their hype.

Republicans promised historic tax reform. Actual reform to simplify the tax code and eliminate loopholes would take time and considered compromises. The Republicans decided they didn’t have time and proved they didn’t care about real simplification. With a 500-page tax bill, I’ll bet the Internal Revenue Code and its regulations will be expanding, not contracting.

Despite the Republican Party platform calling for a balanced budget amendment, they have given up on trimming the annual budget deficit—unless one believes their assurances that the tax cuts will pay for themselves with increased growth. The CBO estimates the Senate version of the bill will increase the deficit by a trillion dollars over ten years. (That’s $1,000,000,000,000.)

Most economists agree the changes will result in some growth because the increased budget deficit provides a stimulus to our economy (which is already generating record corporate profits and nearly full employment). However, virtually all economists maintain the growth will be insufficient to pay the costs of the tax-cut stimulus. 

Three charts to illustrate why the Republicans are mistaken in believing their myths.

To predict the future, we should examine the past. We have reduced both the maximum individual tax rate and nominal corporate tax rates in the past. Did we experience increased growth in real gross domestic product (an inflation adjusted measure of the economy) after those changes? You be the judge. This is what has happened in my lifetime:


In 1950 the top income tax rate was 90% (gray line). The top corporate rate was 42%, which was increased to 52% by 1952 (orange line). The blue line shows annual changes in real GDP (multiplied by ten to show on the same scale). It varies a lot year by year, but during the 1950s averaged 4.06%.

Corporate rates in the 1960s stayed about the same. The maximum personal income tax rate declined from 91% to 70%. Average real GDP averaged 4.43%. Aha! Maximum income tax rates go down and average real GDP increases.

Except with that 70% rate maximum in place throughout the 1970s and a slight decline in the corporate rate, real GDP annual increase averaged only 3.55% that decade. Hmm.

In 1987, maximum tax rates for both individuals and corporations were significantly reduced. The average annual real GDP increase fell to 3.15% for the 1980s.

In 1993, the corporate tax rate reached its current 35% (a slight increase from 34%) and the individual rate maximum increased from 31% to 39.6%. And the average annual real GDP for the 1990s increased ever so slightly to 3.23%

The maximum individual rate dropped for many years to 35%, but the average annual growth in real GDP during the first decade of the 2000s declined to 1.83%, and for the last six years has only increased to 2.09%. This year real GDP looks to grow something over 3%.

If maximum corporate and personal income tax rates were the only or even main driver of real GDP growth, we should go back to the high tax rates of the 1950s!

They’re not of course, but here’s one major problem with trickle-down economics. Give a billionaire an extra $100 and nothing changes for him. Give someone earning $20,000 a year that same $100 and chances are good they will spend every single one of those greenbacks. That spending is what increases GDP.

Lower tax rates are one of the reasons for the increased portion of wealth owned by the richest among us. (A second reason is the increased percentage of every dollar earned going to those who are already wealthy.)



Consider these two graphs showing the portion of income going to the top 1% and the portion of wealth owned by the top 1%.
  
During the 1950s, 1960s, and 1970s when we had significantly higher corporate and personal income tax rates, and the percentage of before-tax income going to the top 1% declined, real GDP growth averaged 4.01%.






In the 1980s, 1990s, 2000s, and the 2010s, while the income to and wealth accumulated by the top 1% has increased substantially, the average real GDP growth has been only 2.61%.








The Republican tax proposals will increase, not decrease income and wealth disparity. If one’s primary objective were to increase real GDP growth, one would skew the benefits of tax law change away from the top income-earners and toward lower income-earners.

If one’s objective is to benefit high income and wealthy individuals, the Republican plan should work quite well.

Sunday, August 27, 2017

An Open Letter to All Members of Congress

It’s artificial crisis time again: you must decide whether to vote to raise the debt ceiling. Congress, according to the latest Gallup Poll[i], has a current approval rating of 16% and a disapproval rating of 79%. When nearly five times as many people think you are doing a bad job as think you are doing a good job, I suggest it is time to change how you operate—and the debt ceiling gives you a perfect opportunity to begin to change perceptions.

Very few, if any, of you 535 officeholders want the U.S. Government to default on its obligations—obligations which you and your predecessors have committed the American people to pay based on the cumulative effect of prior spending and revenue bills.

Therefore, as a group you will vote to raise the ceiling. Historically, one side or both have held the other “hostage” in a game of chicken to try to score a political gain they don’t think they can accomplish in the normal course of doing Congressional business.

I ask each of you to commit to supporting a clean debt limit increase. Do what is necessary so bond holders, government employees, government contractors, and individuals receiving any type of governmental benefit do not worry about being paid on time and in full.

Should you do this because one voting citizen writes an open letter to you? No, you should do it because it is not only in the best interest of the United States of America, it is in your collective best interest, Republican, Democrat or Independent.

Republicans: You have a great number of changes you want to make in how the U.S. functions. You want to reform taxes, increase infrastructure spending, modify healthcare and other social programs, and much more. If you all approve a clean debt ceiling increase, you can spend your time crafting laws to implement those changes. Yes, many of you are concerned about the continual steep increase in our national debt and want to attach provisions to the debt limit increase to slow or stop that rise. Hold that debate as part of the budgeting process where it belongs. Show that as the party that controls all three branches of government you can actually govern.

Democrats: You can demonstrate to voters that you are not the party of politics as usual: the minority party of “no.” Take the lead by making a 100% commitment to vote for a clean debt ceiling increase. Let the Republicans fight among themselves, if they choose, about what else should be attached to raising the debt ceiling. You have made it clear to the public that you are mature adults looking out for the best interests of the entire country. Introduce your bill to cleanly raise the debt ceiling on your first day back to work. Should the Republicans not support it, spend the time generating specific bills to improve the parts of Obamacare that must be fixed.

Independents: In theory, you are not mixed in the fractious party politics. Prove it. Commit to a clean debt ceiling rise.

Pledge your support of a clean debt limit increase, and let’s move on to debating the important issues that face our country.

Thank you,
James M. Jackson
Amasa, MI



[i] http://www.gallup.com/poll/1600/congress-public.aspx

Tuesday, April 25, 2017

The Jim Jackson Simplified Income Tax Plan



I posted the first version of my tax-simplification plan in February 2012. Five years later, I made a couple of tweaks, but the essence stays the same. It's clear, simple, and best of all would be completely transparent. I've emphasized that last aspect more in this updated 2017 version.

