US Government - Homeland Security and Failure to Execute

Democracy has been said to be a messy process but sometimes it is amazing how ineffective government can be.

Following the 9/11 attacks the US government established a commission to analyze how the attacks were conducted and to make recommendations for changes that would help prevent future attacks. One threat identified was the ease of obtaining fraudulent ID which would make it difficult for the government to track persons of interest. Coordinated law enforcement databases, no fly lists and federal warrants are important tools used to protect the nation from bad actors which are made almost worthless if the bad guys can easily obtain fraudulent ID.  Consequently, Congress passed the Real ID Act in 2005 which established minimum requirements for the issuance of ID's by the states that would be acceptable at Federal facilities such as Federal offices or by Federally regulated institutions such as air lines and nuclear power plants. The Real ID Act stipulated minimum requirements for issuing ID's which included verifying the name and address of the applicant and minimum requirements for the physical ID's such as drivers' licenses to make them much more difficult to fake or modify.

Verified identifications with tamper proof IDs clearly make a lot of sense so you might find it surprising how much resistance to the requirements of the Act developed in a number of states. A number of states have argued that the Act is an unfunded mandate and too expensive (India's National ID project issued 600 million biometric ID's for verified applicants in about 4 years), is a violation of privacy rights and impinges on state rights (the ID's would only be required to access Federal facilities and services). I suspect that some states might also object due to the impact on undocumented aliens who would not be able to obtain or renew driver's licenses due to the requirement to document proof of citizenship or legal residency.

Almost 10 years after the passage of the Real ID Act, it was only in 2014 that Real ID compliant identification was required for access to nuclear power plants and restricted areas in federal facilities. Currently, Real ID compliant ID can only be required to board a federally regulated aircraft after DHS conducts a review which can not occur prior to 2016. DHS has delayed the implementation and is now estimating that Real ID compliant identification for boarding commercial aircraft will not be mandated before 2020 - more than 15 years after the passage of the Act and almost 20 years after 9/11.

On a related note, Congress enacted legislation in 1996 referred to as IIRAIRA which required a computerized tracking system for all persons entering and exiting the US.  The entry system has been partially implemented but there is currently no date established for implementation of the exit tracking system.

In both the case of IIRAIRA and the Real ID Act, there have been so many exceptions added over the years that I would question how effective the programs would be even if fully implemented.

It is frustrating to watch so many highly paid legislators and government officials execute so poorly. There is no excuse for the US government to execute so poorly.

The US Should Not Be Fighting ISIS

Any participation of the US in the battle against ISIS at this time much less the recently announced increase in troop levels is a mistake of monumental proportions. The stated goal of the US is to destroy ISIS which is not achievable in the current sectarian atmosphere of the Mid-East. Having the US take the lead will only frame the current fight against ISIS as a Western backed attack on Islam with the goal of securing oil supplies and will fan the sectarian flames and assist radical recruitment efforts.

To call the current organization a coalition is a misnomer unless you qualify the description as a coalition of the kicking and screaming. Egypt is willing to participate but wants the Sunni based Muslim Brotherhood which is supported by Saudi Arabia designated as a target of the coalition. Turkey is willing to participate but only if the Shia supported Assad regime is targeted by the coalition and apparently isn't willing to actively participate until ISIS significantly destroys the Kurds which Turkey views as an insurrectionist terrorist group. Iran is willing to participate but views Sunni Iraq as much of an enemy as ISIS. Saudi Arabia, which has the largest and best equipped military in the region, is only willing to participate as a cheer leader and doesn't want an active role for fear of radicalizing the conservative Sunni segments of their population. Saudi Arabia's only contribution so far has been to make some land available for training of the moderate Syrian rebels. Iraq demurs claiming that they don't have the ability to fight on their own at this time. The only thing that all of the players in the region seem to agree on is that they want the US to fix the problem. If there isn't common agreement on what the problem is then the effort will never lead to a solution.

With regard to Iraq, it would be a mistake to assume that Iraq will undertake political reform to include Iraq's Sunnis in government. Ibadi, Maliki's replacement, has a history of being just as anti-Sunni as Maliki and, given that Sadam's Sunni government killed some of his family members (brother and father I seem to recall), is likely to have an emotional bias against an inclusive government. If the US had been able to negotiate an acceptable Status of Forces agreement and been able to have left troops and trainers in Iraq it would not have made a difference to the current abilities of the Iraqi military. The military leadership is totally corrupt with leadership positions routinely bought and sold and equipment budgets routinely pocketed. I heard an interview with an Iraqi soldier who was in Mosul when ISIS attacked. What struck me was that the soldier said that he had just joined the military 10 days before the attack, an amount of time which would not have enabled any significant training. The current re-equipping and training of Iraq's military is not likely to do much more that pad the pockets of well placed Iraqi's

ISIS was not a threat to the US and to use this as a justification is hyperbole. Yes, ISIS is brutal and the terrors they are perpetrating on local populations is tragic but this by itself does not obligate the US to take the lead in military operations against ISIS. Boko Harim in Northern Nigeria is just as brutal as ISIS and more deadly but I haven't heard any calls to send US troops to Nigeria.

The US can win battles against ISIS but not a war, will only inflame hatred of the US in the region, lead to increased radicalization of large segments of local populations and provide an excuse for the local governments not to take responsibility. I'm not suggesting that the US should have no role under any circumstances. However, it might have been best if the US had outlined some principles, told the regional governments to get together and agree on a plan consistent with the US principles and then only after the regional governments had agreed with each other would the US join their coalition.

