Afghanistan Troop Surge

The administration's announcement of a troop surge of 30,000 US Military personnel in Afghanistan announced 1n 12/2009 appears to have been designed as an attempt to please both the progressive Democrats who argued for a withdraw of the US military from Afghanistan and the Republicans who argued for a larger surge. Predictably, the announced surge please neither group.

The President's justification for the US presence in Afghanistan was primarily to prevent Al-Qaeda from reorganizing and establishing a base from which attacks on the west could be planned. There are two arguments against this objective even of the US's strategy in Afghanistan is successful which are:
1 - Even if the surge is effective, it is likely that Al-Qaeda would move to another failed state such as Somalia, Sudan or perhaps Yemen.
2 - Arguably, the $100 billion plus per year that will be spent in Afghanistan by the US military alone in pursuit of the military operation would provide more security to the west if even a fraction of this military budget was spent on intelligence and surveillance. Recall that most if not all of the terrorist attacks in the west after 9/11 were executed by local cells that were inspired by but not supported by the Al-Qaeda leadership in Afghanistan. Consequently, if Al-Qaeda in Afghanistan was completely eliminated, the attacks in London, Spain and other locations would have still occurred.

In any case, the military effort is designed to fail in that the goal is to build a government from the top down when in fact the strategy should be to build from the bottom up. The US strategy is to build a central government capability including a central military and police force. Afghanistan has never had an effective central government and is a tribal society with power vested in the village elders. To control the entire country and gain the support of those Afghans in the best position to defeat the radical Taliban and Al-Qaeda, the US needs to work at the village level with the Shuras. The majority of Afghans do not support the radical Taliban or Al-Qaeda but they also view the Karzai government as corrupt and a threat and will never support any force that supports the Karzai government.

In support of the above argument, consider the activities of the Central Asia Institute (CAI) founded by Greg Mortenson which has been built about 200 schools in Afghanistan since 1999. Only 1 of these schools has ever been attacked and when this school was attacked, the village elder organized a militia which went after the Taliban who attacked and killed or jailed the Taliban involved in the attack. CAI only builds a school when invited to do so by the village and the village provides general labor used in the construction and security for the school and staff. CAI provides skilled labor used in the construction, materials, teacher training and school supplies.

For significantly less than the $100 billion annual cost, the US could establish relationships with the villages and build institutions at the village level which would benefit the Afghans and stop the Taliban and Al-Qaeda in Afghanistan.

Healthcare Reform DOA

First, I would like to note that I voted for President Obama and firmly believe that US healt hcare reform needs a major overhaul. At this point, I am forced to conclude that the current health care reform is a complete failure and should not be passed.

The current legislation does nothing to reduce costs and it appears that health care providers are raising costs more than they would have otherwise. It is likely that if the legislation currently passed in the House and Senate passes that the reform will cause more harm than good.

The cost of the proposed reforms in both the House and the Senate are intentionally and significantly understated. The CBO has scored both plans for the 10 years following passage and the CBO actually shows a savings for the Senate plan. However, both plans include 10 years of income and 6 or 7 years of expense in that premium subsidies don't start until 2013 or 2014 for the House and Senate plans, respectively. The cost projections are a financial gimmick intended to sway the general public. Medicare currently faces a financial shortfall and I agree that Medicare reform is necessary to keep the current Medicare system operational. However, any savings in Medicare should be used to shore up Medicare's finances rather than to fund general health care reform. Using Medicare savings to fund the current reform is a bit like a shell game in that additional funds, probably from the government, will be needed to shore up Medicare at some point in the near future.

The mandatory insurance for individuals which will result in 94% of the population being covered by health insurance falls well short of the mark. 6% of the population still equates to over 20 million people who will remain uninsured will still result in significant cost shifts to those who do have insurance.

The process for developing the reform was severely flawed. The administration proudly claims that they have entered into an agreement with the drug makers who will contribute $80b (recent discussions indicate that this amount might increase to $140b) over 10 years to the reform effort. Given that the drug makers have US revenues of about $320b per year and it is likely that the drug makers will just increase costs to makeup for the reduced costs to Medicare recipients, this agreement may actually make costs higher for non-Medicare recipients. Much the same situation exists with the hospitals.

The current proposals for reform should be discarded and congress should start from scratch.

Ayn Rand, Greenspan and Tea Parties

Ayn Rand was an author whose books typically sell 200,000 to 300,000 copies per year but over the last year sales of her books were about 2,000,000 copies. Rand, from St. Petersburg Russia, experienced the aftermath of the Bolshevik revolution during her teenage years. The Bolsheviks quickly implemented state control of almost every facet of life down to the number of calories that a person would consume. In her books, capitalist owners of corporations are the heroes and are persecuted by the masses. In addition to being an author, she is noted for espousing a plotical philosophy that she called Objectivism which essentially was a Libertarian philosophy that rejected any state involvement in virtually every aspect of life especially economic life. She firmly believed that state control and socialism would cause to a profound loss of liberty. For reasons that I can't pretend to understand, many Americans, especially those in the Tea Party movement, believe that the Obama administration has a hidden objective of imposing a socialist system in the US. Why so many fervently believe in the socialist intent of the Obama Administration when Republican US president's in the last 100 years have imposed price controls, appropriated land for a national parks system or highway system, etc, is a mystery to me.

Keep in mind that in Rand's view, all industrialists were heroes. Her role models were the 19th century US industrialists who are sometimes called the robber barons. Very few would want to return to an economics system where monopolies, cut throat competition with management tactics that included arson, price fixing and physical violence or control of politics by the few was the norm. I personally see little difference between the many of the 19th century industrialists and the Bolsheviks.

The political philosophy of Rand is not new. The economist Hayek made the same arguments but the novels of Rand are a much easier read than economics books and the philosophy of Rand gives voice to the beliefs and fears of many of those in the Tea Party movement which explains the recent rise in her book sales.

What is surprising to me is that someone as notable as Alan Greenspan who certainly could handle an economics book developed such a close personal relationship with Rand and support her political economy philosophy without apparent reservation. Greenspan was such a Laissez Fair capitalist that he even argued against laws that made fraud in financial markets illegal. He believed that the markets would punish those who engaged in fraud so no laws were required. If there had not been laws against fraud, Bernie Madoff would certainly have seen his investment business go bust but he would have just retired to his yachts and Manhattan penthouse rather than going to jail.

Rand developed her life's philosophy and world view based solely on her personal experience with the aftermath of the Bolshevik revolution which was an extreme but never-the-less local affair. I can't help but believe that her world philosophy would have been exactly reversed if she experienced the mid 19th century work houses in Britain rather than the Bolshevik revolution. But I guess that this wasn't an option because another author, Charles Dickens, already had this covered in his book Oliver Twist.

My point is that something as complicated as government is never a black and white issue and that any world view formed on a single event in a single location is bound to be distorted, limited and of no use.

Who is Paying for the Financial Bailout?

It is frequently said that the taxpayer is paying for the $700b that is being used to stabilize the financial system. In a sense this is true in that the government is incurring debt that will have to be repaid someday. However, taxes have not been raised for anyone to fund the TARP program.

However, savers are the one group who are currently paying real dollars to fund the recapitalization of the financial system. In order to recapitalize the banks to prevent bank failures, the Federal Reserve significantly reduced the federal funds rate. Essentially, this increased the income to the banks by increasing the spread which was accomplished by lowering the interest rate that banks pay to borrow funds.

Total interest, both taxable & tax exempt, reported to the IRS by individual tax payers in 2007 was $347.41b ($268.1b taxable interest). Assuming that interest rates earned by tax filers declined 80% from 2007 and that balances in accounts on which interest is taxable remained constant, reduced interest rates will reduce treasury tax receipts by $56.4b and will reduce the interest income of US taxpayers with savings by $277.93b. This $277.93b is a direct transfer from US taxpayers who are savers to bank balance sheets.

Citigroup Sells Phibro

Citigroup has sold its energy trading division which has had average annual earnings of $375 million over the last 5 years to Occidental Petroleum for $250 million which is less than 1 year's profits for the energy trading hedge fund. Generally, the price of an acquisition if several times the annual earnings of the subsidiary being sold. So, why did Citi sell Phibro for $250 million when the price would typically have been in the area of $1.5b? You may recall that there has been a lot of controversy in the press over the $100 million pay package for Andrew J. Hall who is an energy trader at Phibro. I suspect that Occidental as part of the acquisition agreement has agreed to pay Hall the $100 million bonus that Citi owed Hall. Essentially, I believe that Citi is still effectively paying the bonus funded through a lower than normal sale price of Phibro but since Occidental will be making out the check, the bonus will not be subject to review of the US Government.

The US taxpayer has lent Citi $49 billion and should insist that Citi receive a fair price for the sale of Phibro and block the sale as currently structured. If the $100 million bonus to Andrew Hall was inappropriate then it should be dealt with directly rather than permitting Citi to do an end run. I also find it irritating that the energy trading activities of Phibro have made Citi and Andrew Hall so much money in the past through speculative energy trading which has only resulted in $4 gallon gas and unemployment and higher costs for the rest of us.

