Tag Archives: political economy

It Misses the Question

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Ben Wattenberg wrote about demographics as a cause of our “entitlement crisis” in a recent Wall Street Journal op-ed.

As he pointed out, birth rates are falling drastically in the nations wealthy enough to have an entitlement régime.  Contradictorily, that’s a normal result of the development of widespread wealth within nations.  For a variety of reasons—delayed marriage, increasing education, increasing incomes, more effective means of birth control, lower stigmatization of terminating pregnancies, and so on—birth rates in developed nations have fallen below the replacement rate needed simply to maintain their existing population levels (generally, 2.1 births per woman).   The birth rates in Italy, Spain, Greece, Eastern Europe, Russia, the former Soviet republics, and South Korea, for instance, are all below 1.5.  Japan’s rate is a potentially catastrophic 1.2.  The US rate, at about 2.0, still isn’t quite high enough to maintain our own population; although until the current economic failures, we could count on immigration to make up the shortfall.  Sort of.

All this adds up to not enough people are entering the labor force to pay for the existing entitlements.  When the US’ Social Security entitlement program was created 75 years ago, there were 7 people in the labor force for every retired person, and that retiree could count on living about 6 years in retirement.  Today, the number of people in the work force is  around 2-3 (and falling), and the retiree being supported can count on living around 35-40 years in retirement (that longer support duration is a demographic that Wattenberg doesn’t mention).

This certainly does emphasize the proximity of the crisis that’s upon us.

Wattenberg identified two current solutions to this: cutting the entitlements or running massive deficits.  He then offered what he thinks is a better solution.  Harking back to the ’60s and ’70s worries about the population bomb and the meme that we need to reduce our birth rates, he wants a similar program, this time preaching the opposite: our new parents need to have more children.

But Wattenberg misses the crisis’ cause.  It’s not that birth rates are too low, or that there aren’t enough new workers entering the system to support the entitlement economy.  That argument proceeds from a false premise.

The real answer, the individual liberty- and responsibility-preserving answer, is to eliminate the entitlements and privatize them, instead.  It’s as wrong for government to try to “influence” the family timing and size decisions of free men and women as it is for government to try to “influence” any other family-related decisions made by free men and women—or any other decision founded in individual conscience.

Another Idiotic Idea

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And another attempt to emulate the blatantly failing European model.  This one is backed by the AFL-CIO and the National Nurses United unions….

With that union backing, the Democrats (led by Congressman Peter Defazio (D, OR) in the House and Senator Tom Harkin (D, IA)), are pushing a bill that would impose a .03 cent tax on all financial trades.  Defazio says,

It would benefit long-term investors with stability

but

It’s “tiny,” and it would cost the “average investor” just $1 per year.  Let me see if I understand the logic of this.  It’s too small to matter to the little guy (and since it’s not a progressive tax, it’s even more trivial for the big players) but it’ll influence everyone to move toward trading market stability.

Then Defazio added this:

[I]t will still generate about $35 billion a year in income—income that could be used to rebuild the real economy, infrastructure, other investments.  Or money that could be used to help defray our deficit.

Yeah, sure.  We saw how much the last several Progressive stimulus spending packages did for our “infrastructure” and all those shovel ready jobs that President Obama yucked it up about not actually being shovel ready.  On top of which, when was the last time either party used tax money to reduce a budget deficit, rather than as seed money with which to leverage even more spending?

And this:  Bill Gates and George Soros are cited as backing this…idea…as a fine way to “painlessly” raise “a lot of money without affecting growth.”  There’s that false premise, again, this idea that the government needs more money.

Are the Democrats Serious about Raising Taxes on Americans…

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…or are they just posturing so they can continue their class warfare campaign, or otherwise for personal political gain?

First we get President Obama’s demand that the Congress pass his tax increase forthwith—you know the one: his extension of the Bush tax cuts only for some Americans while raising taxes on that group of Americans of whom he so thoroughly disapproves.

Then we get the Senate Minority Leader, Mitch McConnell (R, KY), trying to take him up on his demand.