The current US effort in the Mid-East meets the definition of insanity which has been defined as as doing the same thing over and over and expecting different results. I just feel profoundly sad that so many people of my generation are so willing to send so many outstanding, young individuals on such a dangerous and reckless quest. I understand that many voters for various reasons believe that the US taking the lead in confronting ISIS is the right thing to do but I really wish that the US leaders fashioned policies on a better understanding of history rather than voter polls.

ACA (Obamacare) Federal Marketplace - Expect Major Open Season Problems

The implementation of the Federal Marketplace web site used by roughly 5.5 million people to purchase health insurance in 2013 and early 2014 was plagued by problems. Open season during which people with existing exchange policies can view and change their insurance plans begins on 11/15/14. Additionally, eligible individuals who don't have existing medical policies can file applications and shop for new medical insurance.

I expect that most people assume that after the problems encountered with the implementation and after expending about $200 million to fix the problems and expand capacity that open season will go smoothly. However, it is likely that the Federal Marketplace open season web site performance will experience major problems and be more problematic than the implementation.

Due to concerns about the heartbleed virus, healthcare.gov reset all users' passwords in April 2014. Normally, a password reset would force a user to select a new password after they logged in with their existing password. What appears to have happened is that healthcare.gov disabled everyone's account.

I have tried to help several people access their accounts unsuccessfully. Using the "Forgot my password" option on the login screen does not work. I've have spent hours on the phone with the Marketplace help desk and they have, on multiple occasions, unlocked the accounts and emailed a temporary password which has not worked. All of the Marketplace agents have been very polite and very helpful but have not been able to resolve the issue and their documentation is incomplete and in many cases incorrect. As an example, after all efforts to resolve the problem failed they told me to create a new account using the same email address registered with the original account assuring me that the new account would be able to access the information in the old account. This didn't work with an error message advising me that you can not use the same email address for 2 accounts. Another agent told me to create a new account with a different email address and then, after logging in with the new credentials, to use the 'find my application' link which also did not work.

The bottom line is that when open season begins that there may be millions of people not able to access their accounts and the help desk will be buried with login problems.

Federal Safety Nets vs. state rights

I've found the Republican positions on the Affordable Care Act specifically and safety net programs in general to be confusing and inconsistent. Most or all Republican presidential contenders, depending on the issue, have claimed that programs such as Social Security, Medicaid or health care insurance should be run by the states rather than the federal government.

Firstly, I don't know how these programs could ever be managed by the states. In the case of social security, how would the situation where someone worked and paid into a retirement fund in several northern states be administered when the retiree moved to Florida upon their retirement? What would stop someone in one state from moving across the boarder into another state to take advantage of a more generous benefit? What would prevent a state which is required to have a balanced budget from promising benefits in the future that they couldn't afford.





In the case of social security, Romney deviates from the consensus and has stated that Social Security is a federal government responsibility while still claiming that health care should be a state responsibility. What is the difference.





Almost all Republican candidates believe that health care should be a state responsibility but support the continuation of Medicare which is a federal health care program. Why is there a difference. If the federal government can require that everyone with a paycheck contributes to the retirement health care program called Medicare then why is it unconstitutional to require that everyone buy pre-retirement health care insurance? In fact, everyone in the US already has medical insurance in that hospitals are required to provide life saving care regardless of whether the patient can pay. The only difference is that some people pay for their insurance and others don't. How can you argue that the commerce clause of the Constitution doesn't apply to a federal health care mandate when health care costs add perhaps $1,500 to the cost of every car made in Detroit when these cars are sold throughout the US and auto plants can be located in any state? Medicare for all would seem to be a major benefit to US manufacturers who are currently have high health care costs which drive up the price of their product which makes them less competitive compared to imports from countries which have national health care programs. If health care costs in each car produced represent a higher cost component than steel which is subject to the interstate commerce clause then why not a federal health care policy?

The Affordable Care Act was poor policy beacuse of the policy details but not because a federal health care policy is unconstitutional and not because it should be handled at the state level.

Death and Living

Having been involved in several memorials following a death in the family, I became curious about how different people respond to the loss of someone close. I noticed that those who were more religious seem to have a more difficult time dealing with the loss than the less devout. This was curious since I assumed that a christian who believed in an after life would find it easier to deal with the loss expecting to be reunited with the departed in the near future. For a christian, death is just a different stage of life rather than a definite end as it would be for an atheist.

One observation that may explain the difference is that it appears that chrisitans may have a crisis of faith caused by the death of someone close at a time when their faith would be expected to comfort them. It was common to hear christians question why such a good person was taken now rather than later or why the departed was put through such a painful experience. Christians believe that death and living are guided by some master plan defined by their faith so the death was planned and required by their deity - there is someone/something to blame. Atheists see no mater plan and accept that death is just part of life, that in a universe which is 13 billion years old that passing this year or next is inconsequential and that biology, physics and probability dictate the eventual demise of everything that lives.

The bottom line is that it appears that a christian has to deal with two simultaneous blows - the passing of a loved one and a crisis of faith while an atheist only has to deal with one.

