Monthly Archives: June 2012

RIP United States of America 7/4/1776 – 6/28/2012 – Obamacare upheld

Below is the body of a letter I sent to my employees today informing them of what they can expect now that Obamacare has been upheld as “constitutional”

All

Today June 28, 2012 the United States of America ceased to be a constitutional republic and is now a fully democratic fascist* oligarchy in which a tyrannical majority elect conceited tyrants that impose their will on all.

What does this mean for you as an employee? It means quite simply that health insurance rates will continue to skyrocket year over year at a 25% clip and that our only recourse is to continue raising deductible’s on the few policies we are even allowed to offer in order to keep premiums anywhere near close to affordable. To prepare for this you will be well advised to begin setting aside 10% of your gross income each paycheck into a separate account to build up a fund to cover the very high deductibles you will need to maintain in order to have some semblance of being able to afford coverage.

This is not a requirement – I am merely offering you my suggestion as to the most logical course of action to protect your own self interest given that government mandates and subsidies do nothing but drive cost of out of control (housing, healthcare, tuition – oddly all 3 have out of control costs and oddly government meddles in all 3, a coincidence? I think not). This is not opinion, this is simple economic fact that those in power simply refuse to believe, preferring to close their eyes, stamp their feet and repeat the mantra “yes we can, yes we can, yes we can” –

it is no different than jumping out of an airplane sans parachute and willing yourself not to crash into the earth… until you actually hit the earth you might believe it is working… but then reality hits you all at once.

Long term (I’m thinking 2020-2030), the government will take over healthcare and we will move to a single payer system after the “private” market becomes entirely too expensive, so naturally the government must step in to save us all.

“Gee thanks for those crutches there, oh right, you’re the one that broke my legs”.

But at least by then you will have saved up enough for medical coverage so you might still be able to afford “private” health coverage on a for cash basis so as to avoid the several month waiting list to actually even see a doctor.

Unfortunately when government steps in to take over it will likely put us and other small employers out of business as I foresee the government simply mandating that employers contribute $40-$50k/year per employee for health insurance that would go to the government – that’s in ADDITION to pay, therefore in order to recoup the cost we would have to double or triple prices and those high prices will severely if not all but eliminate the market for us… whose going to buy a $75 bottle of Marine Buffer?

So start sharpening those resumes for the eventual government job we’re all going to have, because there won’t be any others around. Think I’m overstating the case here – just look at Greece… we’re getting a preview of what is to come to us in 10-15 years… that’s how all socialist/communist/fascist countries end up. We are well on the way on the road to serfdom ( http://goo.gl/m05az )

Greg

* please look up “fascist” for yourself… it does not mean “nazi” as so many seem to believe these days – it is a form of socialism in which there is putative private ownership of business however government directs most aspects of how business is permitted to operate, thus government truly controls the business infrastructure while maintaining the illusion it is otherwise

Crackle, SNAP, Pop(ular) goes the entitlements!

Do “food stamps” mitigate hunger among the American poor? No. Although with a name like “food stamps” one can be forgiven for falling into the trap of believing so. Following the current cutesy trend that apparently requires government programs have clever acronyms that describe their purpose (PATRIOT Act, HIRE Act, etc.) it has been renamed SNAP (get it, “snap” your fingers and food appears courtesy of the US taxpayer!) But I digress. Why do they not help? Three reasons: (a) fungibility & marginal utility, (b) socialized costs and (c) dehumanization through dependency.

Fungibility means that any given unit of something is indistinguishable from any other unit of the same material. For example, grain, silver or dollars are fungible, however diamonds or tires are not (as they vary in quality). Marginal utility is the concept that given some good, as one procures more of said good one values each subsequent unit less. So if you have a small amount of water, you value it highly as you must satisfy your most urgent needs first (thirst). But, as you gain access to more water you may then opt to “waste” it on less urgent needs, e.g. washing your car. Ok, so with that little economics lesson out of the way, how does this relate to food stamps? The food stamp money is fungible with regular money. In other words food stamps are no different than cash. Why? Absent food stamps the marginal value of the money recipients possess is very high and they will spend it on the most urgent needs (food) first. People in poverty aren’t going to NOT buy food and instead buy sneakers, movie tickets and haircuts. That would just be stupid. If we then give them money earmarked for food, they will still buy food (with food stamp money) AND NOW other (less urgent) goods with the money they used to spend on food. We are just playing a shell game, pretending this money is for this and that money is for that. It’s all just mixed together. Fungibilty is the reason some recipients can afford fancy nails and cell phones.