I challenge President Trump to match me in boldness and effectiveness in generating revenue to run the government and being transparent about how the Federal government spends our money.

Personal Income Taxes:

1. All income, regardless how earned is treated equally under the Jim Jackson plan. A dollar earned by wages, dividend, interest, capital gains or pass-through from some corporate-like entity are all taxed the same. Everyone should feel they have a stake in funding the public services provided through the Federal government.

2. Every person is taxed individually. If a couple owns a joint account, each is taxed on 50% of the income. If one spouse works and the other stays home to take care of the children, pets, sick relatives or lays on the beach, only the income earner is taxed.

3. How you spend your money, if legal, is no matter to Federal government or its income tax structure. There are no deductions for mortgage interest, medical expenses, casualty losses, contributions to charity. Nor are there credits or deductions for the individual or their dependent children or extra deductions for being older than someone else, or blind or anything. Taxable income equals gross income.

4. I propose graduated rates. Having four brackets seems fine to me, but if tax experts prefer three or five, I’m not going to argue. The first bracket should be 5%. To repeat, everyone who earns income should contribute to the Federal government. (And yes, I know some will need more support than their income is taxed. That’s fine; provide them the services they need or make a direct payment to cover the need. Do it directly, don’t try to cram it into an income TAX system.) The top rate should be 45%. I personally think it should be higher, but at 45% the income earner ends up with more than the government. Make the other two rates 15% and 30%.

5. I propose a five-year transition. In the first year, everyone can choose to pay either on the new tax plan or 20% new and 80% old. The next year, the same choice, but with 40% new and 60% old. After five years, we are totally under the new plan. Once a person chooses to pay entirely under the new tax plan, they can’t revert to the transition.

I know that my proposed transition will initially bring in fewer taxes than the plan without transition because everyone will choose the alternative that works best for them. Here's where I'll rely on the experts, since I do not know what income levels each tax should kick in since I don’t have the data, time nor requisite skills to determine the revenues from my proposal. Given the current budget deficits (and my proposal for corporate income taxes), we clearly need more income than we are getting. Here's what I would charge the experts to do: Set the income levels so that if there were no transition, the current level of Federal government expenditures would be fully paid for (after reflecting the minor income the government receives from fees, tariffs, etc.)

This solves the economic catastrophe if we were to immediately eliminate the current budget deficit. The difference between the projected post-transition income and actual income paid will be the budget deficit for the first year. The projected deficit shrinks over the five-year transition to zero.

Another reason for the transition is because a lot of smart people who earn their living off an overly complex tax system will need to retrain for productive work. My proposed transition provides a planned obsolescence of their skills. Just think how the economy can grow if these bright people apply their minds to productive activity.

6. Note that personal income tax rates will need to be higher than they would otherwise be to reflect the elimination of corporate income taxes (see below). I charge my experts when setting the income breakpoints for the brackets to make sure that this primarily effects those well off who receive substantial income from interest, dividends, partnership income, etc. Hence the need for a 45% rate.

Corporate Income Taxes

1. Eliminate all corporate income taxes. End of plan. No transition. No deductions for anything. [I challenge you, President Trump to be so bold and comprehensive!]

2. This plan eliminates all loopholes. That means, if Congress wants to “encourage” some business activity, they must cut checks to provide corporations incentives, not hide the largess within “tax breaks.” This provides clear transparency regarding government spending and will allow better and more effective analysis of the results gained for money spent.

3. Eliminating the corporate income tax means the US should become a tax-haven for corporations, bringing back some jobs from overseas. Let the other governments figure out how they want to respond. [Again, President Trump, will your plan provide as much of an incentive?]

4. It also means corporations will be making more money, which they will eventually have to pass through to shareholders in the way of dividends, which (see above) are fully taxed. It's unclear how much of a lag there will be between the increased cash flow and increased dividends. Much of the billions held overseas to avoid U.S. taxes will be repatriated and paid out to shareholders (or go to increased investment, which would also be a good thing). I do recognize that those who own U.S. equities will disproportionately gain value as stock markets would react positively to the elimination of corporate income taxes. However, individuals will need to use it or lose it (see estate taxes below) and therefore will convert significant portions of those gains from unrealized to realized (taxable) income.

5. Since corporations get no deductions for charitable, political or other contributions, they might wonder why they should make them—or at least shareholders should be asking that question since the money is coming directly from their future dividends.

6. Government lobbying will continue, but taxpayer scrutiny of political votes will be easier when the only way they can give money to corporations is through direct payments, not hidden as deductions and credits deep within the corporate income tax. It should also focus attention in political races to how each side proposed to spend money, which I believe would be healthy.

7. Personal income tax rates will need to be higher to reflect the elimination of corporate income taxes—which is fine in the long run but might cause some larger deficits in the short term. Unlike other budget deficits, this one is self-correcting since it is only a temporary imbalance until the increase in corporate net income is passed through to investors.

Estate Taxes

1. A hereditary oligarchy is an anathema to a broadly representative government. Therefore, if someone didn’t manage to spend or give away their money before death, the government shall help them do it through the estate tax.

2. This item more properly belongs under the income tax section, but it occurs after death and Republicans have labeled the estate tax a death tax anyway, so I’m including it here. What am I including? At death, the difference between market value and book value of all assets is income in the year of death. The individual could have sold the asset, realized the gains and paid taxes. They chose not to make the sale while they were living, but now they are dead and income taxes are owed.

It does not matter whether we are talking about shares in Apple or the family farm that has increased in value or a small private business. Income has been earned and it shall be taxed. Life insurance agents will be happy that they still have a role in estate planning for small businesses.

3. After paying any income taxes, estates over $1 million dollars (adjusted for inflation from the date the limit was first $1 million) are taxed at a 50% rate. The very rich will still be incredibly rich, but less so than with no estate tax.

4. Estate tax planners still have a modicum of work to do since planned giving/ gift taxes etc. will still exist. However, note that under the proposed plan, the Government gets its 50% off the top before any distributions to heirs, charities or created foundations.

Summary:

I estimate (based on nothing concrete) that the Jim Jackson tax plan eliminates 99+% of the current tax code and regulations. By eliminating all deductions, it allows each individual to decide for themselves without government incentive how to spend their income. It forces government to make explicit expenditures to corporations or individuals rather than hide them in the tax code, which will allow the public to better understand where we are spending our money and whether the government is effectively addressing the needs of the people.