US Public Debt Reporting Out of Balance

Recent headlines report that the US public debt is approaching the congressionally mandated ceiling of $14.29b and that unless the debt ceiling is increased, the US will default on its debts and the government will be forced to shutdown. Unlike corporate America which reports its financial health using net debt, government accounts are reported in terms of gross debt. Perhaps this approach is preferred due to the fact that a firm where liabilities exceeded assets would be technically bankrupt. According to Economy Watch, US public net debt at the end of 2010 was $9.5t and is forecast to be $11.03t at the end of 2011 based on the current federal budget which is significantly less than the $14.3t public debt reported in the headlines. Net debt is defined as gross debt minus financial assets which include gold, foreign currency reserves, securities and other holdings but does not include non financial assets such as buildings and roads. Although the annual budget deficits contributed significantly to an increase in US public debt, a large percentage of the US public debt increase since 2008 was used to purchase financial assets of distressed US financial institutions through TARP and to purchase US Treasury securities as part of the quantitative easing programs. As of 6/15/2011, the Federal Reserve held $1.58t of US Treasury securities which is an increase of $793b from one year earlier. US public debt can be reduced by selling financial assets on the balance sheet without any change in the annual budget deficit. In the year to 6/15/2011, US public debt declined by $204b at the Federal Reserve from what it would otherwise have been through the sale of mortgage backed securities. Although an orderly sale of US financial assets over time would be required in order to avoid tanking the asset prices, the US government can finance operations for an extended period of time through the sale of financial assets without an increase in the debt ceiling. Although there may be good reasons not to sell assets in the short term such as the desire to maintain high levels of liquidity in financial markets and to avoid depressing equity prices, slightly depressed equity prices and lower levels of liquidity would be preferable to a US government default. Although the cookie jar is far from full, there are still more cookies left than the headlines suggest.

PM Netanyahu's Speech to Congress

I just watched Israeli Prime Minister Netanyahu's speech to a joint session of Congress (5/24/2011) and was surprised that the commentators after the speech said that there was nothing new and that this was a political speech. I think that Netanyahu's speech was pivotal.

Essentially, Netanyahu defined the settlement that Israel would accept and essentially told Obama to not waste time negotiating - here is the settlement and you can take it or leave it. Furthermore, the support that Netanyahu received from the US Senators and Congressman was essentially a message to the president that he, Netanyahu, and not Obama controlled the US Congress on the issue of Israel.

The settlement that Netanyahu presented would never be accepted by the Palestinians. The key points were that Palestinians would only have the right of return to Palestine and not to Israel (essentially conceded previously), that Jerusalem would remain undivided and under the control of Israel, that Palestine would be demilitarized and that Israel would retain a military presence in an Independent Palestine and along the Jordan River.

Netanyahu essentially stated that an independent Palestine would be an occupied territory with borders defined by the Israelis. Bottom line is that this independent Palestine would not be any different from the occupied Palestine that currently exists.

US Foreign Policy - US Interests versus Values

Periodically, most recently with regard to US foreign policy concerning the Arab awakening, the claim is made that US values frequently conflict with US interests. The interest for the US in the Mid-East is for a stable, generally secular, western friendly region which has historically been provided by local autocrats. The value generally claimed to be at conflict with US interests is democracy. Perhaps there is no conflict and the apparent conflict is just a matter of definition. Democracy is not an end in itself but a means to achieving goals. If a democracy leads to a fundamentalist Islamic government that persecutes people of other religions, limits education to religious studies for men only and recognizes few if any rights for women really in accordance with US values even if achieved via a free and fair election? Hussein in Iraq was an autocrat but he provided freedom of religion and gender equality which are key US values. If democracy leads to a civil war, are US values really served? If a country such as many of those in Africa doesn't have the institutions to support free and fair elections such as independent courts, media and election monitoring can a election really be expected to result in practices which are in accord with US values? If a country has an illiterate population with strong tribal loyalties arranged by geographic region it is likely that an election will result in an administration that is dominated by one culture or tribe which exploits the other tribes which usually results in a civil war.

I would argue that when comparing interests to values that an expansive definition of values is adopted with an assessment of what democracy will provide in light of a given nation's institutions and culture. I would also argue that stability is both a major interest and value of the US and is sometimes best served by an autocrat. The US has some ability to influence the policies of an autocrat through aid budgets and other means. Democracy as an alternative to an autocrat is no sure or quick thing. Democracy in some instances, will result in practices that are less in accord with US values than the previous autocratic government.

Western involvement in Libyan revolt

The major cause for the delay by the Western powers in determining their role in the Libyan revolt is the attempt to reconcile values with national interest and to reconcile short term tactics with long term strategy. In the short term, humanitarian imperatives caused by the Libyan regime’s willingness to use the military against civilians in rebel strongholds argues for immediate intervention. Once the regime’s military has entered the rebel cities there is nothing the West can do to prevent a slaughter short of a large military combat presence on the ground which is unacceptable. In the long term, the reluctance to support the rebels is based on not knowing whose interests the rebels represent or what tactics will lead to an end position that does not involve a bloody civil war or a divided country.

One option would be to proceed as follows;

1. The west would adopt a sanctuary zone concept with the zones surrounded by demilitarized zones say of 20 miles. Any regime forces entering the sanctuaries and/or attacking the sanctuaries would be destroyed by the Western powers. Any rebels leaving the sanctuary to go on the offensive would do so without any Western support.


2. A quarantine would be maintained that would prevent the current Libyan regime from importing any weapons or ordinance and Libyan assets would continue to be frozen. It would be helpful of the Algerian border and the southern borders could be monitored to prevent any imports to the Libyan regime of weapons and troops from these areas.