Healthcare Reform - A Possible Option

A national public option appears to be unsupported at this point and, in any case, it was unclear how a public option would quickly lead to lower costs. Following is an alternative that would be cheaper and easier to setup that might be called the 'local option'.

Essentially, the local option would involve individual hospitals selling comprehensive medical insurance policies. The attractive points with this option are:

• Cost Reduction - Currently, doctors and hospitals have the incentive to perform as many services as possible in a fee for service system. If the hospitals sold insurance coverage then they would have the incentive to find ways to reduce costs. As an example, in the current system, if someone has an operation, is discharged and then returns to the hospital with an infection acquired during the initial operation, the hospital would be paid extra to take care of the infection. Under the Local Option, the hospital would incur extra charges without a corresponding increase in income. I'm sure that since money is at stake the hospital would make sure that they changed processes to reduce infections.
• Private Sector- Since most hospitals are private sector enterprises, a major objection to the public option that the government is involved in health care would not be applicable.
• State Regulation - Since hospitals and the doctors who work in them are already state regulated there would not be issues with state versus federal regulations. Also, states already have organizations setup to manage insurance and deal with disputes.
  
• Competition and Innovation - Since there would be multiple providers in each large market, there would be significant incentive for the hospitals to innovate in areas of providing excellent service and reducing costs. For instance, I would expect that hospitals would work to bundle services.
  
• Local Needs - Since the hospitals operate locally, they can customize services to reflect the preferences and needs of the local market.

Following are some aspects that might be considered when developing the plan.

• Perhaps any federal subsidies that are available would be paid directly to the hospitals for their policy holders who qualify for the subsidies. This would provide some leverage with the hospital providers to ensure that the hospitals adopt certain minimum standards.
• Perhaps the hospitals that participate and receive the policy holder subsidies would be required to use a specified, electronic medical records system.
• In large markets, it might be advisable to allow multiple hospitals to participate as a single provider which would give patients more choice except that there should be a limit in terms of the number of insured that each provider services, perhaps 25% of the total market, to ensure that competition exists.
• In terms of pre-existing conditions, with private insurers, their medical underwriting assigns an additional cost for covering the pre-existing condition that is included in the insured's premium. Local Options that wanted to participate would need to cover pre-existing conditions without an additional premium. However, to prevent any single Local Option from incurring excessive costs related to pre-existing conditions, perhaps each individual local option would only be required to accept people with pre-existing conditions up to the point that the additional costs did not exceed a specified percentage of total premium income. There would need to be a state or federal surcharge price list for pre-existing conditions to prevent each local provider from creatively assessing pre-existing condition surcharges to prematurely meeting the maximum percentage that they needed to accept. States would have the option to pay the surcharge for any additional amounts if they wanted to.
• To prevent the Local Options from morphing into HMO's, it might be beneficial to limit the number of providers in any provider category such as cardiologists, vascular surgeons, etc. who are employees of the local provider to a specified percentage of the total number of participating providers in that category.
• It might be helpful if the state or federal government was able to identify providers who would take care of the billing and policy management to allow hospitals to focus on health care rather than accounting and administration. Ideally, there would be at least 2 administrative providers per state to keep the admin costs down through competition.
  

Medicare Recipients and Costs

In the context of the health care reform debate, I became curious about the participation and cost of Medicare and following are some of the key facts:

• The cost of Medicare in fiscal year 2007 was $440B.
• As of 7/1/2008, there were 37,584,186 aged persons and 7,717,651 disabled persons for a total of 45,301,837 people receiving Medicare in the US which equates to a $9,712 per recipient cost. Note that people younger than 65 are eligible to receive Medicare 24 months after qualifying for Social Security Disability payments.
• In order to qualify for Medicare, you must be a US citizen or legally resident for 5 years or more and you or your spouse must have paid into Medicare for at least 40 quarters (10 years) in which case your monthly premium for Medicare Part A (hospitalization) is $0. However, if you have less than 40 quarters you can "buy in" by paying $244 per month if you have 30 to 39 quarters of qualifying income or $443 per month if you have fewer than 30 quarters.
• All Medicare recipients have a monthly premium of $96.40 per month (this changes every year) for Part B (outpatient services such as doctor visits).
• Approximately 99% of recipients have Medicare credit for at least 40 quarters but not necessarily for payments into the US Medicare system.
• The US has what are called Totalization Agreements with 24 countries that count participation in a foreign system for purposes of qualifying for US Medicare. I'm not sure if the US has a Totalization Agreement with Mexico. Totalization Agreements must be approved by Congress which has not approved a Totalization Agreement with Mexico but it appears that the Bush Administration signed a Letter of Understanding which provides the same benefits as a Totalization Agreement.
• Totalization Agreements were originally intended to avoid additional costs for an employee of a company in one country who was temporarily assigned to a foreign work location by not requiring payments into the social security systems of both countries. In practice, someone who has paid into the US social security system for at least 6 quarters is able to count years paying into a foreign social security system when calculating eligibility and monthly pension in the US social security system. The US Social Security system counts all quarters for which payments were received regardless of whether the worker was in the US legally.
• Generally, Medicare will only pay for medical care received in the US although pension checks can be sent to people resident in a foreign country.

I am surprised by what I consider to be a very low cost of $9,712 per Medicare recipient which, given the age of most recipients, I would expect to be much higher.

However, I find several points in the above facts disturbing which may point to some options to reduce Medicare costs.

• 7.7 million people receiving Medicare under disability seems way too high to me. I suspect that a significant number of these people may no longer qualify for disability. By law, the Social Security Administration can review a disability annually to determine whether the recipient still qualifies. I also believe that disability qualification requirements are not stringent enough and should be tightened.
• Someone 65 or older who has never paid into Medicare is able to buy coverage for a maximum premium of $539 per month. This seems way too low for a senior who would likely pay over $1,500 per month for a private insurance policy which would cover much less than Medicare.
  
• The Totalization Agreements should be revamped. A citizen of one country who is an employee of a company in their home country who is assigned overseas should only pay into the retirement system of their home country and should only receive qualifying credits for the retirement system of their home country. As an example, an employee of GE in New York who was assigned to a GE facility in Poland for 5 years should only pay into the US retirement system and should only receive US retirement system credits for those 5 years and not receive any credit for Polish government. However, as the Totalization Agreements are currently constructed, if a Polish citizen works as a store clerk in Poland and pays into the Polish retirement system for say 8.5 years and then comes to the US, even if they are here illegally, and pays into the US retirement system for 18 months then they fully qualify for US retirement and Medicare.
  

Iraq - Time to Leave

Regardless of whether you believe or don't believe that the US invasion of Iraq was wise or justified, the US did invade Iraq and has the ethical responsibility of providing the Iraqi people a reasonable opportunity to develop and implement a system of self governance. Note that I say the US owes the people of Iraq the opportunity for them to develop a replacement system of governance. The US is not responsible for delivering a replacement system but only for providing assistance, security, expertise and funds which Iraq would use to develop their own system of government. After 6 years, I believe that the US has successfully fulfilled their obligation and it is long past time that the US withdraws from Iraq as soon as possible. The US has spent thousands of lives and hundreds of billions of dollars providing security, institutions, elections and infrastructure improvements. We have no further obligation.

Unfortunately, it appears that developments in Iraq point to the probability that Iraq will replace the secular, Ba'ath police state of Saddam Hussein with a Shia police state. Currently, the government of Nouri al-Maliki is engaging in the wide spread arrest and detention of opposition members, control of the media, torture, forced confessions and executions which characterized the Hussein administration.

Furthermore, if the US continues to stay in Iraq, there is a distinct possibility that the US will be drawn into one or more significant regional disputes.

The major power centers in Iraq are currently the nationalist Shias under Nouri al-Maliki, the religious Shias aligned with Iran who will probably be headed by Ahmad Chalabi (the same guy who pushed the US into invading Iraq and who provided a large part of the intelligence relating to Iraqi WMD's that provided the justification to invade Iraq that was later proven to be fabricated), the Sunnis and the Kurds.

There is the distinct possibility that the Iraqi Kurds and the Iraqi central government will come to blows over control of the oil rich area around Kirkuk in the north. There is a distinct possibility that Turkey will support the Kurds and that the northern border will experience periodic border clashes and occasionally be on the verge of an all out limited war.

I think that over the next few years there is the distinct possibility that the Nationalist Shias and the Shias aligned with Iran will come to blows. It is likely that the Nationalist Shias under al-Maliki will resort to the same police state practices that Saddam Hussein used to keep the Shias in line which will only increase tensions between Iran and Iraq.

The US risks significant military involvement and significantly damaging relations with other regional powers were the US to remain. We have met our obligations and it is time to leave Iraq - now.