My recommendation is we give the president what he asked for.  He wants to have a vote on raising taxes on individuals making over $250,000….  That’s a vote we welcome.

But Senate Majority Leader, Harry Reid (D, UT) won’t allow the vote.  Acting on the President’s demand is an “obstructionist stunt,” you see.  President Obama himself, through his press spokesman, Jay Carney, insists that the Republicans’ effort to give him what he demands is just “a gimmick.”

Of course, four Democrats in the Senate who are up for reelection this fall don’t want to be on the record as voting for a tax increase, and it would only take a three-Senator swing to change control of the Senate and cost Reid his power.  Additionally, these four—Bill Nelson (D, FL), Claire McCaskill (D, MO), Tim Kaine (D, VA), and Shelley Barkley (D, NV)—are from swing states whose coming down Republican could cost Obama his job, too.

Hmm….

Taxes

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It’s tax season, again, because the Obama tax increases are looming at the start of next year—just 6 months off.  It appears that President Obama is bound and determined to tax his favorite disliked group of Americans.  In an interview with North Carolina’s WRAL TV, Obama was asked whether he would veto any bill that extended all the tax cuts. [President] Obama said,

[Y]es, and the reason is, we can’t afford it.

We can’t afford to cut spending?  How does that work, exactly?  President Obama had more to say:

We don’t need more top-down economics.  We need policies that grow and strengthen the middle class.

If he truly believes that second part, when is he going to let the 20+ jobs bills languishing in the Senate to come to a vote so they can be passed, he can sign them, and the middle class can grow be strengthened?

Then he doubled down on his demand to increase taxes.

So let me be clear to [House Republican Leader John] Boehner and everyone else: we should not hold middle class tax cuts hostage any longer[.]

In response to which I have to ask, when are you going to stop, then, holding Americans hostage to your taxing demands?  When will you cancel your tax increase and make the Bush tax cuts permanent, instead of vetoing a tax cut bill that includes all Americans and not just your preferred group?

Then Our Obama added this amazing remark:

With all the other budgetary pressures we have—with all the Republicans’ talk about wanting to shrink the deficit—they would have us borrow $700 billion over the next 10 years to give a tax cut of about $100,000 each to folks who are already millionaires[.]

Really?  What borrow (which, incidentally, the Republicans are not proposing)?  President Obama is saying he can’t find $70 billion of spending cuts in his budget each year?  Obama’s 2012 budget proposed spending $3.8 trillion in spending.  He really can’t figure out how to cut his spending proposal by less than 2%?  Hmm….

Moreover, the tax bill he has said he’ll sign–extending the Bush tax cuts exclusively for his favored Americans–is only a temporary extension.  He won’t even allow that to be permanent.  This despite the fact that the continued uncertainty can have no favorable effect on our economy as individuals and businesses continue to husband their resources against that continued uncertainty.

Oh, yeah: President Obama also is imposing a penaltytax increase of some $285 per year, for not buying Obamacare’s health insurance starting in just 18 months.  And this rises to $2100 per year in 2016.  And those are floors: households that make more than $28,500 per year (or rather less than those $250 thousand Obama “promised”) in those 18 months will have to pay 1% of their income as that penaltytax, and beginning in 2016, households that make more than $83,400 per year (still way less than those $250 thousand Obama “promised”) will have to pay 2.5% of their income as that penaltytax.

Health Insurance vs Health Welfare

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The question of universal health coverage is one well worth discussing at the national level; the goal of universal coverage is to make health care services ubiquitously available, for rich and poor alike.  It’s a laudable goal.  However, in order to have a coherent discussion, it’s necessary to review the terms of the subject.

Too often, though, the discussion assumes that health care and health insurance are so much a part of each other that they cannot be had separately.  This is wrong.  Health care is what you get from your doctor or hospital.  You’re getting treatment for a medical condition, advice about how to treat a medical condition, advice about how to avoid getting a medical condition.  In return for these health care services, someone pays the doctor or hospital money.

Many people pay for these services with cash out of their own pocket, and many more would prefer to do so, were they given the choice.