3. The rebel area would be provisionally recognized as a separate state entity apart from the current Libyan regime.


4. The Saudis would provide technical support to run the oil and gas industry and the Saudis would handle the sale of any oil and gas available for export. The Saudis alone would determine price and customer.


5. The French would provide administrative support, account for and dispense funds received from the sale of the oil to existing employees of state owned utilities and health and safety services.


6. The rebels would have a defined period of time, say 3 months, to adopt the core of a constitution, the framework for government and to elect representatives to the government. The Turks or Egyptians might take the lead in this effort.


7. All costs for infrastructure repairs, operation of services and cost for contractors assisting with the elections, formation of core government structure, etc. would be paid for by Libyan oil revenues.


8. If the Libyan government, government representatives and core constitution were acceptable to the western governments then the process to formally recognize the new government as the sole representative of Libya would be rushed to conclusion in the UN.


9. No military aid including weapons, ordinance or training would be provided until the new Libyan government was formally recognized.

Egypt - What Comes Next

I think it likely that Egypt will follow the road that Turkey followed in establishing a secular government. The West and the protesters want a democracy established in Egypt, Mubarak will not remain nor will his son be permitted to take the reins of government and a democratic election under the current rules would likely see the the Muslim Brotherhood gaining more influence than the Egyptian Army and large segments of the Egyptian population not to mention the West would tolerate.

Consequently, in the next 10 days I expect that Mubarak will leave Egypt, the military will take command in a caretaker role and will insist on a new secular constitution being developed after which elections will be held. Much like Turkey, the military will be given a position in government with the explicit objective of ensuring that a secular state is maintained.

Earmark Ban

The Senate today voted against a ban on earmarks claiming in part that earmarks are not expensive costing only $16b in fiscal 2010. However, there are some bills where earmarks are used to get enough votes to pass the bill which would otherwise fail and in these cases I think that you should count the total cost of the bill and not just the cost of the earmark in determining how much would be saved by banning earmarks.

Recall that when it appeared that healthcare reform did not have enough votes in the Senate to pass that an earmark was included in the bill which would pay 100% of Nebraska's additional Medicaid expense with the other states only receiving a 50% federal reimbursement of the increased Medicaid costs. Assuming that Nebraska's Senator Bill Nelson's vote made the difference between the healthcare reform bill passing, should you count the cost of this earmark as the $90 million in additional Medicaid reimbursement over 10 years or the $1 trillion of the new healthcare reform over 10 years?

The argument that earmarks are not a significant cost item is misleading.

Diane Rehm - Please Retire

I am a long time NPR listener and routinely tune in to the Diane Rehm show primarily due to the quality of the quests she is able to attract. Over the last year, a significant number of her guests were invited to discuss financial and economic issues. Ms. Rehm's questions are frequently circutious and she explored popular prespectives almost exclusively. In my opinion, she is not comfortable with basic economic theories, the financial products (MBS, CDO, CDS, etc.) and industry practices that contributed significantly to the financial crisis. She missed numerous opportunities to ask probing questions which could have helped educate even the average listener on government policy and options for legislation.

However, what prompts me to write this entry is that I have listened to Ms. Rehm in two recent shows push her personal view that non-lawyers should be adppointed to the Supreme Court. The two shows were her interview with Justice Breyer and her discussion with panelists of cases on the 2010 Supreme Court docket. Her argument in support of appointing non-lawyers is that the Supreme Court should "represent a great variety of thinking, not just lawyers". I consider her point to be simplistic, insipid and not well thought out. The only thinking that is appropriate for a Supreme Court Justice is legal thinking. Justices need to have a detailed understanding of the Constitution, resources which illuminate the intent of the Constitution such as the Federalist Papers and detailed knowledge of case law decided by the court. The court needs to objectively make decisions based on the Constitution and case law and nothing else. If non-judicial thinking and personal experience were the basis of Supreme Court decisions, the court would become partisian and the decisions would not form a basis for a continuation of legal thought. If people without the requisite legal background, regardless of how much they know about other subjects, were justices, the opinions of the court would come to be seen as arbitrary and capricious and precedents would be routinely overturned such that no person or firm could rely on the legal opinion of their attorney in making decisions. I feel sorry for the mother who has lost her son to gun violence but this experience has no place in determining a 2nd amendment issue and I say this from a personal perspective of believing that easy access to guns is a problem and don't want a gun in my house. The Supreme Court should not be basing their decisions on their assessment of the impact or benefit to society at large as this is the job of the legislators. Do we really want Joe the Plumber voting on the court? It may sound fine to argue that common sense is a valid basis for a legal opinion but consider that one person's common sense is another person's folly. The Court should make legal interpretations and that requires someone well versed in the law. No, I am not a lawyer and generally agree with Shakespeare on the value of lawyers.

The host of a talk show must have some understanding of the topics being addressed in order for the show to be informative and Ms. Rehm is seriously lacking on the more serious topics which she is increasingly addressing. Perhaps she should stick with book interviews and other lighter topics.

Increase Interest Rates to Stimulate US Economy

The typical recession is the result of demand exceeding supply which leads to price inflation and is addressed by raising interest rates to reduce demand. However, in the case of a deflating bubble resulting in a financial bust, the resulting situation is too little demand yet the same remedy of lowering interest rates is prescribed. Is it possible that this is the incorrect policy to correct the weak economy resulting from a burst bubble and that the correct policy might be the counter-intuitive policy of raising interest rates? Is it possible that reduced interest rates to stimulate demand might be appropriate for an economy with a large manufacturing sector with a low savings rate but might not be appropriate for a mature service based economy with a significant savings rate such as the US or Japan?

