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.