Does the Jim Jackson tax plan need to be fleshed out? Of course, but I suspect I already included more than sufficient detail to attract plenty of attacks from the entrenched corporations and wealthy, not to mention the anti-corporation liberals.

~ Jim

Monday, March 27, 2017

Remembering Pearl Harbor

War is caused either by an imperialistic stance by an aggressor, a failure of nations to successfully negotiate their differences, or a combination of the two, which is how the United States ended up in World War Two.

When Japan invaded Manchuria (imperialism), the United States reacted by refusing to sell Japan oil. This was no small matter for Japan, who bought 80% of its oil from U.S. companies. When the terms the U.S. required to begin shipping oil to Japan were too high for the Japanese government to accept and still maintain face—a commodity more important to politicians than to the millions of regular people who suffer when nations resort to war—Japan attacked the U.S. at Pearl Harbor on a date that FDR decried would live in infamy.

In two hours, Japan sank most of our battleships, numerous other vessels, and killed 2,400 people. As battles go, the material losses were major (although temporary, as most of the battleships were raised to fight again). In comparison to other battles, the human loss was small. On a single day at the battle of Antietam (Sharpsburg, MD) nearly 23,000 soldiers died. The atomic bomb dropped at Hiroshima killed over 40,000 people that day and 50,000 -100,000 more in the next four months.

I know all those statistics, but what resonated most with me as I toured Pearl Harbor, part of the World War II Valor in the Pacific National Monument (including the USS Arizona memorial), is the virulent hate so many immediately felt toward those of Japanese heritage living in the United States. In Executive Order 9066, FDR set in motion what would become the mass internment of Americans with Japanese ancestry. In the mainland U.S., over 100,000 were interned. In Hawaii, with a population of over 150,000 individuals with Japanese ancestry, fewer than 2,000 were interned!

Did you know the disparity of treatment of between locations? I did not. This was racism, pure and simple.

Fear allows presidents to take actions that would otherwise be unconstitutional. FDR subjected citizens of Japanese ancestry to the loss of property, freedom, all citizen rights, simply because of fear that they might conspire against their country.

President Lincoln suspended habeas corpus soon after the start of the hostilities now referred to as the Civil War, the War Between the States, or the War of Northern Aggression. The Judiciary determined that the right to suspend habeas corpus resided in Congress, not the President. Lincoln ignored the court order.

Lincoln was wrong to ignore the courts. FDR was wrong to tar all those with Japanese heritage with a single brush. Yet, in surveys, Lincoln and Roosevelt are considered two of our greatest presidents. For example, in the Siena College Research Institute, Presidential Expert Poll of 2010, Lincoln was rated #3, FDR was #1[1].

During the McCarthy era, political persuasion (and sometimes only presumed political persuasion) was cause for citizens to lose their jobs, to be blacklisted by industries regardless of whether they had ever committed any act against the interests of the United States.

This is our past. We should not run away from it. We must remember it to avoid repeating it.

We feared Native Americans and tried to exterminate them, or at least confine them to reservations. We feared Southern sympathizers and allowed presidential power to trump the checks and balances of our three branches of government. We feared the Japanese and illegally interred 100,000 fellow Americans.

Our current president uses fear of race, religion, and national origin to pit U.S. citizen against U.S. citizen. In our society, I am lucky to be privileged: an Anglo-Saxon male with sufficient financial means that I don’t need to rely upon charity to live. From the perspective of those in power, I should be concerned about losing all that I value because of the growing influence of those who are “not our kind.”

They are correct that I am concerned about losing what I most value. However, we have very different concepts about what has greatest value.

If I do not stand with Muslims and Jews and Blacks and Mexicans, if I do not stand with the poor regardless of race or religion; if I don’t object when others’ rights are diminished in response to fear promulgated for political gain; if I allow anyone to trample the inherent worth and dignity of another, I have lost my own soul.

~ Jim

This blog first appeared on the Writers Who Kill Blog 3/26/17




[1] https://en.wikipedia.org/wiki/Historical_rankings_of_presidents_of_the_United_States#Siena_College_Research_Institute.2C_Presidential_Expert_Poll_of_2010

Monday, March 6, 2017

Put Up or Shut Up (An Open Letter to President Trump)

Dear President Trump:

You won the electoral college election and, having been duly sworn into office, are the president of the United States of America.

Act like it.

Presidents represent all the people of the United States. They give up their personal right to voice unproven beliefs to the public as though they are facts because their pronouncements now come from the head of the executive branch of government, not from a private citizen.

Illegal Voters

When you claim to have won the popular vote had illegal votes not been counted, you are saying that at least 2.8 million more illegal votes were cast for Hillary Clinton than were cast for you. This is massive voter fraud. It means more than one in every 24 votes cast for Clinton was illegal. If true, this is a crisis for democracy in the United States. It is much more serious to address this problem than to fix the tax code or repeal and replace Obamacare or even tackle the problem of an insecure border.

Well over a month after you made the claim, we have heard nothing more about the investigation you planned to order. Why is that, President Trump?

Illegal Wiretaps

This past week you tweeted, Terrible! Just found out that Obama had my "wires tapped" in Trump Tower just before the victory. Nothing found. This is McCarthyism! and How low has President Obama gone to tapp (sic) my phones during the very sacred election process. This is Nixon/Watergate. Bad (or sick) guy! If true, this is extremely serious.

Either President Obama has broken the law in a truly frightening way (he’s circumvented the process that requires Justice Department officials to obtain a judge’s permission before allowing them to execute a wiretap, or he’s circumvented the FISA court by not obtaining a legal order to surveil with respect to a foreign entity) or the Federal Government has acted legally (implying someone(s) in Trump Tower, or the Trump Organization, or the Trump Campaign acted in such a way as to justify a court ordering the surveillance).

You must have factual evidence to justify accusing a former president of usurping power from the courts and illegally obtaining information about a presidential candidate and his associates. With such a serious charge about the power of the presidency in a democratic country with supposed checks and balances, it is critical that the public understands exactly what has happened and how we can prevent any future president from committing similar nefarious actions.

The time, President Trump, has come for you to PUT UP OR SHUT UP.