A significant reduction in interest rates by the FOMC might in fact cause demand and GDP to contract while increased interest rates might cause demand and GDP to expand. Although this may seem counter-intuitive, consider the following;

- In 2008, $223.3 billion of interest income was reported to the IRS. As a result of FOMC rate cuts, interest rates paid to savers have declined by at least 80% which, in general terms, has lowered interest income by about $179b and, assuming a 25% federal and state marginal tax rate, has lowered tax receipts by about $44b. The result is that the savers spend less which reduces demand and the state and local governments tax more, cancel projects and/or reduce staff which reduces demand further.
- Insurance companies make a significant amount of money on their float (investing premiums collected until a loss payout is required). When their investment income declines for a given projected actuarial loss, the appropriate response is to increase premiums which reduces the demand of policyholders for other goods and services. Deutsche Bank alone which is the 3rd largest 3rd party insurance asset manager has $150b in US insurance company assets under management.
- US university income comes from tuition and fees and investment income from their endowment funds. In 2008, 4-year not-for-profit colleges and universities collectively held more than $400 billion in endowments with Harvard University alone having an endowment fund of $37b in 6/2008. Typically, a university uses 5-6% of the endowment fund each year to pay for expenses. When earnings from endowment funds decline, the university will either increase tuition, claim additional state tax dollars and/or reduce staff.
- US employers who offer pensions use pension funds to pay for the pensions. Generally, the pension fund calculates how much they need to pay their future obligations, subtract expected investment income and collect the remainder from the employer. Given that the total value of US pension funds at the end of 2007 was $17.3 trillion, a 1% decline in investment income would require that employers contribute an additional $173b which would reduce money available to firms and government for projects and staffing. It should be noted that pension funds are already assuming a much higher rate of return on investments than they can reasonably expect.
- Higher interest rates typically lead to higher prices (inflation) although in a post-financial bubble it isn’t clear that this generalization would hold in the short term. There are certain sources of income such as social security retirement and disability benefits that are indexed to the Consumer Price Index (CPI). Given that social security retirement payments in 2009 totaled $564b and disability payments in 2009 totaled $121b, a 1% increase in the CPI would increase annual benefit payments by about $6.9 billion. Keep in mind that although there are other income sources contractually tied to the CPI such as union contracts, many employers base annual wage increase on the CPI. Given that total 2008 wages and salaries reported to the IRS was $5.95 trillion, even if just 25% of this income was increased by 1% due to a higher CPI this would lead to an annual increase of $14.9b.
- A higher interest rate would typically lead to a higher exchange rate. The net impact of a higher exchange rate on the balance of trade (net imports/exports) is difficult to estimate. However, some imports such as oil are priced in US dollars and as the dollar weakens the US oil cost increases while the cost of oil imports to other countries such as the EU declines. Higher US energy costs reduces consumer demand while lower energy costs to international competitors such as Germany reduces their costs which could reduce US exports.

Note that the above is a general analysis and that there are offsets to increased interest rates. For instance, increased interest rates might increase credit card interest which would reduce demand but can credit card companies really increase above the current 30%?

Of course, when faced with lower investment returns from safe investments, the investor could chase higher returns by investing in riskier assets such as mortgage backed securities but this might just result in a new crisis. Keep in mind that Greenspan intentionally kept interest rates low following the busting of the tech bubble due to anemic job growth but this made the financial bubble possible if not inevitable.

Public Advocacy, Grassroots Organizations and Snake Oil

The Internet and email have made it very easy for small groups of people to organize large numbers of voters to influence legislative policy priorities. Unfortunately, what are essentially special interests are able to portray themselves as general interests. The effort usually starts with a small group or industry who will benefit, a narrative that distorts the special interest portraying it as a general interest and the commissioning of studies by reputable organizations which develop creditable but biased data to support the narrative.

A case in point is the supposedly grassroots organization Defend My Dividend which is flooding the bandwidth with commercials requesting voters to contact their representatives to demand that federal tax rates on qualified dividends (dividends on stock owned for one year or more) not be increased. Starting with the 2003 tax cut legislation, the tax rate on qualified dividends was reduced to 15% (0% tax for people in the 15% tax bracket or lower). If no change is made, the tax rate on qualified dividends will revert to the rate that existed prior to the 2003 tax law change which taxed dividends at the same rate as ordinary income (wages, salaries, savings account interest, etc.). The Obama administration is proposing that the reduced rates only be retained for married tax payers with less than $250,000 in annual income ($200,000 for single tax payers) starting in 2011.

The Defend My Dividend organization was organized by several major utilities. On their web site, a major justification for not raising the rate is that it is a myth that the lower rate only benefits wealthy tax payers. The organization, citing a study by Ernst & Young which was paid for by the Edison Electric Institute and the American Gas Association, claims that 27 million Americans benefit from the lower tax rates and that 65% of the people who benefit have an annual income of less than $100,000. These claims are technically true but are very misleading. The study focuses solely on the number of returns by income bracket which report qualified dividend income and not the dollar amount of the qualified dividends by income bracket. As such, the study considers the person with a 2007 taxable income of less than $5,000 with an average qualified dividend income of $42.37 the same as the people with a reported income of more than $10 million who in 2007 had an average annual qualified dividend income of $1.5 million. No points for guessing who benefits more from the reduced tax rate.