Impact of 2001 & 2003 Tax Reform

Following is the distribution of the savings accruing to tax filers for the rate reductions for Long Term Capital Gains (LTCG) and qualified dividends passed in the 2001 and 2003 Tax Acts. This analysis is based on IRS data for all returns filed for the 2007 tax year. Performing the analysis required that certain assumptions and generalizations be made which cause this analysis to approximate the distribution of savings. For instance, the actual tax rate used to calculate the savings from the reduced tax rates assumes that all tax returns are filed as Married Filing Jointly because the IRS data does not provide the detailed income data by tax filing status. Using the Married Filing Jointly status would tend to understate the savings resulting from the rate reductions because tax rates for this filing status are lower than for other filing statuses. All long term capital gains and qualified dividends above AGI's up to $63,700 are taxed at a 5% rate and then at a rate of 15% beyond $63,700. The income levels referred to below are Adjusted Gross Income (AGI) brackets which include all income including capital gains minus certain deductions such as IRA contributions, education and moving expenses, etc. The tax rates used to calculate savings are based on net taxable income which, generally, is adjusted gross income minus the standard or itemized deduction and the personal exemptions.

The method for calculating the savings of the reduced tax rates below is as follows:
1) Determine the mid-point marginal tax rate for each Adjusted Gross Income (AGI) income bracket published in the IRS stats.
2) Subtract the new tax rate (5% or 15% depending on AGI) from the marginal tax rate determined in step one above.
3) Multiply the reduced tax rate percentage by the qualified dividends or long term capital gains total income for the bracket to determine the dollar amount saved by the filers in the individual brackets. For instance, if for a given income bracket the marginal tax rate was 33% then the tax rate reduction would be 18% (33% - 15%).

QUALIFIED DIVIDENDS

$155.9b of total qualified dividends were reported in 2007. The reduced tax rates for qualified dividends reduced US Treasury tax receipts in 2007 by approximately $24.5 billion. 80.9% of total qualified dividends were reported by tax filers with AGI's of $100K or more, 64.4% were reported by tax filers with AGI's of $500K or more.


LONG TERM CAPITAL GAINS (LTCG)

The reduced tax rates reduced US Treasury tax receipts by approximately $306.8b. 94.2% of total LTCG tax savings were to tax filers with AGI's of $200K or more and 71.2% to filers with AGI's of $1 million or more.

TAX RECEIPT IMPACT OF FINANCIAL BAILOUT

In order to recapitalize the banks to prevent bank failures, the Federal Reserve significantly reduced the federal funds rate. Essentially, this increased income to the banks by increasing the spread which was accomplished by lowering the interest rate that banks pay to borrow funds.

Total interest, both taxable & tax exempt, reported in 2007 was $347.41b ($268.1b taxable interest). Assuming that interest rates earned by tax filers declined 80% from 2007 and that balances in accounts on which interest is taxable remained constant, reduced interest rates will reduce treasury tax receipts by $56.4b and will reduce the income of US taxpayers by $277.93b. This $277.93b is a transfer from US taxpayers to bank balance sheets.

Swine Flu, Civic Responsibility and Healthcare Reform

There is an interesting recent development which I expect will figure prominently in the health care reform debates in the US Congress scheduled for September 2009.

Recent estimates from the Centers for Disease Control (CDC) indicate that about half of the US population will be inflicted with swine flu in the 2009/2010 flu season and that there will be about 45,000 additional influenza related deaths in the US due to the swine flu in this flu season. Historically, with never enough vaccine for everyone, vaccination priority has been given to those most likely to die from the disease which is to say infants whose immune systems are not fully developed and seniors who frequently have other health issues and less robust immune systems. This approach can be referred to as the vaccinate "those at risk" vaccination strategy. Unusually, the experience with the swine flu so far is that the disease impacts seniors less severely than other segments of the population perhaps because many seniors have a limited immunity from past contact with a flu strain similar to the current swine flu.

A new study argues that vaccinating those most likely to spread a disease such as school age children and 30 to 40 year olds who are most likely to be working and in contact with a large number of customers and co-workers will result in fewer people becoming ill and fewer people dying from a communicable disease. In fact, this "vaccinate the spreaders" method of prioritization has been recommended by the CDC's advisory committee on immunization practices but the official recommendation from the CDC is still to "vaccinate those at risk".

In summary, prioritizing vaccinations for those most likely to spread the disease will result in fewer deaths, fewer people sick and less economic impact (fewer lost work days) to the US in total compared to prioritizing vaccinations for those at risk. However, this strategy will increase the chances of any individual senior or infant contracting the swine flu and dying. However, it should be noted that the experience with the swine flu thus far is that seniors unusually have less severe symptoms with the swine flu than younger flu victims perhaps because the seniors have previously been inflicted with a flu strain similar to the swine flu which has given them partial immunity.

Because of political issues rather than medical issues, I think that vaccine distribution will be prioritized based on the current 'at risk' method. However, the CDC has recently expanded the at risk definition to include young adults. For the greater good, seniors should be low on the priority list but for political reasons rather than medical reasons I expect that they will stay on the top of the list.

Where it gets interesting is that if the vaccine supplies are in sufficiently short supply so as to make it difficult for seniors to get vaccinated, which is likely, this will become a very vocal headline in the health care reform debate. There will be outcries that the government is rationing medical care and that the government is limiting care for seniors who are in some way less valuable than younger people. The issue will reinforce the "pull the plug on grandma" soundbite.

I would hope that the seniors keep everything in perspective and support a policy which provides for the greater good rather than the individual benefit. In other words, I would hope that we are good citizens but I am not hopeful.

Are Prices Declining?

Many people read the monthly inflation or price change announcements with detached curiosity but for many, such as social security recipients or people with contracts with built in price escalators, the price changes have a real world income impact. The price change announced in August 2009 reported a 2.1% decline over the preceding 12 months. Sounds like good news since this indicates that we are paying less for what we buy compared to what we paid 12 months earlier. However, the reported price change did not match my experience and, I expect, doesn't match the experience of most people. I was notified in 6/09 that my medical insurance premiums were increasing by 14.4%, notified in 8/09 that my annual property taxes were increasing by 10.8%, my condo fees have increased by more that 10% over the last year and I haven't noticed any price reductions in the grocery store. For those of you interested in why the CPI probably doesn't match your experience, following is a brief explanation of why this might be the case.

The monthly price changes are calculated by the Bureau of Labor Statistics (BLS) which is part of the Federal Department of Labor. The headline inflation rate reported by the BLS is typically the CPI/U which is the consumer price index for urban areas and covers approximately 87% of all consumers. Following are some of the reasons why the CPI reported price changes might not reflect the experience of every consumer.

1. The costs of buying and maintaining an owner occupied home is not included directly in the CPI. Rather, the BLS uses a concept called Owner's Equivalent Rent to indicate home ownership related costs. Essentially, BLS measures monthly rent for rental housing and assumes that the owner of the rental unit calculates rental rates to fully reflect all costs such as mortgage interest, taxes, insurance, etc. The assumption is that changes in rental rates will reflect the changes in the costs which are also experienced by home owners. However, over the last several years, with the housing bubble rapidly first inflating and then deflating which resulted in a significant over supply of rental units, rental unit owners priced rents for what the market would pay rather than to fully reflect their costs. Rental rates have been declining in most if not all markets which misrepresents the increasing costs experienced by most home owning consumers. For example, the CPI/U in July 2009 shows an annual price decline of 0.7%. However, if you live in your own home, especially if you have no mortgage or a fixed rate mortgage, I expect that your costs have not declined and may have increased significantly.
   
2. The costs of medical care are measured based on the payments made to medical care providers such as doctors and hospitals and do not measure health insurance premiums. So, by example, if Blue Cross aggressively negotiates rates with providers and reduces payment to the providers but still raises the premiums charged to the insured, the CPI will show a decline in medical care costs even though you are paying more in premiums. BLS also measures health care insurers charges included in insurance premiums for reserves and profit but for some reason these studies are not published. The CPI/U for medical care in July 2009 shows an annual price increased of 3.2% which is much less than most health insurance premium increases.
   
3. BLS staff collect price data for a basket of goods which includes almost everything that anyone might buy from pet food to TV's to medical care but most people will not buy everything in the basket of goods. For instance, many people who live in New York City don't own cars so changes in gasoline prices don't directly apply to them.
4. BLS calculates a weight for each item in the basket of goods which represents the percent of total income spent on the indicated category by the typical consumer. For instance, home ownership and medical care represent 24.3% and 6.4% of the basket of goods. Consequently, an item with a large weight which has even a small price change can have a large impact on the CPI.
5. BLS adjusts prices for an item to reflect changes in quality or function. Consequently, if an item doubles in price but also doubles in quality or function then the price will be included in the CPI as unchanged. As an example, TV prices in the CPI/U show declines of 24.0%, 17.4% and 3.3% in 2007 compared to 2006, 2008 compared to 2007 and the 12 months to July 2009 compared to the previous 12 months, respectively. We all know that due to the digital transition, we paid almost twice as much for an LCD TV with a digital tuner compared to the older tube TV's with an analog tuner since but the BLS calculated a significant improvement in quality and/or function the BLS price data shows a decline in price.

Consequently, even though the July 2009 CPI shows a 0.2% price decline, if you live in New York City in an owner occupied co-op, have a fixed rate or no mortgage, don't have a car and have an individual medical insurance policy, I'll bet that you have seen your costs increase much more than the 0.2% decline reported by the BLS.