A secondary issue is that of socialized costs. Because the program exists people are willing to work for less than they would absent the program because they know they can count on it. If I know I need $15k/year to survive but I know the government will give me $5k/year in food stamps, then I’m going to be a lot more willing to work for $10k/year. So the employer pays less because the employee is willing to accept the lower wage BECAUSE OF the program. Then the government taxes the employer and hands the money over to the employee as food stamps. So in the end both end up with the same amount of money. So what did we accomplish here? Why not just cut out the middleman (the government) and pass the savings onto everyone? Once again we are just playing a shell game where the only beneficiary is the government.

The state is our shepherd, we (the sheeple) shall not want.

The final issue is the social harm the program engenders through the promotion of an entitlement mentality (literally – the government is running ads trying to get people to join the SNAP rolls). This mentality dehumanizes the recipient by promoting the idea they are merely wards of the state who cannot survive without suckling at the state’s communal teat. The state is our shepherd, we (the sheeple) shall not want. Inherent to the structure of any entitlement program is an economic feedback incentive that promotes attachment. The more money you make the less benefits you qualify for. I think U2 captured the idea well, “running to stand still.” Why expend great effort to obtain that which you can obtain from no effort at all?

I know politicians mean well, but their complete ignorance of basic economics and incentives creates problems bigger than the ones they were trying to solve. Just because something seems intuitively obvious (state sponsored welfare helps people) doesn’t mean it is correct. The notion that the sun revolved around the earth was intuitively obvious for centuries until someone took the time to apply some thought to the question. Big problems require deliberate, contemplative analysis, not thoughtless, knee-jerk, feel-good solutions.

Carrots are good for your health (insurance)

The Supreme Court is expected to deliver its decision this week on the PPACA (“Obamacare”) so while we wait with baited breath I thought I might offer an alternate approach to achieving the goals of the “Shared Responsibility Payment” (“the mandate”), which is the core issue of the court’s upcoming decision. The mandate is structured as a disincentive (“stick”) against not buying health insurance. Constitutional issues notwithstanding, the mandate is just about the worst method to achieve that goal. The penalty by 2016 would be a mere $695/year or 2.5% of household income (whichever is greater). Considering that an individual policy costs anywhere from $3-$6k/year it is more costly to pay the fine than to buy insurance only for those who earn more than $180k/year (3.7% of taxpayers ). In other words, the mandate incentivizes 96% of taxpayers to drop their insurance in order to realize a financial gain. If the Supreme Court does not overturn the PPACA on constitutional grounds then, they should overturn it on sheer stupidity grounds.

Although libertarians are opposed to any government intervention in any market, IF it seems a foregone conclusion that our overlords will simply not stop until they’ve “done” something about healthcare then I suppose it is my duty to point out how to properly incentivize behavior. Incentives (“carrots”) work much better than disincentives (“sticks”). My solution uses our existing legal framework: contracts and government enforcement thereof.

Referees don’t make the rules, they just enforce them.

Health insurance should operate like life insurance. With life insurance you purchase a policy for X number of years. In so doing you enter into a contractual relationship with the insurer whereby you promise to pay them $X dollars per year for Y years and they promise to not cancel the policy regardless of changes to your health. If they break that contractual promise, then the government steps in and forces them to live up to their end of the bargain (lawsuit).

So in the case of health insurance there should be a “term-health policy” whereby you contract with the insurer for X number of years (typically one’s expected lifetime) and the insurer provides you a price structure that is guaranteed for the life of the policy. The “carrot” here is that the longer the term, the better the rate, so rates would be much lower than they are today. Pretty simple: you promise to pay for a long time, they give you a low rate and promise to not cancel. If either party breaks their promise then the government steps in and enforces the terms of the contract.

So, how would this work in practice? Consider the following: If you cancel a policy there would be penalties, however (and here is the key) if you later want to reinstate coverage you would be required to bring your premium payments current by paying all the premiums you would have otherwise paid during the lapse in coverage OR you could obtain a brand new policy with premiums that reflect your current health status and shorter term period, so they would be exponentially higher.* This “discount-incentive/payback-disincentive” system eliminates the free rider problem because (a) in general people prefer to pay less now rather than more later and (b) you gain nothing by not carrying insurance and only trying to get it when sick. By removing government regulation we would see market driven solutions like this one, where the only limit is human imagination rather than bureaucratic fiat. Insurers should be permitted to figure out the best way to incentivize people to maintain their polices IF they must be straddled with the legal requirement that they may not deny coverage.** Those insurers that figure out the best methods will be copied thus improving compliance over time. However insurance companies often seem as inept as the government (bureaucracy is the same everywhere!) so I thought they could use a nudge in the right direction.