Using the same 2007 IRS data used by Ernst & Young, I find the following;

- 80.9% of all qualified dividend income was reported by people with annual incomes of $100,000 or more.
- 65.1% of all qualified dividend income was reported by people with annual incomes of $200,000 or more.
- The preferred tax rate on qualified dividends reduced IRS tax receipts in 2007 by about $23.6 billion.
- Approximately 86% of the $23.6 billion in tax savings went to people with income above $100,000 and 76% to people with incomes above $200,000 and 46% to people with income above $1 million.

Just like the snake oil salesmen of the 19th century, they are claiming that reduced tax rates for qualified dividends are good for everyone when in fact most people will not benefit and end up paying higher taxes someplace else to make up for the revenue lost due to the lower tax rate on qualified dividends.

Hacking BIOS and Windows Passwords

I'm going to do another tech post as I am totally frustrated with political economic policy development and wonder whether it is even worth my time to follow legislation and developments.

In any case, I was enjoying a beer at the local American Legion post the other day when the bartender asked if I could help with a problem with their PC. She couldn't remember the Windows password she had set so she could not use the office PC. I told her that I thought that it wasn't possible to bypass a Windows password and she would probably need to reformat the hard drive and reload Windows and all of her applications (she didn't know if she had the software) but that I would check it out. I was dead wrong. After about 30 minutes with Google, I found that not only is it possible but hacking a Windows password is incredibly easy.

There are several software applications that will hack the Windows password and tell you what the password is but the best that I found is Ophcrack. You need some advanced but basic PC skills in that you will need to be able to set the BIOS boot sequence to try to boot from the CD drive before the hard drive and will need to be able to make an ISO boot CD (takes about 2 minutes with some freeware) but beyond that you just boot from the CD and wait for Ophcrack to tell you what the Windows password(s) is.

I went to the Legion to crack the Windows password only to find that one of the people who had tried to help had set a BIOS password so back to the drawing board. I quickly found out that clearing the BIOS password is even quicker in most cases than hacking the Windows password. All you have to do is get access to the motherboard inside of the PC and move a jumper which on a Dell takes about 60 seconds. A notebook PC would be much harder only because it is more time consuming to take a notebook PC apart which is required in order to access the jumper on the motherboard. I should note that some notebook manufacturers such as Toshiba have reportedly implemented additional security to prevent clearing or hacking the BIOS password.

OK, so what are the comparative benefits of setting a BIOS versus a Windows password?

A BIOS password generally protects the PC in that the PC is not not usable if you can't get by the BIOS password. However, the data is not protected in that you can take the hard drive out of the PC and plug the hard drive into a working PC and access all of the data on the drive. Removing a hard drive from a notebook PC made in the last 6 years or so takes about 1 minute.

A Windows password generally protects your data but not your PC. If someone stole your PC which had a Windows password set, they could reformat the hard drive and reload Windows and have a functioning PC. However, even if they removed your hard drive and plugged the drive into another PC they would not be able to access your files on the drive.

As noted above, neither a BIOS password nor a Windows password will protect your PC or your data from a moderately competent advanced user but it will protect your data in the vast majority of cases.

Health Care Reform - Individual Policy - Fine Print

An individual health care policy is medical insurance purchased by an individual rather than a group health care policy which is typically provided by an employer. Since I have an individual health insurance policy, as do about 22.5 million Americans, I have closely followed the health care reform legislation as it impacts individual policy holders and have summarized the major impact on individual policy holders below.

1. Subsidies - Starting in 2014, the legislation provides subsidies for health care premiums for those with incomes below 4 times the federal poverty level (in 2010 about $44K for a single person). However, in order to receive the subsidy you will have to buy an insurance policy through a health insurance exchange. You will not receive a subsidy if you stay with your current policy. However, policies sold through the exchanges will have to provide very low or no co-pays, charge very low calendar year deductibles, not exclude or charge more for pre-existing conditions and must cover medical services which many policies do not cover or only cover for an additional premium. Consequently, the premium charged might be much higher than a current individual policy so even with the subsidy you might end up paying more than you do now. Premiums on the state exchanges can charge an older person up to 3 times the premium for a healthy young person (some carriers currently charge 10 times the premium for an older person) can charge 50% more for a smoker (most carriers currently charge 25% more for a smoker). If you are in your early 60's, don't smoke, have a low income and have expensive pre-existing conditions you will probably pay less but for others you may pay more.
   
