Monthly Archives: February 2012

Off budget

This is rather scary. Using figures directly from the IRS we see than in 2008 (the latest year for which there are figures and which represents most accurately pre-recession income since the recession did not start until the very end of the year) the total personal income was $8.3 trillion. Further we see that the income for all corporations in 2008 was $0.9 trillion for a total of $9.2 trillion. Due to the down economy it would not be expected to be significantly greater than that value by 2013. Obama’s proposed 2013 budget is $3.8 trillion.

In other words the President believes it is entirely justified that the federal government alone consume $41 out of every $100 earned.

In other words the President believes it is entirely justified that the federal government alone consume $41 out of every $100 earned. When you add in state and local taxes then all government spending consumes at least half of all income from the entire economy. Half. And we aren’t even paying for all of it right now. The 2013 budget has a deficit equal to 100% of all corporate income ($0.9 trillion). Obviously corporations can’t be taxed at 100% so clearly the bulk of the eventual tax increases will be from the $8.3 trillion in personal income rather than from a paltry $0.9 trillion in corporate income. Since we can assume that Obama will continue the current tax policy whereby 50% of all Americans pay no income tax that means the income taxes on everyone else (people and corporations alike) would necessarily have to double to close the gap. Double. Have any other expenses in your life doubled in the last year? Didn’t think so. And for those that believe everything government does is so essential we (or rather “they”) must simply be willing to fork over one out of every two dollars that we earn then consider this: From the founding of this country until the passage of the 16th Amendment in 1913 the government got by just fine with no income tax and consuming only 3% of GDP  as tax revenue from other sources. For 125 years somehow this country did not succumb to anarchy, chaos or mass starvation while operating on a mere 3% of GDP. Today 3% of GDP would be a budget of only $0.4 trillion (1/10th the current budget). That budget is entirely “doable” today if government was only concerned with its core focus of defense and judiciary. If 90% of that $0.4 trillion were devoted to national defense it would equal the defense budget we had in 2000. I don’t recall any outcries of America being woefully militarily vulnerable in 2000.

In closing I’d like to share a simple yet hard hitting illustration of this countries’ current budget problems. This has been going around the Internet recently and is really an excellent way to relate to the enormous sums of money discussed (numbers modified to reflect 2012 values).

US Budget 2012 (http://goo.gl/Ad9CD)

• United States Tax Revenue:              $2,468,599,000,000

• Federal Budget:                                $3,795,547,000,000

• New Debt:                                        $1,326,948,000,000

• National Debt:                                $15,400,000,000,000

• Recent budget cut:                               $38,500,000,000

Remove 8 zeros and pretend it’s a household budget.

• Annual family income:                                         $24,686

• Money the family spent:                                      $37,955

• New debt on credit card:                                      $13,269

• Outstanding debt on credit card:                         $154,000

• Total budget cuts:                                                   $385

There are only two candidates proposing any kind of serious budget cuts to solve this nightmare. Ron Paul, Republican and Gary Johnson, Libertarian ($1 trillion and $1.3 trillion respectively in 1 year, not 10 years). We finally have a real opportunity to fix this. Let’s not blow it.

Playing the odds…

Is insurance gambling? It feels like we have “won” if we suffer a loss and it is covered. In point of fact, insurance is not gambling. In gambling you start in a position of low probability of a loss (money safe and secure in your wallet) but move to a high probability of loss (once you lay your money down the odds are very good you will lose it). You move from a “more-sure” to a “less-sure” state. With insurance, however, you move from a “less-sure” to a “more-sure” state. Without insurance you have a non-zero chance of a bad event occurring (less-sure state) that will result in a loss, but with insurance you have reduced that non-zero chance of a loss to zero – so you have moved from a less-sure position to a more-sure position.

Health insurance in its current form (laden down by numerous government mandates) is not insurance anymore but rather is simply prepaid consumption.

Likewise the insurance carrier is not gambling because they actuarially know for a given number of insured that they will experience losses of $x/year, so they simply set rates high enough to ensure all claims can be paid and they can still make money and thus build up a reserve for those years where the predictions are off. Insurance costs scale directly with the likelihood and magnitude of a covered loss. That’s why a several million dollar liability policy can be had for only a few hundred dollars per year but a health insurance policy costs several hundred dollars per month and pays only a fraction of what the liability policy would pay. Health insurance in its current form (laden down by numerous government mandates) is not insurance anymore but rather is simply prepaid consumption.

For an event to be insurable it must be statistically unlikely (e.g. theft, fire, being sued, etc). Health insurance covers events that are statistically guaranteed (routine exams, drugs, contraception, pregnancy, etc). Why are routine events 100% covered? Government mandates. For example, as we have all learned recently, Obamacare requires 100% contraception coverage. <sarcasm> Apparently women who desire contraception are unreasonably barred from obtaining this essential human right due to a burdensome $30/month cost barrier </sarcasm> and so it is mandated that all of society must subsidize this cost. This and many other mandates drive up cost. A catastrophic health policy would be relatively inexpensive. For example last year I investigated the cost of a non-group health plan for my family and discovered that simply removing pregnancy coverage cut the cost of the policy in half! But a group plan cannot remove this coverage and thus most pay for a coverage they can never use. As an employer I’m not even allowed to offer more than three health plans. Why? Government mandates.