We, free individuals in a free market, should make the rules amongst ourselves (contracts) – it is government’s job only to enforce, not make, those rules. Referees don’t make the rules, they just enforce them.

* If an insurer went out of business the law could specify that as long as you had a policy in place it could be transferred to a new insurer irrespective of your current health condition. A more free market approach however would be to take out insurance against the insolvency of your own health insurer, so if they do go out of business your policy would provide you a lump sum payment to establish a new policy elsewhere. In such a system the insolvency premium would reflect the relative risk of your health insurer, i.e. a new upstart carrier might offer really low rates but carry a high risk premium and thus the cost of the health premium + insolvency premium might be the same as a more established carrier. Because those insurers insuring against insolvency have a vested interest in not paying claims they will be the ones to “regulate” the solvency of the health insurers through auditing and such. The insurers would permit this regulation because they will know that few people would buy their health policies if no other carriers will issue insolvency policies that cover them.

**In order to transition to this new system, we should dismantle Medicare (which currently covers wealthy old people) and Medicaid and use those funds to establish a new temporary program that would subsidize the premiums of the unhealthy AND destitute, i.e. those that truly need help as opposed to those whom the premium might merely be inconvenient or difficult. In the long run the “pre-existing condition” issue would go away as the market would incentivize parents to purchase life-term health insurance for their children at birth (these policies would be so inexpensive even the “poor” could afford them). The parents would pay the premiums until age 18 at which point the child would “inherit” the policy with an excellent rate. They would have a huge incentive to never cancel as “lifer” policies would be the ones with the lowest overall cost since they have the longest guaranteed term. 

Are those pumpkins next to that tree?

Democracy is sometimes described as “the tyranny of the majority over the minority” (e.g. two wolves and a sheep voting on what’s for dinner), however a more appropriate description might be “the tyranny of the uninformed over the informed.” Georgia’s new license plate is but just one mundane case in support of this secondary meaning.

To be fair, it is an attractive design… for a t-shirt. But it’s not going on a t-shirt, it’s going on a moving object and its sole purpose is to rapidly convey information to an observer (e.g. plate number and state). At this it fails miserably. I recently observed a new stationary plate not more than 30 feet away while filling my car with gas and I simply could not make out the number even after staring for some time (yes, my vision is fine). The plate is simply too busy. There is too much color and too many contrasting objects. These design elements while “pretty” do nothing but serve to camouflage the numbers. Sometimes “less is more” (think Apple’s simple package designs vs Microsoft’s “where is Waldo” package designs). Fortunately there is a “plain” tag, although it is not much better due to a dark colored peach in the background obscuring the two central numbers. The only designs that came close to being appropriately designed for the task were tags #1 and #8 and possibly #4.

Georgia is not alone. In the past decade many states have updated their plates to more colorfully busy designs that look great on a magazine cover but are utterly unreadable from more than 6 feet away. This plate beautification trend is symptomatic of a larger dysfunctional political process wherein it is believed that uninformed popular opinion can never be wrong. Rather than choosing politicians who possess the requisite abilities for proper job execution (fiscal discipline, faithfulness to the constitution) we choose them based on superficial qualities (i.e. attractiveness, personality, pandering ability or sometimes whether or not they have a D or R next to their name). The result is a political class that for the most part doesn’t understand what the purpose of government is. Likewise, by employing uninformed popular opinion in its decision making process, government has managed to fumble even the simple task of choosing a plate that succeeds at just one function (legibility) by turning it into a popularity contest that seems more suited to choosing a design for a t-shirt.

And it gets even better. The final design wasn’t even chosen by the people, although it was winnowed down to the top three through a biased on-line voting scheme. The final design was chosen by none other than Governor Nathan Deal. Reminds me of that commercial…”you wouldn’t want your doctor doing your job (cut to doctor playing instrument or running jackhammer), so why are you doing his.” Do you really want your governor acting as an untrained art director, going simply on his gut of what looks “nice” versus actually having someone with training in the field of design who understands the actual task of a license plate: being legible from a distance. Perhaps the governor should decide what books are read in our state run schools based on the cover design?