Others—the vast majority of Americans (I’m eliding the free riders in the market)—pay for these services by buying something we call insurance: they pay a periodic premium to a health insurance provider for a policy that obligates the insurance provider to pay (most of) the costs of a medical condition should that condition actually arise at some time in the future.  The insurance company makes its money by selling lots of such policies on the bet that few enough people actually will incur the covered condition within a given time frame that the aggregated premiums over that time frame will more than cover the actually required medical payouts.  That’s what insurance is, including health insurance: it’s one person transferring part, or all, of a risk of something untoward happening to him to another—an insurance company, for instance—in return for an agreed upon fee.  For that fee, the entity accepting the risk, or the agreed part of it, agrees to cover the cost of that untoward event should it actually occur, with the aggregated fees over lots of such agreements, being enough to cover the required cost payouts.

Health care and health insurance, thus, are entirely separate industries: one is the actual provision of services, and the other is simply a means of paying for those services.

But for the risk transfer, or insurance, industry to work, though, two things must occur: the first is that the fees charged for the risk assumptions must be voluntarily agreed to between the two parties to the risk transfer.  If the fees are dictated to one or the other side, without any market flexibility, they run a very strong risk of being too high for the one party to afford, or too low for the other party to be able to cover the agreed costs.

The other thing that must occur is that the fees must be consistent with the risk assumed.  To take an over-simplified example, if a man has a risk of a medical condition that costs $1,000 to treat, and the likelihood of his incurring that condition within the next year is very high, and he wishes to transfer 80% of that risk to an insurance company (i.e., get the company to pay $800 should the condition arise), then the insurance company must be able to charge a premium that, over the course of a year, sums to $800 in order to break even.  Of course, if the insurance company were to sell that same policy to lots of folks subject to that medical condition, actuarially it’s highly unlikely that all of them—even with the same risk—will incur that condition in the same year.  This would allow the insurer to sell the policy for a lower premium than it could if the customer population were limited to that original single person.

With lots of companies in the market selling policies for a given coverage, competition ensures that a single company does not abuse single-company monopoly power and overcharge.  Nation-wide marketability of that policy both enhances the competition and expands the customer base with the insured-against condition, thus increasing downward pressure on the policy’s premium—the risk transfer fee.  This downward pressure makes insurance more accessible to more people.

The actual situation facing us, though, is a market structure of government limits on the policies offered, government limits on the premiums allowed to be charged, and two critical government mandates: every individual must buy health insurance—must buy those government-limited policies—and every insurer must accept all customers.  There is little to no market flexibility—or pressure—to structure coverages to match the risks being transferred, nor is there much flexibility to match the fees charged to the risks being transferred.  This combination of government limits and mandates is a health welfare program of universal coverage.

My own view is that universal coverage is unnecessary, never minding its laudability, and that health welfare (or welfare generally) is actively suboptimal when it’s the first resort, rather than the last resort after market forces have taken their effect on prices and availability.

Because the welfare program’s risks and fees do not match, and because competition among health insurance purveyors is limited, inefficiencies will rapidly develop in the form of coverage payouts being too great for the premium income in some areas and too little for the premium income in others, with a strong bias toward too little premium income.  While companies’ desires to charge more, including “too much,” would be heavily constrained by competitive pressure, the government’s bias is to hold down costs to its voters, without regard in the short term to the market consequences, and the bias is unchecked.

This drives the welfare program to one or more of three outcomes: the insurance companies must prevail on the regulatory authorities to raise premiums, they must get tax dollar help from the government to make up the shortfall, or they must stop providing that insurance coverage.  All of these represent stark cost increases to the insurees: either they pay higher premiums today (even for conditions for which they do not want coverage or whose risks are very low, because those conditions are included in the required coverage allowed to be sold), their taxes go up tomorrow, or next week they lose their insurance coverage altogether until they move to another company—if one is left in business.  Indeed, this is the rationale for the Individual Mandate requiring everyone to buy insurance: all those extra premiums, hopefully from young, healthy Americans who aren’t likely to need a payout (and who also aren’t likely to want to buy the coverage) are intended to provide those extra monies and so avoid any of the three outcomes.