Individualized prepaid consumption (saving) is an effective method to address intermittent but regular events. However aggregated and shared prepaid consumption is a terrible method. It has the effect of actually raising costs. In order to understand this, just imagine that we had “food insurance”. The premium would be equal to the total of all money spent on food in a given time frame divided by the population. For some the premium would be more than they would have spent on their own. In those cases there would be an increase in consumption (so as not to get short changed). That increase in consumption increases demand, and hence prices. Additionally, the “food insured” won’t be directly paying for any of their food thus they’ll have no inclination to restrict their intake (why buy ground beef when you can get grade A sirloin). This overall increase in demand will drive up prices. Insurable events can’t be “over consumed” because they rarely occur. Prepaid events can be over consumed because they occur regularly and thus there is ample opportunity. Just imagine what would happen to auto insurance costs if the government mandated that it had to cover the cost of oil changes, brake pads, and other routine maintenance.

Who will speak for me?

All too often violations of liberty by our government upon its citizens occur silently, sheltered from the bright lights of the Fourth Estate as it were, because the victims are singular. Abner Schoenwetter was sentenced to 8 years in federal prison for violation of the Lacey Act because he imported seafood from Honduras in plastic bags rather than cardboard boxes. Civil asset forfeiture incidences are on the rise, such as the case of the Motel Caswell in Massachusetts wherein the local police are attempting to seize an entire hotel from its owner under federal law (the police get to keep 80% of the value of seized property under federal law but only 50% under state law) because over the last 20 years 0.05% of guests had been arrested for drug offenses. These repugnant violations of civil rights occur every day as a consequence of the over bearing government that now exists in this country. The president can laugh all he wants about “spilt milk” but these are real people with real lives that are destroyed due to the passage of thoughtless laws whose “unintended” consequences could have clearly been seen by Ray Charles.

If you’re going to point a gun at someone you can’t cry foul when they grab that gun and point it back at you.

Oh, but I must chuckle when I hear the howls and screams from the large indignant organizations who have recently become ensnared in the briar patch that is our Federal government. Oh, the humanity! We cannot permit such violations of our basic freedoms (because now those violations affect us!) A few weeks ago it was the SOPA flap. Nearly the whole country stood arm in arm with the big Internet companies (Google, Wikipedia, etc.) to fight back against government intrusion. Why? Because it affected them. When government violates other people’s rights nobody cares, but when it affects us, well that we cannot stand for! Likewise the Catholic Church was rather upset that Obamacare will force them to provide health insurance that covers contraception. This requirement would force the church to violate one of its core beliefs. I would argue it is not so much a 1st Amendment issue as it is rather an issue of “the government has no right to tell anyone how to spend (or not spend) their money.” The Church is right in their opposition. But what is humorous is that the church in the US was a proponent (3/23/10) of Obamacare  (except as it related to coverage for abortion). What’s the saying…“If you dance with the devil, you will get burnt.”

Although both groups are absolutely correct in their stance in proclaiming that the government is violating their rights, they are both somewhat hypocritical (and please don’t accuse me of Catholic bashing, I’m Catholic, all right). The internet companies are all too happy to push for “net neutrality” regulations that employ government force to compel others to behave the way they want, yet they don’t like it when such force is turned on them. Likewise the Catholic Church is equally happy to endorse laws that restrict civil unions or outlaw state recognition of homogender marriage, yet they don’t appreciate that same force being turned on them by people who find their stance on contraception as archaic. If you’re going to point a gun at someone you can’t cry foul when they grab that gun and point it back at you.

When violations of liberty are perpetrated we must all stand together at all times, not just when it affects us. The lessons of political apathy were summed up well in the words of Martin Niemöller (a German pastor who initially supported Hitler but then opposed him and was jailed for that opposition) – “First they came for the communists, and I didn’t speak out because I wasn’t a communist. Then they came for the trade unionists, and I didn’t speak out because I wasn’t a trade unionist. Then they came for the Jews, and I didn’t speak out because I wasn’t a Jew. Then they came for me and there was no one left to speak out for me.”

 

Bubbles…

The higher education bubble will soon burst. Like the popped housing bubble, higher education prices are being distorted by massive government subsidization. Subsidization causes prices to increase at a rate dramatically above what they would have otherwise increased absent subsidization. It is true that bubbles can occur “naturally”, but these are called “crazes” or “manias.” The most well known example is the “Tulip mania” in Holland in 1636-37. It is the first recorded example of a speculative bubble, but it lasted only 6 months. These “natural” bubbles are limited in scope and size by the limited savings of those involved. Government bubbles are different. The earliest government influenced bubbles were the bank “panics” of the 19th century. They were the result of legalized embezzlement otherwise known as fractional reserve lending (it was thought that a Central Bank (The Fed) would solve these panics but it only made them worse (e.g. the Great Depression and every recession since then)). Government bubbles grow quicker and longer than natural bubbles. Government bubbles can grow over decades because they have no built in monetary constraints. Governments are free to tax, borrow and print as much money as they desire.