2. Medical Loss Ratio is the percentage of medical insurance premiums that spent by the insurer on health care expenses (payments to hospitals, doctors, etc.) versus overhead expenses such as administration and profits. Starting in 2011, health insurers will be required to have a medical loss ratio of at least 80% for individual policies. Currently, health insurance is regulated by the individual states if regulated at all. In Florida, the state currently requires that insurers have a minimum medical loss ratio on individual policies so this change may lead to lower premiums on current policies in those states with minimum medical loss rations less than 80%. However, the legislation permits insurers to reclassify administrative expenses as medical expenses if the expense improves health care quality. WellPoint recently reclassified $500,000,000 of administrative expenses as medical expenses in anticipation of this change. The Secretary of Health and Human Services must approve of non medical expenses that are reclassified as medical expenses so the net impact of the 80% minimum medical loss is not clear. If you are in a state which currently has a low medical loss ratio you may see a premium decrease.
3. High Risk Pools will be established in July 2010 by some states and residents of states who elect not to establish a high risk pool will be eligible for coverage through a federal high risk pool. These pools are for individuals who are not able to get an individual medical insurance policy due to pre-existing conditions. In order to qualify for the high risk pool you must not be able to get insurance from an employer and must have been without insurance for at least 6 months. These high risk pools are temporary and will end as of 1/2014. However, only $5 billion is being provided to subsidize the premiums in the pools which is not expected to be nearly enough. If you currently have expensive pre-existing conditions and currently have an expensive insurance policy you would need to take the risk and out of pocket expense of going without insurance for 6 months in order to take advantage of the high risk pool.
4. Grandfathered insurance policies are those health insurance policies in effect prior to the health care reform being signed by the president in March 2010. These grandfathered policies are exempt from some of the requirements of the health care reform which require additional services, no exclusion or additional premium for pre-existing conditions and low co-pays and calendar year deductibles. I recently received my annual 15% premium increase from Blue Cross and inquired about increasing my deductible to off-set part of the $75/month premium increase. However, Blue Cross was still waiting for guidance from the Federal Government as to whether this would cause me to lose my grandfathered status so I elected not to make a change to my policy.
5. Higher taxes - Prior to reform, people with individual policies could deduct as an itemized expense on their federal tax the medical expenses paid including premiums that exceeded 7.5% of their adjusted gross income (AGI). Reform raised the threshold to 10% of AGI so even if you pay less in premiums you will pay more in taxes.
   

Several of the soundbites made during the campaign to pass the health care reform were misleading including;

If you like your current insurance you won't be required to change - This is true if you don't need or want the federal premium subsidy but if you do then you will be required to change.
Reform is required to combat increasing premiums - For individual insurance policies, the Congressional Budget Office (CBO) has estimated that in 2014, premiums on individual policies will be 13% less than they would be without health care reform. Using my current Blue Cross policy, I can look forward to only paying %52 more in 2014 in premiums rather than %75 more without the reform. A 52% increase in premiums in 4 years (+ $300 per month) is not nearly good enough and that is assuming that the CBO estimate is accurate.

If you currently have an individual medical insurance policy I would suggest that you consider all options but I have decided to keep my grandfathered policy until the impact on premiums of the new legislation is more clear. You might get better coverage with the new legislation but might end up paying much more in premiums even with the subsidy.

Top Tech Picks

For this post I am deviating from my usual political economic subject matter and will cover my favorite technical gadgets acquired over the last year.

1) Digital Video Recorder (DVR) - A DVR essentially performs the same functions that a VCR does except it records TV programs to a hard drive (same thing that your PC stores files on) rather than a tape and consequently offers a number of additional functions. Some of the most noteworthy functions are that it can a) record up to 170 hours of programming on the hard drive versus 6 hours on a tape, b) while the DVR is recording a program you can watch a program previously recorded on the DVR or a live TV broadcast, 3) all programs recorded are saved on the DVR as separate digital files much like on your PC so you can add a program name for easy identification or edit the program file to remove commercials, 4) the DVR has a DVD recorder so you can copy programs that you want to keep to a DVD, 5) you can "rewind" a live TV program which in essence gives you your own instant replay function and 6) if you have an old style analog TV (tube TV), you will be able to watch digital programs without needing a converter.

Tivo and most cable providers sell or rent DVR hardware but you need to pay a monthly subscription to use these DVR's. The only DVR that doesn't require a monthly subscription available in the US is a Magnavox H2160MW9. Don't bother looking for it at Best Buy because they will tell you that no such machine exists and will try to sell you a unit that requires a monthly subscription. Surprisingly, as far as national stores, I have only found the Magnavox DVR available from Walmart and Target and only through their web sites. Walmart's price, at the time of this posting, is about $50 less than Target.

2) U3 Launchpad with Allway Sync Software - I have always done backups (copies of my PC files) to protect against the loss of my data should my PC break or be stolen. The concerns I had with this is that I could not password protect the files on the backup media and backups took a very long time. Using a Sandisk flash drive, you can install the U3 launchpad from Sandisk at no charge which enables you to install and run applications from from your flash drive. The U3 launchpad allows you to encrypt the date on the flash drive so someone who gets your flash drive can not look at the files unless they enter the correct password. The Allway Sync software handles the copy of the files on your PC to the password protected flash drive. The backup is much quicker than usual because, after the first full backup, it only needs to copy/change/delete files to reflect the changes you have made since your last backup. It will also copy your Outlook contacts and mail message and your Internet Explorer favorites.

3) MP3 player - A Music Player 3 (MP3) device does much more than play music. A typical MP3 player will have an FM radio built in and will play any audio file. I am an NPR talk radio fan and I can not always listen to my favorite radio programs live. Most talk radio stations allow you to download what is called a podcast which is a file which contains the full audio of their shows. You can load the podcast onto the MP3 player and then listen to the radio program whenever you want with the additional benefit of being able to fast forward or rewind the program. I walk for exercise and if I was not able to listen to a podcast on my MP3 player I'm sure that walking would become so boring that I'd quit. Yes, you can also copy music albums or individual tracks to the MP3 player if you like.

Next Financial Crisis

If you have been irritated by the current financial crisis and the ensuing bank bailout then you are really going to hate the next financial crisis which is already being formed thanks in large part to the remedy for the current crisis.