The CPI should be used to indicate price trends in general and it should be realized that the actual CPI will not accurately reflect the experience of any individual consumer. It is incredibly difficult to accurately measure prices and assign a dollar benefit to product quality which, I believe, should be reflected in the CPI. It also should be noted that a major benefit of the BLS data is to indicate changes in prices over time. Even if a better way was developed to measure prices, in order for this new price measurement to be of value, the data for previous years would need to be modified to reflect the new method in order to enable comparisons and doing this may be impossible.

Healthcare Reform - Price Controls?

As I wrote on 6/24/09, I expressed a concern that the Administration had agreed not to negotiate Medicare drug prices in exchange for $80b from Big Pharma over 10 years in reduced prices for Medicare Part D recipients in the "doughnut hole". Now, unfortunately, there are rumors that this was indeed part of the agreement. I also suspect that there is also the possibility that the Administration has agreed not to pursue legislation that would prevent Big Pharma from extending the patents on brand name drugs or legislation that would prevent payments from Big Pharma to generic drug makers in exchange for the generic manufacturer agreeing to delay the production of low cost generics. It now appears that Big Pharma will gain much more than the $80 in price reductions and, what is of more concern, there is nothing that would prevent Big Pharma from increasing prices for everyone else not covered by the agreement.

The American Hospital Association has agreed to price cuts of $150b over 10 years if the reform includes universal coverage. Since hospitals had $34b in uncompensated charges in 2007 alone which will probably increase over the next 10 years, hospitals will get as much as $340b in exchange for $150b in cuts. Again, there is nothing in the current legislation that would prevent the hospitals from increasing other charges not covered by the agreement to recoup the $150b in cuts.

The private insurers have agreed to raise premiums by 1.5% less than the premiums would otherwise have increased if the reform includes universal coverage mandates in which case the private insurers have agreed not to charge a higher premium for pre-existing conditions or to reject applicants with pre-existing coverage. Again, there is nothing in the current legislation that would prevent the private insurers from raising the average premium to compensate for the higher costs related to the pre-existing agreement.

There have been few policy considerations designed to reduce costs and none of the changes being considered so far will reduce costs. For instance, changes to enable a private insurer to sell across state lines would probably increase costs. A private insurer moving into a new area would incur significant costs in establishing a provider network and negotiating prices with medical providers in the new area and would probably resort to acquiring a local insurer with consequent huge costs that would be passed on to the policyholders.

In summary, the major medical providers have made relatively minor cost concessions in exchange for significant profit increases with no restrictions on being able to shift the costs for the concessions to other areas. Perhaps it is worth considering the implementation of price controls for medical providers to be no more that the Bureau of Labor Statistics measured cost increases at least during the transition period of any major health care reform.

Every reform that would lead to significant price reductions have so far been excluded from consideration. Medicare prescription drug price negotiations, tort reform (at a minimum, any punitive damage awards should be paid in into the Medicare trust fund), taxing employer health benefits, higher co-pays, etc. have all been excluded.

Unfortunately, the current reform efforts look like they will produce higher profits for the providers and higher costs for the consumers. We lose.

Recollections of Discrimination

How society deals with race relations specifically and discrimination in general changes over time and discrimination negatively impacts everyone including the segment of society that is doing the discrimination. Discrimination is a lose-lose proposition although there are some who say that dealing with adversity improves the moral character. On this last point, I was recently recollecting on my experiences with the issue of discrimination in an effort to determine what impact my experience as a white guy in his 50's had on my world view.

When I was about 5, I used to spend part of the summer with my grandparents who lived in a small community in the hills of Pennsylvania. Not that it came up often, but occasionally a black person would appear on TV or be in a newspaper photo and my grandmother would refer to them as 'darkies'. She never said it with any malice; it was just a term used by an older woman who, I don't think, had ever met a black person but I recall feeling without understanding why that the use of the term 'darkie' was wrong. In the section of Syracuse that I grew up in, there were very few blacks. I never really wondered why there were so few blacks and just assumed that since the section of Syracuse I lived in wasn't a particularly good neighborhood that the blacks just chose not to move there. My father bought a laundromat in the late 1950's which was located across the street from the 'projects' in Syracuse. As I recall, there were about 5 ten storey, red brick buildings entirely populated by blacks. The laundromat had a self service section in the front with coin operated machines and a drop off section in the back where people would drop off their dirty clothes and my father and 1 employee would wash, dry, fold and sometimes deliver the cleaned clothes. I recall going to work with him during the summers and on several locations finding that someone had started a fire in one of the machines or vandalized the business. No problem though. He filed claims with the insurer and fixed things up and was back in business. I just assumed that there were some bad people around and never saw it as a race issue. Eventually, however, his insurance was dropped due to the number of claims and then, during the race riots of the mid 60's, he was completely burned out, went out of business and over the subsequent years paid back the business loans out of his own pocket.

I graduated from the State University of New York at Buffalo where I had an academic scholarship called a Regent's Scholarship from the State of NY which was based on my performance on a state exam. When I received the bill for my senior year, it no longer had a credit for the scholarship because, as it was explained when I asked, the Regent's Scholarship had been replaced with a grant program that was for women and minorities. I graduated from university in 1975 which was a time characterized by long gas lines and high unemployment. I went to a campus interview with one of the large banks, I don't recall which, and the interviewer said that although I had excellent credentials that he couldn't be promising. He explained that his company had cut back on hiring and he had been instructed only to refer women and minorities for company interviews.

While in Buffalo, I occasionally went into Canada. I never had any trouble getting into Canada but almost every time, I had a hassle getting back into the US. The US border patrol would pull me over to the side and do a search sometimes even putting a dog in the car. They never found anything wrong but seemed to enjoy giving us a hard time. I was a college student with long hair, had a 1959 Volkswagen bug on the hood of which I had hand painted the album cover from King Crimson album In the Court of The Crimson King. I wasn't an artist but did a pretty good. Someone carrying drugs or other contraband would have kept a lower profile but even then I knew that my paint job and long hair would attract the ire of those who for reasons unknown to me hated 'long haired hippies' with a passion. The irony was that I was an economics and political science major and was fairly conservative. I didn't have much money so saved on haircuts and really just liked the band King Crimson. I guess this was a type of profiling.

Upon graduating, since I couldn't find a position other than sales in private industry I decided to go for a federal civil service position. At that time, professional federal civil service jobs were filled based on, among other things, your score on an exam called a the PACE Exam. When I took the exam, since minorities were under represented in the federal civil service, minorities were awarded an extra 10 points out of a maximum 100 based on their minority service. I scored 99 or 100 in each of the sections and was hired by the Department of Labor (DOL) in Washington, DC.

While at the DOL, I parked my car in the basement parking garage which, although a government building, was operated by an independent contractor. One day, the supervisor of the parking garage assaulted me so I went to the DC district attorney and tried to have him arrested. The DA explained to me since the guy who punched me was black and that since I was in DC, the jury would be black and judge would probably be black and that since I was white there was no way that I could possibly win. I kept pushing it so they agreed to investigate and the guy who punched me gave them a list of 15 people who would testify that I had attacked him and his 2 friends. I weigh about 150 lbs and each of them was about 225 so it would have been stupid to do this. In any case, they contacted all 15 of the people on the list and every single witness either was fictitious or said that they were not a witness to the event. The DA decided to prosecute because, I think, that they were PO'ed that they had been lied to rather than that they believed that they could win. In any case, the black jury working under the instructions of a black judge found the black defendant guilty of assaulting the white guy.

The point of the above experiences, and they are many more, I didn't look at the issues as black/white issues. The blacks that burned my father's business were just bad guys who would most likely have been a problem even if my father had been black. The preferential gender/race policies that negatively impacted me were most likely developed by a bunch of white guys who were legitimately exercising their authority to correct a larger problem that my personal employment. The jurors who convicted the guy of assaulting me just happened to be black but were fair minded people who took their civic responsibilities seriously just like any other.

I think that many people take things that negatively impact them too seriously and consider the issue too narrowly. Sometimes, for the greater good, we have to look at the big picture and accept the fact that the world doesn't always function just for our individual benefit.

Public Option will be Good for Private Insurers

Most of the private health care insurers and their supporters are strongly against a public option because they fear that a public option will reduce their business and profits and may, in the extreme, put them out of business. The private insurers are being short sighted and I think that a public option will actually increase the business and profits of the private insurers assuming that health care reform includes a tax credit for most people to help pay for insurance which is likely or requires health insurance for everyone.

The tax credit will help a large number of people keep medical insurance who would otherwise drop coverage due to cost. Every private interest group with a health concern will lobby their local politician to add covered medical services that private insurers don't include thereby increasing the cost of the public option. For instance, maternity care will probably be included in basic coverage (now this is an extra charge coverage that older people, single men, etc. don't need to include or pay for), extended home care, autism personal care without limit, unlimited psychological services, etc. will be included which will drive the premium cost much higher than the private insurers. The net result is that the private insurers will be able to raise prices significantly and still cost less than the public option and will have more policyholders due to the tax credits that will help many pay for their premiums. The private insurers will do even better if there is mandatory coverage for everyone. As far as being required to accept people with pre-existing conditions without a surcharge, they will be able to raise premiums for all of their policy holders to pay for the extra costs that would be expected.