Government has no feedback mechanism to limit the bubble because they “have no skin in the game”, that is, it’s not their money.

To understand why prices go up in a government induced bubble we must first understand how normal economic transactions occur. Actor 1 (Buyer) wishes to obtain a good or service from Actor 2 (Seller). What Seller can charge is constrained by the willingness of Buyer to pay (max price). Likewise, how much Buyer can purchase is constrained by the willingness of Seller to sell (min price). A pricing equilibrium is maintained through the efforts of both parties to maximize their self-interest. However, when government gets involved (Actor 3) they insert themselves in the middle of the transaction. Actor 3 now pays Seller for what Buyer wants (typically by stealing from Actor 4). The shackles of price restraint are severed and thus Seller is free to perpetually escalate pricing because (a) Buyer doesn’t care about price because Buyer isn’t paying and (b) Actor 3 doesn’t care about price because it’s not their money. Likewise nothing inhibits Buyer from limiting their consumption because (a) price increases don’t affect Buyer and (b) Actor 3 doesn’t care because it’s not their money. In a free market an increased demand by Buyer upon Seller would drive prices up, however that would attract new providers who, through competition, would drive prices down. However with the presence of Actor 3 this feedback is disrupted. Increased prices do attract more providers however not for purposes of competition. They are joining everyone else at the government trough of largesse.

Government has removed the price barrier to education by providing grants and guaranteed loans. Students don’t worry about price because someone else is paying for it right now, and the schools have no constraint on limiting price increases because they know the government will subsidize whatever tuition is charged. College education costs have gone up at nearly 5 times the rate of inflation. To put that in perspective, health care costs have gone up “only” about 3 times the rate of inflation.

To underscore the point that costs are driven by government subsidization – cosmetic surgery, which is not subsidized nor paid for by insurance – has actually gone DOWN relative to inflation.

Education costs are doubling about every 10 years. In 2011-12 the average cost of tuition and fees for in state four-year college was $8,244/year. Private college tuition and fees average $28,500/year. Based on present trends I predict the education bubble will burst around 2025-2030. So clip and save this article so that you may impress your friends with your ability to predict the future… it will happen, just as the tech stock and housing bubbles burst, so too will the education and healthcare bubbles burst. Apparently the old aphorism is true, “Those that fail to learn from history are doomed to repeat it.”

Do carts push the horse?

President Obama remarked in the recent state of the union address that he is “proposing that every state require that all students stay in high school until they graduate or turn 18.” A laudable goal (for students to finish school) however the idea that this goal must be forced upon the student by the state is a symptom of how some confuse cause with effect. The effect they wish to see is a “successful” adult and they mistakenly assume that completing school causes this. Motivated individuals will complete schooling just as naturally as a fish swims in water (it is inherent to their nature). Forcing unmotivated individuals to graduate will no more make them successful than does teaching a man to swim make him a fish. Besides, what is the plan here? Jail or fine the student or parents if the kid doesn’t graduate?

Before college tuition costs had ballooned out of control it was only students that had a genuine interest in expanding their knowledge and skills that went to college. These individuals were naturally driven to be successful; going to college was simply a way station on the road to success. Those in government looked at the statistics and saw that successful people had gone to college and thus they confused correlation with causation. Government enabled more and more to attend college each year and thus the floodgates opened to not only ever increasing tuition costs but also a new generation of students where college is no longer viewed as an opportunity to grow one’s knowledge and skills but rather a rite of passage that one is obligated to endure in order to assure “success”. Those that simply endure it exit with a degree and a slightly greater perspective on western culture than your average high school graduate, but that’s about it (oh, and the morale crushing debt burden).

The ultimate goal of government subsidization of college education is nothing short of 100% college education for every citizen. But it should be obvious that were this to be achieved nothing will be gained. If everyone has a college degree then how is that supposed to lead to a high paying job? Salaries depend directly on the number of people capable of performing the desired task. That’s why janitors don’t make much money (everyone can clean) and brain surgeons make a lot. If everyone has a college degree then you’re competing with everyone… that’s a lot of people! So wages will go down for jobs that formerly required a college degree (over supply of labor). Wages will remain high for those that excelled in college (constrained supply of labor). But those were the people that used to be the only ones going to college. So nothing will change, wage disparities will remain since wages are driven by supply and demand. If you don’t believe me then just look at the unemployment levels among recent college graduates, the stories of college grads living with their parents, or college grads working at low paying jobs because they can find no other work. These are all symptoms of oversupply, in this case one that is artificially driven.

It’s not the student’s fault. They’ve been duped by promises of the moon if they can just cross the finish line. So they waste their time on useless (for real world jobs) degrees (i.e. anthropology, women’s studies, etc) that have no value to an employer. However, as with most government policies, the unintended consequences of subsidizing college education are coming home to roost. Turns out there is a large labor shortage in this country: a shortage of skilled trade labor. Because culturally and governmentally we look down on such trades there are fewer and fewer capable of performing these jobs. I suppose when a plumber makes as much as a lawyer the tide will turn naturally, but the point is this “bubble” of unemployable college grads would not exist if government had not meddled in the higher education market.