Because you have stated that Administrative leaking is a security issue, and you have tweeted that nothing was found on the wiretaps, I must assume no secret material is involved. Please release the verifiable details of the wiretaps. How were they issued? Who carried them out? What was discovered?

And tell us who is performing the critical inquiry into your claim of voting fraud. What specifically is their charge? When is their report due to the American people?

Regarding any further statements you make:

Please provide the proof prior to or simultaneously with your presentation of the issue you choose to address. In the vernacular of the playground, PUT UP or SHUT UP.


~ Jim

Thursday, March 2, 2017

A Primer on Replacing Obamacare

“For every complex problem, there is a solution that is clear, simple, and wrong.” – HL Menken

“Nobody knew that health care could be so complicated.” – President Donald J. Trump

For the last six years, congressional Republicans have had a clear, simple, and wrong solution to fixing the Affordable Care Act (ACA or “Obamacare”). They voted umpteen times to repeal it and offered no measure to replace it.

The law, as many laws are, is a complex compromise between aspiration (mostly by Democrats) and legislative reality. It was not perfect at birth and, like a six-year-old car that has had no maintenance, is in worse shape today. Had Republicans spent the last six years fixing the problems in Obamacare, it would be in much better shape. But that is all past. We must look to the future.

With Trump’s election as president, Republicans suddenly became the dog that caught the Obamacare car. What do they do with the thing? In my Open Letter to President-elect Trump and the Members of the 115th Congress (on repealing Obamacare) I closed with these words:

If you do not have sufficient experience with the actuarial and underwriting principles that underpin the individual insurance marketplace, I urge you to work with the American Academy of Actuaries to understand how those principles relate to any proposed legislation before casting your vote.

Perhaps had President Trump reflected on my open letter he would not have been so surprised about the complexity of health care.

Fortunately, Congressional leaders recognized that the wrong approach of repealing without replacing a law that runs to 906 pages (and tens of thousands of pages of regulations) would lead to multiple disasters. With healthcare, even the minutia has minutia.

However, there are several broad truths about heath care that are important to keep in mind as we evaluate the Republican’s proposed replacement.

The total cost of medical insurance =
the total cost of medical benefits provided, plus
administrative costs, plus
profit

To reduce the cost of medical insurance requires reducing some or all of its three components.

Reducing corporate profits is not part of the Republican (or Democratic) agenda.

Everyone would like to reduce administrative costs, which everyone agrees are too high. There are very few incentives in place to reduce administrative costs. Obamacare forced certain insurers to rebate to their policyholders a portion of paid premiums if overhead, including profits, exceeded 20% (15% in the large-employer market) of premiums collected. I received a rebate related to my premiums for 2015 from my large-deductible medical care policy.

Moving to a one-payer system would probably reduce administrative costs. It has for other countries; but the U.S. has its unique issues, so I am not making promises. Shifting policies to give consumers a larger choice of insurance options will not materially affect administrative costs—and may increase marketing costs.

Which leaves us with reducing medical costs as the only practical method to reduce overall premiums.

Reducing the cost of medical benefits provided can be achieved by
(a) reducing costs charged to patients or their intermediaries (insurance companies or the government),
(b) shifting the costs from covered insurance to some other source of payment, or
(c) eliminating utilization of the benefit.

Reducing Costs Charged: Competition without collusion usually reduces costs. Republican proposals to allow insurance carriers to operate over state borders could offer additional competition and marginally reduce administrative costs. (Insurance companies often must keep separate corporate entities and books for each state in which they operate.) Changing laws to provide greater competition on drug prices would address that aspect of cost. Three steps Congress could take to reduce drug costs incurred are to allow Medicare to negotiate costs with drug companies, to outlaw the ability of a drug patentholder from paying another company to withhold a generic from the market, and to allow the public to import drugs from other countries when they are the same drug sold at a lower price.

Regulating provider prices (as Congress has tried with Medicare reimbursement rates) often leads to shortages of providers when doctors make the economic decision to stop accepting Medicare patients and concentrate instead on private insurance payments.

Shifting Costs from Covered Insurance: One of the most popular approaches to reducing medical insurance premiums is to shift costs from the policy elsewhere. The two major approaches are to increase the policy deductible and to cap expense reimbursements.

Before I became Medicare eligible, I purchased high-deductible insurance. I was healthy and gambled that my out-of-pocket medical costs would be less than the insurance costs of a low-deductible plan. However, if something major happened, I didn’t want to pay for that out-of-pocket. My insurance costs were significantly reduced – BUT at the cost of taking on considerable risk. (My gamble paid off for the fourteen years I had individual coverage.)

My behavior was affected, however. I thought twice before going to a doctor or agreeing to a test or procedure. This is a double-edged sword. Because I had monetary skin in the game, I was a more careful consumer. However, studies have shown that when people defer routine healthcare, the long-term costs of chronic diseases increases because the individual enters the health care system at a more advanced stage.

The two ways of limiting reimbursement is to impose a lifetime maximum or reimburse fixed amounts for a particular benefit (for example $200/day in the hospital). As costs increase and reimbursement does not, more of the total costs are shifted from the plan to the covered individual. (The same will happen to states if they receive block grants. Unless Congress continues to increase the block grants to match cost increases, the states must either pick up the tab or cut benefits to those covered.)

Eliminating Benefit Coverage: There are multiple ways to decrease benefits and reduce costs. Health care policies could exclude certain procedures now covered. They could decide to eliminate coverage for organ transplants, or abortions and birth control, or sex-change procedures, or wellness exams, or any drug that costs over $1,000 a year, or whatever was deemed legal. The United States could effectively ration health care by limiting the number of procedures performed each year. This is the approach Canada has taken to reduce costs: fewer procedures equals lower costs.

Reducing the number of covered individuals: Finally, the easiest way to reduce costs is to reduce the number of individuals covered. Increase Medicare’s eligibility age to seventy from sixty-five and you’ve eliminated five years of costs. Eliminate medical coverage for Medicaid-eligible individuals, and cut those costs.

Obamacare increased overall covered costs by including additional benefits in plans, decreasing the acceptable size of deductibles in order to avoid a tax-penalty (I had to pay a penalty the first year because my high-deductible plan did not qualify), and significantly expanding the number of individuals covered under medical insurance by allowing children to remain much longer under their parents’ policy and expanding Medicaid edibility for those states who accepted it.

Republicans currently claim their proposal will decrease medical costs. The question that we need to answer is how will they do it? What are the tradeoffs they are proposing? Whose ox is gored?