The public option will be good for the private insurer's business.

As far as a health co-op which is being touted by Republicans and some Democrats as an alternative to the public option, no details of how a co-op would work have been provided. There are generally two different approaches to the operation of a co-op for health care which are:

1 - A buying co-op in which the co-op would negotiate premiums for pools of people looking for medical insurance. This would provide some of the same buying power that large organizations have in negotiating lower insurance costs for their employees. This may result in lower rates for individuals and small firms but, if the majority of the people in these pools are those people who have health problems significant enough to be declined by existing insurers, then rates will probably be higher than the rates for typical employee coverage.
2 - A health co-op modeled on existing agricultural co-ops where the co-op would own the health care provider facilities such as hospitals and the doctors, nurses and other health care providers would be employees of the co-op. This is probably the type of co-op that the Republicans have in mind when they talk about co-ops which is amazing because the Republicans have argued against a public option claiming that a public option is socialized medicine. A health care co-op more closely fits the definition of socialism and more closely resembles the health care system in Britain.

Socialism and Capitalism Can Work Together

A major objection to the Obama's administrations public option in the health care reform debate is that a public option is socialized medicine and will take the US down the road to a socialist society similar to the former Soviet Union.

Socialism by definition is the ownership and administration of a business activity. Socialism is not necessarily something to be feared and the US currently has a significant part of its economy operating under socialism. Most of our roads, our military, most of our schools, the weather service, etc. are socialized in that they are owned and operated by the government. Capitalism even requires that some services be provided as socialized services. The economist F. A. Hayek who is a champion of capitalism and is frequently quoted by conservative commentators such as Larry Kudlow said that in cases where restrictions and regulations apply to all, capitalism does not argue against central control such as in the areas of food safety or working hours and that capitalism is not incompatible with the provision of social services. In general, Hayek says that legitimate areas of state control are where the payment of a price is ineffective such as most roads or where the cost of harmful effects of competition can not be confined to the owner that state regulation is required. Hayek specifically makes the case that the state is responsible for developing regulations that limit the negative impact of pollution and deforestation.

The public option being discussed by the Obama administration would not be a business owned or operated by the government and therefor would not be socialist. Britain has socialized medicine in that the hospitals are owned by the government and the doctors are employees of the government. The public option being advocated by the Obama administration would not be socialized medicine in that the doctors, hospitals, pharmacies, etc. would remain private businesses. The public option would pay medical bills for its policyholders with money collected in the form of premiums from its policyholders. The public option would be governed by an independent board of directors working under the same state and federal regulations that private insurers work under and would therefor be similar to the US Post Office (USPS). Like the USPS, the public option would compete for business with privately owned competitors. The only real differences are that like the USPS, a public option would not be operated for profit, would not need to pay some of the money collected in premiums to shareholders, would not use premiums to pay sky high salaries or to fund mergers and acquisitions. Keep in mind that some of the existing private insurers such as Blue Cross are not-for-profit firms owned by their policyholders. Also, it appears that some people who object to the public option do not make a distinction between the terms public option and single payer. Every private health insurer is a single payer mini-system. In the case of my Blue Cross insurance, all of my medical bills (after the considerable calendar year deductible) are paid by Blue Cross.

Although there may be many good arguments against the proposed public option, a claim that the public option is taking us down the road to communism is not a valid argument.

What is Palin Planning?

Palin has resigned prior to the end of her first term as Governor of Alaska and has not explained why she resigned early or what her future plans are. I think that her resignation is the first step in her plan to run for president in 2012. By resigning now, she is able to campaign for Republicans in the 2010 mid-term elections without risking ethics charges as she would expose herself to if she were still Governor of Alaska. She commands support from the extreme right wing fringe who make up for what they lack in numbers with enthusiasm which she will be able to direct to the candidates she supports. By campaigning in the mid-term elections, she will pocket political IOU's and have some influence on the platforms of the candidates she supports. Given her animosity to the media, she will not announce that she is planning to run for president in 2012 until the early 2012 so as to limit media coverage of her activities. Given that primaries are usually decided by the most extreme supporters of both political parties, she stands a good chance of winning the Republican Primary although there is almost no chance that she would be able to win the general election. She will use the next few years to build her base and collect the IOU's that she will call in during the primaries as well as to earn money for her personal needs. Unfortunately, she won't use the time to become better versed on the issues as I expect that she believes that everything she needs to know is in the bible or written between the lines of Obama administration policy. Her between the lines reading of the current administration's policy results in pure fiction and her supporters believe it with a passion. Obama is not a citizen, health care reform will lead to the euthanization of the elderly and feeble, Obama is a Moslem and other beliefs are all clearly a fiction but Palin's supporters accept them as fact without reservation. I'm sure that the policies which will result from the Obama administration's first term which will include some flavor of health care reform, some immigration reform which will probably include a path to citizenship for some illegal immigrants and probably at least one court case that limits gun ownership will provide more than enough incentive to get Palin's supporters to actively support her.

The 2012 presidential elections will be the ugliest that we have ever seen but the election of Palin as the Republican candidate will be a gift to Obama which will make it almost impossible for him to loose re-election.

Benjamin Franklin Deserves More Credit

George Washington is frequently referred to as the father of our country having served as the Commander of the Continental Army in the War of Independence and as the First US President. It was George Washington's wisdom that shaped the form of government in the US and arguably ensured that the new nation survived the birth. He was instrumental in establishing the balance of power between Congress and the Executive branch refusing to making significant decisions without the participation of Congress. He refused to accept a 3rd term as president and assiduously avoided imbuing the presidency with the trappings of a monarchy most famously instructing those he came in contact with to refer to him as Mr. President rather than as 'Your Highness' as many were inclined to do so. He set the tone and the rest is, as we say history.

Benjamin Franklin was instrumental in forging a consensus in the drafting of the US Constitution and without him, if less wise and hotter heads had prevailed, it is unlikely that the Constitution would ever have been finished at least in the form that has proven so robust over the centuries. In addition to guiding the development of the US Constitution, we have Franklin to thank for establishing much of the infrastructure that would serve is so well of the centuries. Franklin established the first public lending library, the first fire department and what would become the US Post Office.

However, there are perhaps more important accomplishments to credit to Franklin. Arguably, Benjamin Franklin deserves as much if not more credit than George Washington for the military success against the British without which the US would never have been born. I am comfortable in saying that without Franklin's contribution, the US would have lost the War of Independence with the British and remained a colony.

Benjamin Franklin is almost solely responsible for arranging the support of France for the War of Independence. Without the support of France, the US would almost have certainly lost the war. Over a period of about 2 years, Franklin used his considerable skills of planning, communication, argument and leveraging his rock star like status in France to win French support. In the 18th century, scientists were accorded the fame that rock stars and performers are now accorded. Franklin was known as the "man who tamed lightening" for his experiments with electricity and kites with which every schoolchild is familiar with and the development of lightening rods which saved many buildings from lightening damage.

The support of France was essential to the winning of the war. The Battle of Yorktown was the decisive and last major battle of the War of Independence after which the British withdrew from America. It was a French General who persuaded Washington not to attack the heavily fortified New York City but rather to attack the British in Yorktown. During the battle, there were almost as many professional French soldiers attacking Yorktown as there were militia under Washington. 90% of the gunpowder and many of the weapons used in the Battle of Yorktown were supplied by the French as the US did not have a military manufacturing capability at the time. It was the French Fleet that prevented the British fleet which was en route to Yorktown to relieve the British with supplies, additional troops and to provide naval artillery support. The consequence of the French support was that the US won and defeated Cornwallis taking about 8,000 British prisoners as well as significant quantities of British military equipment and supplies.

Without Franklin and the support of France that he had arranged, the US could not have won the war. We repaid our debt to the French people with the liberation of France from Germany during World War II but we still owe a dept of gratitude to Franklin that is generally not recognized much less expressed.

Medical Insurance - $14 Million for 1 Salaried Doctor

I have medical insurance through Blue Cross and I have read my policy and I always review the benefit statements for medical services processed on my insurance. A few months ago I had a routine screening colonoscopy because of my age and everything was fine until I received the bills.

Since I have a private policy, i.e. not a group policy, I have a fairly high calendar year deductible. However, I was aware that my policy pays 100% of the allowed charges for a screening colonocsopy every 10 years which is to say that Blue Cross waives the calendar year deductible and should pay everything. The allowed charge is the price that Blue Cross negotiates as payment in full with a service provider.

