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.