The major goal of the US Treasury is to enable the US banking sector to make sufficient profits to offset the losses suffered by the banks over the last 2 years thereby restoring the banking sector to financial health. Secretary of the Treasury Geithner would probably prefer to just give the banks a no strings attached check in an amount equivalent to what the banks have lost over the last 2 years but realizes that this would be politically unacceptable. So, he is pursuing a more convoluted approach which essentially accomplishes the same thing. The banks are borrowing hundreds of billions from the Federal Reserve and paying 0.25% (one quarter of one percent) and then lending the borrowed money to the US Treasury and being paid 2% plus (about 3.5% on a 10 year bond, less on 2's and 5's). The banks are also using the borrowed funds to buy foreign government bonds which are paying much more such as Brazilian bonds that are paying in excess of 8%. The banks are making a fortune using the money borrowed from the fed to make low risk, low cost loans to the US and foreign governments which explains in part why the banks have borrowed so much but lent so little to US businesses and consumers.

The problem is that the banks are doing the same thing now that got them in trouble a couple of years ago. They are currently borrowing short term and lending longer term and pocketing significant profits. However, if interest rates increase and/or the dollar strengthens significantly over the next couple of years, the banks are going to take massive losses. I'm sure that the fed realizes this but is focused on fixing the short term problem even if the fix leads to a larger, longer term problem. The current method of resolving the financial crisis is analogous to giving a heroin addict more heroin to avoid the pain of with drawl.

The really disappointing thing is that having suffered such a huge hit to the economy over the last couple of years due to the financial crisis, the US Congress is not able to develop any effective financial reform. Increasing the disclosure requirements on consumer loans is not going to make any significant difference to financial stability.

Are Seniors Paying their Fair Share of Taxes

I was reading a piece this morning about income growth slowing which was attributed in large part to Social Security (SSA) recipients not receiving a cost of living increase in 2010 due to the fact that prices (CPI) did not increase in 2009. On the face of it, I didn't think that an annual increase in SSA payments would make that much difference in gross income on a monthly basis but proceeded to check my assumptions. Per the Social Security Administration, payments to social security recipients in 12/2009 were $55.9 billion so a 2% increase in payments in 1/2010 would have amounted to only about $1.2 billion of additional income in 1/2010 which is a very minor amount in an economy of $13.6 trillion.

However, what I did notice was that per the Social Security Administration trustees, the total payments to social security beneficiaries in 2007 was $585 billion. Per the IRS, total social security income in 2007 reported by taxpayers was $382 billion or $203 billion less than paid by SSA. In some cases, the income of a recipient would be so low that they are not required to submit an annual tax return but I would be surprised if $203 billion was paid to people who are not required to submit a tax return. I would hope that the IRS and the SSA are exchanging info to ensure that recipients are paying their fair share of takes.

What I also noticed was disability payments in 2007 were $99,086,000,000 ($99.1b) made to 8,920,371 recipients. In 1990, there were 4,265,981 disability recipients which represented 10.71% of total social security recipients while in 2009 there were 9,969,398 disability recipients which represented 18.5% of total social security recipients. Are Americans really getting sicker and more disabled to the tune of almost twice what they were just 20 years ago or is there an issue with fraud and perhaps extreme generosity. Based on the experience of some people I know, it appears that anyone with a good lawyer can qualify for disability. For a program that we taxpayers are paying $100 billion per year (more when you add in Medicare for which disabled individuals qualify), I think that it is time to review the goals of the program with the way that it is being implemented.

In the context of the current health care reform debate and the Republican claims that a public option would lead to rationing and Washington bureaucrats determining the health care that you get, I think it more likely that our elected representatives would provide more than the private insurance industry and more than what the taxpayer can afford.

Supreme Court Decision on Campaign Finance

In a 5 to 4 decision in Citizens United v. Federal Election Commission announced on 1/21/2010, the US Supreme Court essentially ruled that corporations have the same first amendment rights as individual US citizens. The specific impact was that existing campaign finance restrictions for corporations were invalidated and that any corporation could spend any amount they wanted to support any candidate for any US political office. The ruling would have the impact that even foreign corporations could spend money to affect the outcome of a US election.

I really don't understand how the Supreme Court arrived at their decision but then I am not a US constitutional law specialist. The US Declaration of Independence states that "... all men are created equal" and endowed "with certain inalienable rights". The preamble to the US Constitution speaks in terms of "We the People of the United States". It seems to me that the protections in US law should only apply to US men and woman - nothing here about corporations, either foreign or domestic.

Supreme Court Justice Alito who votes with the right leaning justices and disagrees with the Supreme Court rulings on abortion (Roe v Wade) never-the-less has supported the court's view that a fetus is not a ‘person’ within the meaning of the Fourteenth Amendment. Justice Alito has stated that the US Constitution clearly states that the rights enumerated therein apply to men and therefore not to fetuses. So I wonder how it is that US constitutional rights that he believes don't apply to the unborn off spring of US citizens apply to corporations, both foreign and domestic.

In any case, the US Supreme Court has ruled and we need to play by the rules and accept this ruling. However, I believe that there are some options that the US Congress has to mitigate the effect which would be:

1. Remove the tax deductibility for lobbying and campaign related efforts for corporations.
2. Bar tax exempt status for any Political Action Committee (PAC) that accepts any funding from any source other than an individual US citizen. If the PAC accepts funding from a corporation then they lose their tax exempt status.
3. For financing from a corporation, make them pay an equal amount which would be made available to PAC's with an opposing point of view to provide a balanced perspective. If needed, the money could be collected via import taxes on imports from the foreign company.