When I received my benefit statement, I noticed that there were two charges for anesthesia - one with a list price of $602 and an allowed charge of $133 and the the second with a list price of $595 and an allowed charge of $133. Thinking this was a billing error and a duplicate charge, I called the doctor's office who explained that the $602 charge was for an anesthesiologist who prescribed the anesthesia and was available in case there was a problem, the second charge was for the anesthesia nurse who actually administered the anesthesia and monitored my vitals and that I was only charged for the actual time that they spent with me which was 22 minutes. First, I spent about 3 minutes with the anesthesiologist who asked my weight, whether I had any allergies and then presumably wrote the prescription for the anesthesia. Based on the number of procedure rooms, I would estimate that this anesthesiologist supervises 6 anesthesia nurses. One of my 1st thoughts was how could the anesthesiologist accept such a significant discount for Blue Cross patients? But then I did the numbers. Assuming that the anesthesiologist works 50 weeks per year, 8 hours per day, supervises 6 anesthesia nurses who each perform 2 colonoscopies per hour, then the total annual billing for her services at $602 per procedure would be $14.4 million! Even at the lower negotiated rate of $133 per procedure, the total annual billing would be $3.2 million. Note that there was also a facility charge at $1,295 and the doctor who performed the procedure billed separately. $14.4 million per year in charges for 1 doctor's time is outrageous. For the anesthesia nurse, using the same assumptions, the total annual billing would be at least $2.4 million at the list price or $532K at the Blue Cross price. I know that nurses are paid well but again this is ridiculous.

Getting back to the benefit of knowing what is in your policy, as I explained above, per my policy I was only responsible for the allowed charges (not the list price) and Blue Cross waived the deductible for this procedure so I was surprised that I received a $250 bill for the Outpatient Surgery Center where the procedure was performed and another bill for $200 for the doctor who performed the procedure. After a number of questions, it turned out that the doctor coded the Blue Cross claim incorrectly, he corrected the claim and Blue Cross paid him the additional amount that he had billed me for. The 1st Blue Cross claims representative said that the Outpatient Surgery Center charges were not part of the Colonoscopy and that I was responsible for the $250 co-pay. I called back again, spoke to another rep who agreed with me and setup the paperwork to refund the $250 co-pay that I had already paid. If I hadn't read my policy I would have paid $450 more so reading the policy was time well spent.

Larry Kudlow - Soap Box Jockey

Although there many TV commentators that I disagree with, Larry Kudlow is one of the few that cause me to change the channel when I encounter him. I don’t know why he even bothers having guest specialists and commentators on his CNBC show that disagree with him because he usually treats the show as his personal soap box, interrupts constantly, talks over everyone else, and is generally rude and trite. Rather than educated economic analysis, he is prone to trite summary judgments and is constantly applying juvenile labels such as “bubble head” or “Bailout nation” and is constantly shouting warnings that the US is headed towards socialism. He has never encountered a tax or government regulation that he supported and constantly cites unbridled capitalism as the cure for every economic situation. Larry "buy more stock" Kudlow doesn't seem to realize that Capitalism is a system in which capital is only one of the input factors and requires other inputs such as an educated labor force, an efficient infrastructure, etc. to work well. He responds viscerally to any suggestion that the stock market is overbought or that investors should stop buying stocks calling anyone with a message of caution a 'doom monger".

His economic analysis, when he even bothers to refer to some economic principle, is almost always wrong. He doesn't seem to recognize that the economic landscape has changed over the last 200 years from an economy based on agriculture and trade primarily in commodities and low value added manufactured goods. In 2007, he belittled anyone who suggested that we were heading towards a recession and up to mid 2008 denied that the US was in a recession. In June 2002, he actively argued for the US to invade Iraq in order to help the stock market arguing that “a lack of decisive follow-through in the global war on terrorism is the single biggest problem facing the stock market”. There are a number of justifications for putting the life of soldiers on the line but keeping the DOW index high is not one of them. He has without exception supported every Bush era economic policy without reservation. Mr. Kudlow’s economic philosophy is essentially classical economics which has consistently proven to be too limited of a theory to be of any value to planning economic policy. One of his favorite economists is Friedrich von Hayek who he cites often to support his contention that current government policy will lead the US to socialism. Mr. Kudlow is a conservative while Hayek, using contemporary terminology, is a libertarian and would have argued equally strongly against Mr. Kudlow’s economic prescriptions as he would against current Democratic policies. Ironically, Hayek says that regulation by the state is required in areas where the payment of a price is inefficient such as with most roads or where the cost of harmful effects of competition can not be confined to the owner such as air pollution. Kudlow would use Hayek to argue against Cap and Trade legislation while Mr. Kudlow’s hero Hayek would have said that such legislation was indeed the responsibility of the state.

I really don’t understand how Mr. Kudlow has been able to acquire such high level positions including the head economist for Bear Stearns (from which he was fired for substance abuse) and numerous high level government positions with only a BA in Economics. If you want unbiased business and economic analysis based on sound economic reasoning then I would suggest that you look elsewhere.

Health Care Reform - Myths and Disguises

It is difficult enough to evaluate such a complex issue as health care reform without the misinformation that is beginning to flood the media. Following are some of the most significant claims, myths and intentional misdirection that I have recently noticed.

• A number of US Senators and Representatives have been stating that if a public option is part of the health care reform, “About 88.1 million workers would see their current private, employer-sponsored health plan go away and would be shifted to the public plan”. They attribute this conclusion to a report from the Lewin Group which is characterized as a research firm. What they don't tell you is that the Lewin Group is owned by a company named Informix which is a wholly owned subsidiary of the United Health Group. United Health is a major health care insurer in the US with about 27 million policy holders which might be negatively impacted by a public option. I doubt that United Health can be relied upon for an unbiased opinion.
• You may have seen the TV commercial or web site from a group called Americans Against Food Taxes which claims to be a coalition of concerned citizens. The commercial and web site argue against imposing a tax on soda and juice drinks which has been discussed as one way to fund health care reform.The web site and commercials have been developed by Goddard Claussen which is a public relations firm that advocates for anyone who pays them. This ad campaign is being financed by the American Beverage Association rather than a coalition of concerned citizens. The group claims that “taxes never made anyone healthy”. Oh really? Wasn’t this the argument that was made to justify additional taxes on tobacco, i.e., that higher cigarette prices would cause people to stop smoking thereby making them healthier? Another argument made to justify higher tobacco taxes was that the taxes would help fund the additional health care costs attributable to smoking related diseases. Soda, fruit drinks, candy and similar foods have contributed significantly to the explosion in rates of obesity, type 2 diabetes, heart disease, etc. that are chronic life long diseases which cost significantly more in terms of health care than smoking related diseases which typically develop in old age.
• The claim has been made that a public option will pay medical providers the same low rates as Medicare does which will put them out of business. Yes, Medicare typically but not always does reimburse at a lower rate than private insurers. However, when you consider that Medicare is designed to only reimburse 80% with the remaining 20% coming from the patient’s secondary insurance or patient’s pocket, Medicare patients in total frequently reimburse more than private insurance.
• The claim has been made that if a public payer option is included in health care reform that administrators in Washington will determine what medical services you can get and limit your options. However, with a private insurer, an administrator with the carrier will determine what care you can get and private insurers who are motivated by profit margins are more restrictive than Medicare. Dr. David Scheiner, a Chicago-based doctor who was Obama’s primary care doctor before he became president, said that Medicare is not restrictive enough and permits almost anything while he constantly battles with private insurers to authorize medically necessary treatments.

There will continue to be dire claims made on both sides of the debate and it will be difficult to sort accurate information from misinformation. Hopefully, each of us will take a few minutes to check the accuracy of the most significant claims before making a decision on the issue.

Cash for Clunkers Program Benefits

Although most commentators have commended the Cash for Clunkers program, there have been a few notable exceptions such as John McCain who is threatening to filibuster the extension of the program in the US Senate. The acclaim for the program has been in general terms and, since I haven't seen the program benefits quantified, below is my estimate of what the program actually will deliver. You can download the spread sheet used to calculate the benefits and modify the assumptions if you like. The benefits below are based on the initial program funding of $1 billion and you should triple the benefits if the $2b extension is passed by the US Congress.

SUMMARY OF BENEFITS (Remember to triple #'s if program extension passes)

1. Since the US consumes 20 million barrels of oil per DAY, a savings of 1.6 to 3.6 million barrels of oil per YEAR will not significantly reduce dependence on foreign energy imports.
2. The program will generate a one time benefit of about $250 million in increased tax revenues to financially strapped state and local governments.
3. The program will save or add 341,000 jobs.
4. The program will result in additional federal income tax receipts of $3.7 billion per year.
5. The program will add 0.11% to US GDP.
   

In summary, it appears that the program was an outstanding success from a return on investment perspective and will significantly improve the economy but will do little to improve energy independence.