The truth about pre-existing conditions

I pay house insurance every year and I hope to lose money every year because I don’t want my house to burn down just so I can win. Even though I have “lost” money on my housing insurance every year, it’s reasonably fair. Actuaries and underwriters price my insurance based on my house’s size, structure, safety measures, type of wiring, how far it’s away from a fire hydrant and fire station, and so on. They can reflect all the pre-existing conditions of my house in determining the premium.

In the past, we have done the same thing with individual medical insurance. If you are a young, healthy male, don’t smoke, do drugs, or engage in risky avocations (motocross racing, for example), your medical insurance can be inexpensive. Your biggest risk is from accidental injury; you rarely get sick. And you don’t get pregnant, which is why individual insurance for women used to cost more than for men.

Until as a society we decided that wasn’t fair, and eliminated sex as a basis for determining premiums. Men now subsidize women in this regard.

Many group medical insurance plans charge the same premium regardless of age. Older folks have more medical issues than younger ones. The young subsidize their elders. This is also the case for Medicare. Young(er) beneficiaries generally cost less than their older compatriots, yet premium costs are the same.

Even where plans reflect age in their premiums, they may not reflect health status. All Medicare beneficiaries pay the same premiums (ignoring extra premiums paid based on income status). Healthy beneficiaries subsidize sicker ones.

When we turn to the individual insurance market, healthy people think premiums should be based on their age and health. Why should they pay to cover someone who is older, or overweight, or has diabetes? It’s a fair question and one that needs an answer.

Under Obamacare, the answer was essentially that the young and healthy had to join plans and pay more than their fair share as part of a societal good. The same extra costs that are buried in group plans now became embedded in individual plans. Younger individuals either joined and paid these extra costs through their premiums or chose not to join and paid the costs through a tax. Because Obamacare provided a financial mechanism for supporting the extra costs of those with pre-existing conditions, they could require insurance companies to provide coverage for those sicker people. It was up to insurance companies to enroll enough of the younger, healthy individuals to break even on the deal.

What happens under such a system? The sick sign up in a New York minute: it’s a great deal for them. It’s up to insurance companies to enroll enough healthy folks to pay the tab for the sick ones. Insurance companies set rates based on an assumption of how many sick and healthy people they could attract. Where they were unable to enroll as many younger healthy individuals as they planned, they lost money. To make up for those losses, they raised premium rates. In those areas of the country where states supported the new marketplaces, lots of younger people joined the plans. Competition remains and premiums increases are moderate. Where states did not support the new marketplace, enrollment was well below expectations, resulting in subsequent huge rate increases and carriers dropping out of the market.

The death spiral of individual plans

Those of us involved in employer group medical insurance saw this death spiral when employers first introduced optional higher-deductible plans in an attempt to lower their insurance costs. Back in the 1970s and early 1980’s, most plans had no or very small ($100 individual/$300 family) deductibles. Increasing the deductible to $250 or $500 produced significant savings relative to the costs at the time. Employees chose the plan that made the most economic sense to them. Healthy individuals and families rushed to the higher-deductible plans. Older and sicker individuals stayed with the old no-deductible plans.

At the same time, companies first introduced Flexible Spending Accounts, seeding them with money for those employees choosing the higher-deductible plans and allowing employees to set aside tax-free money to pay for the costs they would now need to pay out-of-pocket.

Note what employers did: they lowered plan costs and provided “tax credits” to help pay for the plans. The very same elements Republicans currently promote (although we do not yet know the details). How did that work?

The next year, the costs of the no-deductible plan increased significantly. It included sicker folks after all, and in the second year, those on the margin dropped their expensive coverage and selected the higher-deductible plan. Those folks in the high-cost plan were on average even sicker. In a short time, the high cost plan had astronomical premiums and the companies dropped those plans altogether.

Deductibles for everyone have continued to increase, as have premiums, but at least under the group plan concept, those with pre-existing conditions can still receive coverage, and that coverage is subsidized by their fellow employees.

Take the same scenario to the individual market and no such protection will exist for those with pre-existing conditions. With multiple insurance plans to choose from, the healthy will make economic decisions that will cause people with pre-existing conditions to experience that same cost death spiral. Sure, they won’t be denied insurance, but they won’t be able to afford it.

Squeeze the Balloon

Visualize medical costs as a balloon. Each new drug, each new treatment, each new test, each new procedure, each administrative change either blows more air into the balloon or lets a little out. Total U.S. medical expenses only decrease if we find ways to let air out of the balloon. Squeezing the balloon simply shifts who pays for it and makes the one doing the squeezing “good” by pushing costs away from their sector of the balloon.

Propositions such as changing Medicare from a single-payer system to a system in which all covered members receive a credit grant to allow them to shop for their own insurance does not affect the size of the balloon. It will affect who pays the costs, and, depending on its implementation, may create its own death spiral similar to the corporate experience of the 1970s and 1980s. Block grants shift responsibility and burdens from the Federal government and introduce additional inequities between states.

Conclusion

Above all, ignore the pretty words (and titles) politicians use to describe their laws.

When evaluating health care proposals, consider the specifics: how costs are being reduced, who will subsidize whom and by how much, and what incentives will counteract the inherent inequities in paying for medical plan costs.


~ Jim

Tuesday, December 13, 2016

An Open Letter to President-Elect Trump and the Members of the 115th Congress (on repealing Obamacare)

An Open Letter to President-Elect Trump and the Members of the 115th Congress

RE: Repealing “Obamacare”

Beginning January 20, 2017 with the inauguration of President Trump, a vote to repeal Obamacare moves from political posturing to potential reality as the assured veto of prior bills by President Obama is no longer available. I urge members of the 115th Congress and President-Elect Trump to consider the real and varied consequences of any changes to the current programs.

Public reports indicate Congressional leaders are considering a sweeping repeal of Obamacare with implementation delayed until a replacement plan is developed. The uncertainty caused by such an approach will result in unintended negative consequences for the individual healthcare market.