Having people vote on the final license plate design is not like having them vote on the Peachtree Road Race t-shirt. Rather, it is more like having them vote on which model of police cruiser should be purchased or how thick the asphalt should be on a new road. Hopefully our government buildings won’t someday be engineered by uninformed popular opinion… unfortunately our laws are driven by the same misguided process. Perhaps that explains the mess we are in.

Where are the jobs?

Following up to last week’s post (read here). Although the constant cycle of supply and demand tends to make it unclear which process came first, in the end we can trace the inception point to supply. Supply that can be used to satisfy demand comes about through savings and so it is savings that ultimately is the source of jobs (employees are paid prior to sales). So, since the popular media tells us that corporate profits and cash on hand have never been higher, why is job growth so anemic?

There is actually a great deal of job creation (see chart), even at the height of the recession there were millions of jobs being created. Unfortunately, more were being destroyed. However, it is misleading to suggest there are few jobs being created. Further investigation of the chart reveals that  job growth rates have been trending downward for the last 12 years (no BLS data for this statistic exists prior to 1992). Why would this be?

Quarterly Job Creation & Loss as % of Workforce

 

1) Regulation: regulation hinders jobs in three ways: (a) it acts as a stealth tax by increasing dead-weight costs (for example, a report last year by the House Government Oversight and Reform Committee stated the Obama administration has established nearly 300 new regulations that will cost businesses an additional $60 billion each year), (b) it acts as a barrier to new firms that would otherwise compete with established firms either by criminalizing innovative ideas or imposing paperwork compliance costs that are disproportionately burdensome to smaller business and (c) in some cases it simply outlaws entirely certain types of business (see the Lacey Act as one example). To illustrate point B consider the following: where would Apple be today if Microsoft had encouraged regulations that required competitors to conform to their standards. It would be illegal for Apple to innovate and thus deviate from those “standards”… and we’d all be running Windows 95 while listening to our Zunes and the iPad would be mere fanciful sci-fi fodder. Because the computer industry is relatively unregulated, there has been tremendous innovation and growth. But in other heavily regulated sectors (health insurance, agriculture, automotive, etc.) there is little to no innovation because bureaucratic micromanagement simply does not allow it. Without innovation there is no growth and without growth there is no reason to have a new job.

2) Risk: Many of those in government condescendingly dismiss the idea that risk arising from unknown tax costs contributes to slow job growth. Their condescension is rooted in ignorance of the real world, a world where risk is a constant companion. But in the government’s ivory tower that companion is nowhere to be found. Their obliviousness to risk is apparent in the squandering of other people’s money on “good ideas” that ultimately fail and for which they have zero accountability. Although taxes were higher in the 1990’s, at least they were stable. Tax rates that vary year to year on the whim of Congress are more destructive than high taxes as people focus their energy on gaming the tax system rather than in pursuing productive goals.  Think of it like this: what if the final price for a car you bought today would not be revealed to you until 5 years from now. You would start your monthly payments now and at the end of 5 years you’ll either have it paid off or owe a whole lot more. How likely are you going to buy a car with that level of cost risk? Likewise, those with money to invest in new jobs also will wait until they can be certain of the final costs. Risk makes people cautious… unstable tax policies that increase financial risk will increase cautiousness.

Risk makes people cautious… unstable tax policies that increase financial risk will increase cautiousness.

3) Training: the stock bubble destroyed financial capital, however the housing bubble destroyed financial & human capital. Financial capital destruction can be swept under the inflationary rug through Federal Reserve printing press slight of hand, however there is no keystroke subterfuge that can wipe away the years people spent training and gaining experience in construction and related industries. In short, human capital was misallocated into the wrong sectors of the economy. The government operated a national multi-year housing circus financed with artificially suppressed interest rates and the implied moral hazard of “too big to fail”. People were attracted to that monetary opportunity like flies to honey. But then overnight the government flipped the switch and the circus went dark. Now the circus participants must spend years retraining. Training takes time.

Ultimately the market can heal itself if the price mechanism is left to operate free of government manipulation or interference (the mechanism whereby wages for high demand jobs will rise and thus attract people to train for those sectors). Propping up burst economic sectors or inflating new ones will only postpone the fever that ultimately is needed to cure the economy and restore healthy job growth.