DETAILED BENEFIT ESTIMATES FROM PROGRAM

$250,000,000 Additional sales tax to states & counties
3,567,447 BBLS of oil saved per year @ 19.5 gallons gas per 42 gallon barrel. Remainder of 42 gallons other products and/or lost in process.
1,656,315 BBLS of oil saved per year @ 42 gallons gas per 42 gallon barrel. Actual conversion factor is 19.5 gallons per 42 gallon barrel.
$231,884,058 Annual reduction in payments for oil to foreign countries @ 19.5 gallons of gas per 42 gallon barrel.
$107,660,455 Annual reduction in payments for oil to foreign countries @ 42 gallons of gas per 42 gallon barrel.
$16 Billion Annual increase in GDP
341,450 Number of jobs created or saved as a result of program
$3,680,000,000 Annual increase in IRS income tax receipts

ASSUMPTIONS/VALUES USED TO DERIVE BENEFIT ESTIMATE

250,000 # of new cars purchased in initial Cash for Clunkers program.
8 Avg MPG improvement
15 Avg MPG of clunker
23 Avg MPG of new car
5.00% Avg sales tax rate
$20,000 Avg cost of new car purchased
12,000 Avg miles driven per year from Federal EPA estimates
4 Money Velocity
23.00% Avg Federal Marginal Tax rate from the National Bureau of Economic Research
80.00% Domestic content of new vehicles
$65 Cost of barrel of oil
$46,859 2008 US GDP per capita from IMF

- Sales tax receipts by state and local governments will not result in increased expenditures.
- All consumption resulting from new car purchases will be spent on domestically produced goods and services.
- All consumption resulting from new car purchases will be spent rather than saved.

A Personal Note

With this post, I am going to take a brief respite from the political commentary and post a recollection of a personal note.

Back in the early 1980's, I worked at the Cummins Engine Company in Indiana in various IT positions eventually advancing to the position of a CIM (Computer Integrated Manufacturing) specialist. CIM was the organization of computers, machine tools, robots, automated inspection stations, etc. to produce a product in a way that promised huge leaps in productivity and quality. CIM was intended to eventually lead to the near fully automated factory which, at the time, was frequently referred to as the "lights our factory". Most of the technology used by CIM was available off the shelf and the challenge was to integrate the technology so as to enable automated manufacturing. At that time, CIM was new and CIM specialists needed to be proficient with all major IT technologies as well as know manufacturing methods. I might install and configure a database such as Oracle one day, install an operating system on VAX computer another day or write some custom software another day. Consequently, we CIM specialists were very rare. I used to say frequently that I loved my job and would not want any job where I couldn't make a ton of metal dance with the press of an ENTER key.

In around 1985, I was the CIM specialist working on a project to implement an automated machining cell (computers, machine tools, robots, etc.) to produce replacement water pumps for diesel engines. Diesel engines can be rebuilt and consequently last for maybe 20 years. Consequently, with the different engine series and engineering changes to each engine series over the years, there were hundreds of water pumps that might be ordered. Long story short, the project was a huge success and, at the time, was ranked as being in the top 100 factory automation installations in the world. I was invited to speak at major trade conferences and participated in a project with Purdue University to assist the university in designing courses for manufacturing technology.

In 2000 while driving to Florida, I stopped in Indiana to see a friend with whom I had worked on the water pump manufacturing automation project. He explained to me that Cummins had decided to outsource as much manufacturing as possible to reduce costs and the water pump cell had been sold to a former manufacturing engineer at Cummins who was producing the replacement water pumps required by Cummins on a contract basis. My friend asked if I would like to see the equipment that I had worked on so we went to see it. As it happens, the manufacturing engineer who purchased the equipment had a side line business as a pig farmer. In the middle of his pig farm, he had erected a large metal building in which he had installed the machine tools shorn of all the computers and robots. What had been one of the most advanced manufacturing installations in the world was now sitting in a building next to piles of pig manure.

I suppose that there are several lessons in this story. Be proud of what you do and not what you have comes to mind as being at the top of the list. With some changes to the software perhaps I could have made pigs dance.

Selection of a Supreme Court Justice and Sotomayor

Regarding nominee Sotomayor's comment that she would bring empathy to the Supreme Court, empathy is subjective and objectivity, not subjectivity, is what is required in a judge. A Supreme Court justice is human and will have personal subjective views like anyone else but this empathy or subjectivity should be left at the door. This is no more than is expected of each of us when we serve on a jury.

As far as the selection of a Supreme Court Judge, nominees are confirmed by the US Senate by a simple majority vote. Since Supreme Court Justices are confirmed for life, I think that there is an argument to be made that the confirmation should require a super majority vote rather than a simple majority vote. Judges confirmed by a super majority would tend to be more middle of the road and the confirmation proceedings would be less divisive.

It is unfortunate that the confirmation proceedings are more about Senators appealing to their constituents and grand standing rather than a real job interview. It would be helpful to know how a judge goes about interpreting the Constitution and the law. For instance, using part of the 2nd Amendment as an example which reads "the right of the People to keep and bear arms shall not be infringed" how would the nominee determine the definition of the word arms. Would it be appropriate to use available reference material written by the people who wrote the Bill of Rights such as the FEDERALIST PAPERS to reach a definition of the word arms? Assuming that the word arms was defined as any weapon that could be carried in a persons arms such as a rifle, would the word arms only include flint lock rifles such as existed at the time the 2nd Amendment was written or is it appropriate for a judge to 'update' the definition to include modern weapons that can be carried in the arms such as an assault rifle? How are limitations to rights justified and determined? For instance, using the above example, what is the constitutional justification for excluding the right to minors and convicted felons?

Also, how would a judge weigh competing constitutional rights? Take the rights of Freedom of Speech and Right to Privacy in the context of telephone marketing which are competing constitutional rights. How does a judge make a determination which by necessity limits the constitutional rights of one of the parties?

I'd rather know more about how a nominee goes about making a legal decision rather than hearing campaign speeches from the Senate.

Health Care Reform and Costs and Savings

There are several proposals in congress in the area of health care reform which would raise costs to the insurers including the Schumer plan which would add $10b in fees per year to insurers and requiring insurers not to charge more for policy holders with pre-existing conditions. Any reform which raises costs to insurers without capping premium prices or reducing costs will just result in the insurers passing on the increased costs to policy holders and increasing the cost of medical coverage. I see only two ways to make sure that premiums do not rise to offset the additional costs which are:
1 - A public plan similar to medicare. Competition with the public plan would prevent insurers from continuing the double digit annual premium price increases.
2 - Price controls. Capping the premium charges at there current level and only permitting annual premium increases in an amount equal to the annual increase cost of health care as measured by the Bureau of Labor Statistics (BLS). The BLS currently collects health care pricing by region and metro area for a range of health care services. Per the BLS, health care costs have been rising by about 8% per year by premium charges have been increasing at double digit rates.

As far as how to pay for health care reform, following are some options with the annual potential savings.

1. $10.0 b - Negotiate Medicare Part D pricing. The US House Oversight committee estimates the 10 year savings at $156b.
2. $0.5 b - VA pension decrease resulting from universal coverage. The VA provides pensions to certain groups of veterans or surviving spouses based on income and health care premiums are subtracted from income so a reduction in premium costs would reduce the pension amount paid.
3. $7.1 b - Per the IRS, in 2006, federal tax revenues were reduced by $14.3 b due to deductions from income for medical expenses. Keep in mind that only those medical expenses that exceed 7.5% of adjusted gross income are deductible. If everyone had insurance then medical deductions would decline significantly. I also think that some thought should be given to removing the deductibility for elective procedures such as plastic surgery.
4. $17.0 b - Per the American Hospital Association, uncompensated costs in 2007 for US hospitals was $34 b. These costs for services rendered but not paid for, typically for services provided to the uninsured, are shifted to paying patients. If everyone had insurance then uncompensated costs should decline dramatically. I expect that other health care providers such as labs and doctors also have significant uncompensated costs which are also passed on to paying patients.
5. $30.0 b - Tax 20% of the value of employer provided health care benefits. Per the Heritage Foundation, $150b per year is lost in federal tax revenues by not taxing health insurance benefits. All other employer provided benefits such as day care credits or 401K contributions have an annual limit of the amount that is deductible. Also, in terms of fairness, it doesn't seem fair that 100% of health care premiums paid by an employer are tax deductible while, for someone who pays for their own health care premiums in an individual plan, only the costs which exceed 7.5% of adjusted gross income are deductible. Employees, especially unions, too frequently are against this because they think that they will lose benefits. What they don't understand is that higher health care costs incurred by their employers causes the employer to cut other benefits and reduce wages and to use more part-time and contract employees for whom the employer typically does not provide benefits.
   