Certain aspects of the current law function only because private insurers expect robust risk pools. The Health Practice Council of the American Academy of Actuaries recently sent a letter to House Speaker Ryan and Minority Leader Pelosi, expressing their concerns regarding a deterioration in individual health insurance markets if certain provisions of the Affordable Care Act are repealed without immediate replacement. You may find a copy of the letter at http://actuary.org/files/publications/HPC_letter_ACA_CSR_120716.pdf

I urge you to thoroughly understand the risks outlined in the letter before voting on any repeal measures. Unintended consequences can include significant premium increases by insurance carriers to offset increased uncertainty and reflect adverse selection in which younger and healthier individuals drop coverage. The adverse selection will quickly lead to spiraling premiums and contraction of markets as only high-risk individuals remain in plans and more insurance companies drop coverage. The number of uninsured would rise from current levels, leading to less preventative care and higher use of emergency services with their attendant costs.

I also caution you not to retain certain popular provisions of Obamacare without understanding the incentives necessary to make them work. For example, retaining pre-existing conditions protection without exorbitant costs requires either a very large enrollment base over which to the spread costs of that benefit or direct subsidies. Keeping the provision without providing appropriate incentives to provide one or both mechanisms will rapidly lead to a collapse in the individual healthcare market.

If you do not have sufficient experience with the actuarial and underwriting principles that underpin the individual insurance marketplace, I urge you to work with the American Academy of Actuaries to understand how those principles relate to any proposed legislation before casting your vote.

Sincerely,

James M. Jackson
Retired Actuary

Wednesday, December 9, 2015

Donald Trump’s War on Muslims

Taken from DonaldJTrump.com
First they came for the Socialists, and I did not speak out—
Because I was not a Socialist.

Then they came for the Trade Unionists, and I did not speak out—
Because I was not a Trade Unionist.

Then they came for the Jews, and I did not speak out—
Because I was not a Jew.

Then they came for me—and there was no one left to speak for me.

~ Pastor Martin Niemöller

Donald Trump is not the United States of America’s version of Adolf Hitler. However, Hitler and his propaganda minister, Joseph Goebbels, would certainly understand and appreciate Trump’s tactics of gaining political support by picking on a minority religious group and telling big lies enough times they begin to sound like truth to many. Trump’s invective against the Muslims reached a new moral low when he called for “a total and complete shutdown of Muslims entering the United States until our country's representatives can figure out what the hell is going on.”

This pronouncement comes fast on the heels of Trump’s statement that the U.S. should “strongly consider” shutting down certain mosques in the United States (likely unconstitutional).

Trump indicated he is open to the idea of a Muslim registry because “we’re going to have to do things we never did before.” Is it much of a step from a Muslim registry to forcing Muslims to prominently display a star and crescent moon on their persons to make the rest of us aware we might not be safe in their presence?

I know; you’re thinking we would never do something like that, right? The German people never anticipated Hitler’s final solution, did they?

Your rights of free speech? Not so much if that free speech happens to infringe on The Donald’s sensibilities. When a Black Lives Matter advocate tried to interrupt one of his rallies and was reportedly pushed to the ground and kicked, his response was, “Maybe he should have been roughed up, because it was absolutely disgusting what he was doing.”

We in the United States have a history or forgetting our ideals, not to mention our laws, in times of perceived national security crisis. Abraham Lincoln suspended the right of habeas corpus and ignored a Supreme Court’s ruling that his act was illegal; Roosevelt illegally interred Japanese citizens; Bush authorized torture, and Obama continued Bush’s practice of allowing illegal information gathering on U.S citizens.

Trump admits that he is willing to break international law by reinstituting President Bush’s authorization of waterboarding. He’s willing to ignore the constitution if it does not suit his purposes. He is Machiavellian with his ends-justify-the-means positions. When he has no arguments to refute his detractors he relies on ad hominem attacks against the person rather than disputing their ideas.

Trump exhibits the characteristics of a playground bully. Like any bully, the earlier we stand up to him and call out his lies, the better it will be for everyone, including Trump.


~ Jim

Tuesday, June 24, 2014

The Effect of Canada’s New Anti-Bitcoin Law

While traveling in Canada, I came across an article about bitcoins. It turns out while the U.S. has held hearings about bitcoins and other virtual currencies, Canada has recently (June 19, 2014) actually signed legislation. To be fair, the law affects all virtual currencies without mentioning bitcoins by name, but be sure they are the main reason the bill was passed.

Prior bitcoin posts

For those not familiar with bitcoins, I have two previous blogs. This one dealt with my skeptical view of bitcoins as a possible investment. The second one followed up with breaking news about a bitcoin depository going bankrupt, costing its customers a bundle.

Regulation as a bitcoin risk

I had not specifically mentioned it earlier, but regulation by various countries may be a significant risk to whether bitcoins or any other virtual currency becomes generally accepted as a payment mechanism.
The price of bitcoins over the long term will be negatively impacted to the extent they are not readily available in minimum-friction transactions and positively affected if they are usable with minimal transaction costs.

One purported advantage of bitcoins is that their value is determined by supply and demand, so they do not rely on any government to determine their value. That is not the same as saying governments are not able to affect its value, as I discuss below.

Canadian Law

In Canada, the main legislation dealing with money laundering is the Proceeds of Crime Money Laundering and Terrorist Financing Act (PCMLTF). The newly passed legislation brings bitcoin use under the jurisdiction of that Act. This means (and remember my usual caveats, I am not a lawyer and in no way should anything herein be considered legal advice):
1. Businesses utilizing bitcoins in Canada must now register under PCMLTF.
2. Businesses registered under PCMLTF must maintain extensive transaction records to prevent money laundering.
3. Canadian financial institutions are prohibited from establishing and maintaining bank accounts for customers involved with bitcoin businesses that are not registered under FINTRAC.
4. Foreign businesses that operate in Canada (including online) must comply with the Act.

Impact on Bitcoin Use

Although not sufficiently knowledgeable to perform a detailed analysis of the Canadian Act, I can foresee two major impacts on bitcoin use in Canada.

1. Once the Act is implemented, the costs of doing business using bitcoins in Canada will increase significantly. A business will need to register under PCMLTF and that will probably require consultating with expensive experts. Unless someone develops a boilerplate solution this will significantly increase transaction costs.

2. The Act eliminates one of bitcoins purported advantages: the ability to hide from the government transactions affecting Canadian entities (and to a lesser extent individuals).

Risk of More Countries Adding Similar Regulation

Because of the money laundering possibilities of bitcoin, I doubt Canada will be the last country to regulate their use by introducing expensive registration and reporting requirements. If (and when) more countries follow course, bitcoins will either (a) disappear, (b) become used primarily within countries with loose banking regulations (where gray money already collects), or (c) be driven underground and become controlled by criminal elements for whom the downside of breaking laws is less than the upside of hiding transactions.

One mitigating possibility is for countries to adopt uniform regulation, thereby diminishing the costs of worldwide compliance. Not likely in the near term.

Recent bitcoin prices

Since the Canadian bill’s signing, the price of bitcoins has dropped from $599 the day before passage to $585 on June 23. This follows soon after a nearly 11% drop earlier in the month after the U.S. announced it would sell 30,000 bitcoins seized from Silk Road.

Of course, if you had bought your bitcoins in January 2013 at $13.36, you would still have a tidy profit. If you had bought at the all-time high of $1,124.76 on November 29th of that year, you would have lost almost half your investment.

I’ve done neither and will continue to watch bitcoins from the sidelines, although there is a part of me that really would like to sell them short.


~ Jim

Thursday, September 12, 2013

Who Deserves a Quality Life?

The fifteen dollar minimum wage: over the last month pundits on every side of the economic icosahedron have put forth their arguments, couched in terms of effects on job creation, inflationary pressures, global competition and the like. It’s either great, terrible, probably okay or not.

I’m a number geek so the numbers side of things is interesting to me, BUT all the economic back-and-forths miss the real question: Who deserves a quality life? Keep that in mind as we look at the general pros and cons of a minimum wage.

Most economists agree that establishing a minimum wage decreases the number of jobs that economy produces. Well, no kidding. If we had no minimum wage and paid less than any other country in the world, we could have all the jobs we wanted—assuming people would take them.

So let’s get real. We have a minimum wage now and we’re not going to abolish it. The only real argument is about the level of the minimum wage. Minor changes to the minimum wage have not had the deleterious effect to jobs that opponents have suggested. That means a bit of an increase can be had with little economic dislocation. As evidenced by the current lack of jobs, decreasing the minimum wage by letting inflation wear away its real economic value hasn’t produced a plethora of new jobs either.

A little change is not what is needed. Measured against inflation, the minimum wage is considerably less than it was when I graduated from high school in 1968. 

Chart taken from CNN.com


To get back to the same real value as the 1968 minimum wage would require us to increase today’s $7.25 by almost 50%.

But that’s not enough. Why should I, and why should you, be willing to pay someone so little they cannot live decently?

Assuming you have a job that pays decent wages, imagine with me what it must be like to try to live on $15,000 a year. With rounding, that’s the result of working forty hours a week, fifty-two weeks a year at the minimum wage. Also imagine you have one child to support. You have no benefits, other that perhaps a 401(k) plan you can’t possibly afford to contribute to in order to earn the company match and the opportunity to purchase a family medical plan, for maybe a third of your income—not likely.

In the U.S. this level of income for a family of two is just below the published poverty line. It is well below the impoverished line. Some unions are calling for a $15 minimum living wage. At that level, a full-time job will earn $31,200. That’s not exactly rolling in money, but it is closer to the amount needed to take care of basic necessities including healthcare.

Others have gone to great lengths to try to figure what a living wage means. I’ll rely on the results posted on http://livingwage.mit.edu/ . Half the year I live in Chatham County, Georgia (Savannah area). According to this calculator, the living wage for an adult and child, the adult working a 40-hour week, is $18.30. That is 22% above the level demanded by the $15 minimum wage proponents. Imagine how far away from a living wage $15 would be for this hypothetical family of two in New York City or San Francisco.

Okay, I know some of you are mentally griping about my single parent family. Let’s look at a family of two parents, both of whom work at minimum wage, and two children. As reported by the folks at MIT the poverty level wage is $10.60, and the living wage is $18.82—higher than for a single parent with one child.

Okay, I convinced you and everyone else and, we’ve increased our minimum wage to a living wage. What are the consequences of that action?

Overnight millions of families will be more economically secure. The money we pay these workers will be recycled back into the economy because although these workers are now being paid up to twice as much as they used to earn, they will not be saving much of this money. It will be used to purchase living necessities. The psychological health of affected families will certainly improve. Government programs to support the working poor will be less needed.

Bad news will arrive as well. All economists agree that with such a dramatic increase in wage rates, we will surely lose jobs—and many proclaim that is the reason for not making such a change.

Heck, we lost a lot of jobs when we abolished slavery too. We abolished slavery because it was the right thing to do. Counting jobs lost is a mathematical argument. Economists disagree on how many fewer. There will be increased costs for things that currently utilize “cheap” labor. Food crops will cost more to harvest. Fast food will be more expensive. The list is long.

By not paying people fair, living wages we hide the true cost of the items and services their labor produces. The extra costs show up elsewhere: in the Earned Income Credit, in emergency room costs when people without insurance get routine care, in higher medical expenses because people cannot afford relatively inexpensive preventative care, and as a society we collectively pay for expensive restorative care.

We cannot use the fear of higher unemployment to argue against treating people fairly. A significant portion of our long-term unemployment problem (as opposed to that caused by the most recent recession) is caused by the very poverty a living wage would diminish.

Despite the fact that paying living wages will not solve all our economic problems, it is morally the right thing to do.


~ Jim

Friday, August 30, 2013

A Discussion About Obamacare


During a recent bridge tournament I enjoyed dinner with several of my teammates and friends. I have no idea exactly how it happened, but the talk turned to Obamacare. The initial statement tossed out to the table was something to the effect that “Obamacare will bankrupt the country.” Since at least two of the seven sharing dinner did not agree at all with that statement (including yours truly) the result could have been (1) a heated argument between opposing sides, (2) those who did not agree chose to remain silent, or (3) an interesting discussion where both sides might learn from the other.

I stepped into the breach and asked why the person thought that was true. His answer included the current deficits and health care costs that continue to increase uncontrollably. I agreed those issues were major problems, but suggested they were attributable much more to Medicare and Medicaid than to the Affordable Care Act, aka Obamacare.
I suspect it was in part the fact that I agreed there was a problem that allowed us to explore the sources of the problem and solutions that might work. It also allowed those who were small business owners to educate the rest of us on how they will have to respond to the law.

The first charge against Obamacare was that more people would be insured and therefore the costs would increase. I used my own situation as an example to suggest why that wasn’t quite accurate. I carry a high-deductible policy, which, unless I become very ill, will never pay me a cent. The benefit I reap even if no medical catastrophe arises is that the insurance company negotiates the cost of my medical care. I am not stuck paying the full “sticker” price for the services I use.