6. $2.2 b - Require a $2 co-pay for prescriptions covered by Medicare Part D. I found it amazing that each year there are 1.1 billion prescriptions filled by medicare recipients. I think it only fair that everyone share in cost of health care reform that will benefit everyone.
7. $20 b - More actively fight medicare and medicaid fraud. US Attorney General Eric Holder estimates that the annual cost of Medicare and Medicaid fraud to the taxpayer is at least $60b.
8. $10.9 b - More actively fight Social Security Disability fraud. Keep in mind that most people who are awarded Social Security Disability are also able to use Medicare. Social Security Disability payments are $109b per year and rising fast. At a minimum, the Feds should more frequently review medical conditions of recipients to ensure that disability awards are still warranted. To get an idea of how much waste and fraud there is in the system, see the NY Times article or an article on Medicare fraud in Miami.
9. $ ? - When a chemically identical generic is available, require Medicare & Medicaid recipients to use the generic. Most private insurers such as Blue Cross will only pay for generics in this case so why not the government? As an example, a 30 day supply of the brand name drug Zocor for cholesterol is about $150 while a 30 day supply of the chemically identical simvastatin is about $6. Also, Medicare and Medicaid could reduce costs by not paying for prescriptions which are available over the counter such as high dose Tylenol.
10. $ ? - In 18 states, personal injury protection (PIP) coverage on auto insurance policies is mandatory. PIP pays for up to $10K for medical expenses for people involved in auto accidents who do not have private medical insurance. If everyone had medical insurance, I don't see why PIP would continue to be included on auto insurance policies. In Florida, I pay about $250 per year in auto insurance for PIP even though I have medical insurance because I might be in an accident with someone who doesn't have medical insurance. In Florida, there are about $1b per year in claims on PIP coverage so I woud assume that the auto insurers are collecting in excess of $1b per year in PIP premium charges.

The savings identified above amount to about $100b per year and I'm sure that an expert in the field could identify other savings.

Health Care Reform - Round 2

It appears that the main features of a reformed health care system are firming up and will include the following:

1 - Mandatory health care insurance for everyone although there will be an opt-out for those who claim financial hardship.
2 - No exclusions or additional premium for pre-existing conditions from private insurers.
3 - Annual premium increases from private insurers will be 1.5% less than what the increase would otherwise be.
4 - No public insurance option other than possibly cooperative insurance at least for the 1st 5 years following reform.
5 - Government subsidies for low and middle income families for premiums paid.

The net-net of the above is that private insurance premiums for everyone will probably increase and the private insurance companies realize significantly higher revenues and profits.

In the case of no exclusions for pre-existing conditions and no additional premium for medical issues that exist at the time that the policy is taken out, the insurers will just raise the premiums for everyone else in the age group to cover the higher costs associated with this new group. When I took out private health insurance from Blue Cross several years ago, my premium was increased 25% due to high cholesterol. I doubt that health care reform will require these existing surcharges to be removed but the insurers will not be able to levy these surcharges on new policies and will spread the surcharge over all policy holders.

In the case of mandatory insurance, the health insurers will add a large number of young, healthy policyholders which can only translate to higher profits.

Government subsidies will increase the number of policy holders above what it would otherwise be which will also increase insurers' profits. With the annual cost of health insurance increasing at double digit rates, the insurance industry must have realized that they were in danger of pricing themselves out of business. The subsidy will enable the insurers to keep increasing premiums at double digit rates without pricing themselves out of the market - at least for a few more years.

As far as increasing annual premiums by 1.5% less than what the premium increase would otherwise be, it will be almost impossible to determine whether the insurance industry is keeping to this promise. The premiums on my personal policy from Blue Cross has been increasing by 14% per year so even the lower annual increase of 12.5% which, if this is typical, will still eventually bankrupt the consumer.

An effective and significant health care reform would need to include the following characteristics:

1. Single payer
2. Mandatory coverage
3. Negotiated prices with all providers
4. Emphasis on preventing fraud
5. Higher co-pays for everyone including Medicare recipients. A $120 per year calendar year deductible is too low.
6. Generic drugs required if available
7. Electronic, centralized health and treatment records
   

Silent Casualty of the Financial Crisis

Investors, pension funds and over extended home owners have frequently been discussed as victims of the housing bubble meltdown and ensuing financial crisis but there is another group of casualties that is almost never mentioned. This other group is the savers who by and large played by the rules and invested their money safely and conservatively in CD's and deposit accounts. Following the financial turmoil, the Federal Reserve aggressively reduced interest rates in an effort to recapitalize the banks and to stimulate the economy to offset the economic slowdown that was an additional consequence of the financial turmoil. The lower Fed rate widened the rate spread (difference between what the banks pay for deposits versus the rate that they can lend at) enabling banks to make billions in additional profits. According to the IRS, in 2006 (most recent year for which data is available) individuals reported $222.26b in interest income on their tax returns and paid about $33.57 billion in tax on this income. Interest rates available on 1 year CD's have declined about 70% in the last year. A very general calculation would indicate that savers have lost about $155 billion per year in interest income and the Federal Government has lost about $23 billion per year in tax revenues due to these lower interest rates required to save the banks.

Response to Michael Jackson’s Passing

I think that the reason that music is so important in all human cultures is the ability of music to recall an emotional memory. Music can evoke the feelings of a previous love, a significant life event or a momentous decision in our lives and cause us to relive the event and perhaps to better understand our response to the event. However, especially with the music of pop stars, some fans make the mistake of assuming that the creator of the music has some keen insight and really understands the person, emotions and thoughts of the fan. Some fans transfer the sentiment, especially the sentiment of love, that the music evokes to the person who created the music rather than the person who created the emotional experience. I suppose that this is what explains the emotional outpouring following the passing of Michael Jackson. Michael Jackson was a stupendously successful musician whose style and skills influenced the music of those who followed and enriched the musical landscape. However, it seems to me that the fans are making him into something much more than he was. Although a skilled musician, he was a narcissistic, troubled, self absorbed individual who does not seem to me to be worthy of the adulation that he has garnered. I also find it troubling that so many people spend so much more time and effort staying current on the trivia of Michael Jackson’s life than on more important issues such as education, careers, public policy, etc. If only half of Michael Jackson’s fans spent as much time and effort understanding and speaking out on significant issues such as climate policy, the invasion of Iraq or health care reform then perhaps they could have made a more meaningful contribution to the quality of human existence.

I also believe that many people are exaggerating Michael Jackson’s contributions. As an example, I have heard it reported that Michael Jackson broke the race barrier that enabled subsequent black entertainers to appear on MTV when in fact Michael Jackson had nothing to do with MTV showcasing black entertainers. The Jackson Five were under contract to CBS Records in 1982 soon after MTV began broadcasting. CBS approached MTV requesting that MTV broadcast a Jackson Five music video for the song "Billie Jean". MTV refused stating that they had a policy of not broadcasting black entertainers. Walter Yetnikoff , then Chairman of CBS Records, threatened to pull other CBS artists from appearing on MTV and go public alleging that MTV was racist. Consequently, MTV changed their policy and broadcast the "Billie Jean” music video. It was Walter Yetnikoff, not Michael Jackson, who should be credited with breaking the race barrier.

Let’s keep things in perspective. Michael Jackson was a highly compensated singer. He didn’t cure cancer or make any significant contribution to the well being of humanity.

You Lost Your Job Due to a CDSs

Thousands of people have lost their jobs due to Credit Default Swaps (CDSs) and they don’t even know what a CDS is. A CDS is insurance that a borrower will repay a loan to the lender. Here is how the CDS leads to a job loss using as an example a fictitious company that I will call Acme, Inc. that makes pencils.

Business is good so Acme borrows $100 from Jones Investments to buy a machine to make more pencils. Acme agrees to pay the loan off over 12 months. Energy prices then increase so Acme is making less money on each pencil that it sells and is unable to pay off the loan as agreed upon. Due to the liquidity crisis, Acme can not find a bank to refinance the loan which would enable Acme to stretch out the loan repayment over a longer period of time, say 2 years, by which time Acme expects the market for pencils to improve.

Before CDSs, Acme would probably be able to modify the loan payment terms with Jones Investments because if Jones did not modify the payment terms the alternative would be that Jones Investments would end up with a used pencil machine which would be worth say $50 or Acme would be forced into bankruptcy in which case Acme’s assets would be sold off or the loan restructured in which case Jones would get back only part of the money owed to them, say $50.

However, Jones Investments, when they made the $100 loan to Acme, then bought 5 CDSs for $100 each from AIG on the $100 loan to Acme. If Acme can not pay back the loan per the loan terms, AIG will pay Jones $100 on each of the 5 contracts for a total of $500. Consequently, Jones wants Acme to default on the loan and wants to force Jones into bankruptcy. If Jones refinanced the loan for a longer term then Jones might only get $110 back on the $100 loan versus the $500 Jones will get if Acme goes bankrupt.

The way this scenario plays out is that Acme if forced into bankruptcy, all of Acme’s assets (tools, machines, vehicles, etc.) are sold for pennies on the dollar, Acme’s employees are now unemployed and Jones Investments makes a 500% profit.

The above example is not idle speculation. The above scenario is believed to have contributed to the refusal of GM bondholders and, more recently, to the debt holders of Six Flags Amusement Parks to refuse to a restructuring plan because they could make more money from their CDS contracts if the companies went bankrupt.

CDSs are not centrally cleared so it is almost impossible to determine who holds what CDS contracts. There is even the possibility that some lenders have actively worked to force companies into bankruptcy on which they hold CDS contracts by shorting the equity to force the stock prices down of borrowing companies.

There is the argument that the availability of CDSs lowers the borrowing costs for some companies so CDSs are good for the economy. However, since CDSs are not regulated and no reporting is required, it is impossible to know if this is true and almost impossible to determine if CDS holders are manipulating the market to force defaults.