There are three major systemic problems with the roughly 1 in 7 Americans who are uninsured. First, partly because they have no insurance, they skimp on preventative care. They roll the dice and hope they don’t come up snake-eyes. Second, if they do get a bad roll of the dice, they tend to utilize the most expensive medical care option, the emergency room, because they will not be turned away. Lastly, because they are uninsured, they are charged “full-rates.” That is, they do not have an insurance company between them and the provider to negotiate fees.

Obamacare addresses two of the three problems. People currently uninsured will be able to obtain insurance that provides preventative care, and the insurance companies will negotiate on behalf of their policyholders. These are serious problems. Over 60% of personal bankruptcies are caused by medical issues (that includes medical costs and loss of work). Unfortunately, because universal coverage is not provided under the Affordable Care Act, not all uninsured will choose coverage. However, even if only half become covered, it will make a significant improvement.

The Affordable Care Act does not solve the problem of insufficient providers. Over the short term, it probably exacerbates the situation. Newly insured, just like people who become eligible for Medicare, have accumulated health issues that they want to immediately take care of. The provider shortage, I said, was largely caused by state licensing requirements issued by boards run by doctors. They act as a semi-closed society to keep out lots of qualified foreign-trained doctors, in order to keep fees high. Doctors are not unique; every profession does this, including my own: actuaries had a series of difficult exams, and I didn’t ever use most of the information covered by the exams, but it was a barrier to entry.

Someone objected that Obamacare would ration healthcare similar to the problems in Canada that cause Canadians to come to the U.S. for treatments. I said that if we were to control healthcare costs we would need to ration it. In my opinion we spend too much on extension of life without quality and too little on preventative care. Until we as a country have a serious discussion about those issues we wouldn’t get to the root of the problem. We could argue about how to make those decisions, but no one would disagree that we need to make them IF we choose to rein in costs.

One of the small-business owners said he had to change his staffing levels because of the costs of Obamacare. To stay competitive, he eliminated several permanent part-time positions and created a small number of full-time positions.

I acknowledged any major change would cause dislocations. Large corporations had already gone through their own staffing changes to reduce costs. Regardless of whether those changes were accomplished in order to maintain competitiveness (the corporate view) or to increase profitability (labor’s perspective), for the last twenty years corporations have moved people from benefit-qualifying positions to those without benefits. The most aggressive were now making many of their workers on-call, and expected them to be available regardless of how many hours they actually got to work.

The great thing about this conversation was it was a conversation. All of us sitting around the table are affected by and concerned about healthcare, but none of us were experts. (I had the most comprehensive background in healthcare costs and financing from my years of creating and determining costs of health care plans; the small-business owners knew what they were doing to accommodate changes.) At the end of the discussion we had all learned something we didn’t know before, and we did it through civil discussion.

If seven people from various economic and cultural backgrounds can accomplish that much over dinner, why can’t Congress?

~ Jim

Monday, January 7, 2013

Eliminating the Debt Ceiling


There are many problems caused by the so-called U.S. “Debt Ceiling” negotiations, but I’ve decided one solution is to change the incorrect framing of the issues. Just as anti-abortion advocates recast the conversation after Rowe vs. Wade by calling themselves “Right-to-Life” advocates, we need to reframe this conversation about the issue of our Federal debt.

Debt Ceiling is a misnomer. The only ceiling to the debt is whatever mathematical limit Congress implicitly authorizes with its tax and spending policies. If they authorize less in taxes than they do in spending, the amount of outstanding debt will increase.

Since Congress has shown an ability to avoid cliffs—or at least defer them—I suggest the Debt Ceiling should be renamed the “Default Cliff.”

The most recent incantation of the Default Cliff came about in 1995 when Republicans changed a House rule that automatically increased the Treasury’s authorization to borrow whatever was necessary to implement Congressional spending and tax laws. Republicans wanted leverage over then President Clinton and forced (and got blamed for) a couple of government shutdowns as a result. The Republicans are at it again, although in fairness, when the Democrats regained control of the House, they did not manage to change the rule back to the common sense approach Democrat Rep. Dick Gephardt had implemented back in the late 1970s.

If Congress, in another show of politics over reality, does not vote to have the U.S. government pay the bills THEY racked up with THEIR previous spending authorizations and tax cuts, THEY will cause the U.S. Government to default on its obligations. On a cash-flow basis, falling off the Default Cliff immediately requires a balanced Federal budget. Such a default will not cause a miraculous cessation to the increasing debt because that is determined on an accrual basis. Cumulative debt will continue to increase because the government will owe someone money for unkept promises—those debts continue to accrue.

Assuming Congress drives us over the Default Cliff, the big question is whose oxen (for surely it will be more than one ox) get gored. If we default on the interest or repayment of principal on U.S. government bonds (an actual default), a world-wide financial crisis would shortly ensue since U.S. obligations are the foundation for much of worldwide commerce. To avoid that, the Obama administration would likely continue to pay those obligations. However, it could choose to cut back the Social Security benefit my mother receives or pay part or none of the bill a defense contractor sends for supplying food to our soldiers in Afghanistan or defer paying the Medicare invoice from a doctor or hospital. As it did in the 1990s, the government could immediately shut down most “nonessential” departments, laying off millions of people.

This is the world those who want to immediately balance the budget by spending cuts will bring us. Kept in place for longer than a few days and regardless of the choices, GDP would fairly quickly drop about 10% (more than twice as bad as the recent “Great Recession”). Then the ripple effects kick in.

Government contractors would soon terminate employees, as would suppliers to those contractors, not to mention the barbers who no longer had people coming to them because they couldn’t afford haircuts and so on and so forth.

We would shortly have a depression with no safety nets in place. The depression would spiral downward, unchecked by the ability of government to stimulate the economy because it could not borrow more. Eventually, the economy would bottom out at a much reduced level.

But we won’t do that because the House Republicans are not that stupid. Are they?

It’s time to find out. We citizens of these United States need mature conversations AND decisions on what we expect our governments to do and how we will pay for those services. Holding the Default Cliff over the economy’s head does not inform the conversation. House Republicans should show leadership by reinstating Rep. Gephardt’s House rule to automatically extend the Treasury’s ability to borrow as needed to implement enacted legislation.

~ Jim