Deficit Busters!!

At 9:53 pm Mountain Standard Time on 18 Dec 2010, the US deficit was at $13,872,370,279,521 or 94% of GDP, the highest ratio of debt to GDP since shortly after WWII. In other words, the United States almost owes dollar for dollar as much as the entire country produces in a year. That's insane. So insane, in fact, that the president of the Council on Foreign Relations has stated that the debt is a national security threat. If it helps to bring such an enormous number to perspective, realize that each and every citizen of the united states would have to fork over $44,614 or each TAXPAYER would have to shell out $125,559 to wipe it clean.

Now, that number is not quite as horrific as it sounds. The debt held by the public, which excludes debt owned by government accounts (debt the government owes itself), is "only" at approximately $9,000,000,000,000, or about 63% of GDP.

So why is the deficit such a big deal? Benjamin Graham wrote in The Intelligent Investor (a great book by the way) that he feels it is unwise to invest in a company that has a debt load of over 50%. In other words, if a company has $5 million in assets, but owes $3.15 million to its creditors, Benjamin Graham would likely turn his nose up to it. China, the United State's largest "investor", has made grumblings to this effect. It's possible that they're beginning to feel that the US is "over-leveraged" and may not be a good investment. Not a good thing.

Some argue that the US shouldn't worry about it's current deficit as it only has to pay the interest payment to its debt holders. The current T-bond yield is about 3%, so in essence, these guys claim that as long as the US can afford to pay $416 billion (and growing) each year in interest on its loans, we can continue to get loans. That's akin to somebody saying it's fine to keep racking up their credit card debt because they can afford the minimum payment. That's all well and good until your creditor changes the rate (something China has threatened to do), or until you don't make as much money as you expected for some reason.

Regardless of what degree of threat you think our deficit poses to our national solvency, it is a problem that needs to be addressed. Earlier this year, President Obama had a budget deficit reduction committee created with the sole purpose of finding ways to reduce our country's soaring deficit. They brainstormed and think-tanked their socks off and came up with a handful of solutions.

The primary fixes are as follows:

1. Collapse today’s five income tax rates (10%, 15%, 25%, 28%, 33%, and 35%) into three brackets (12%, 22% and 28%).

2. Eliminate itemized deductions

3. Tax capital gains at ordinary income rates

4. Eliminate and simplify a bunch of tax credits (mortgage, charitable giving, etc)

5. Gradually eliminate the exclusion for health coverage premiums

6. Change the corporate tax bracket to 28%

7. Increase the federal gas tax by 15 cents a gallon.

8. Raise the age at which Americans can get Social Security benefits to 69 by 2075.

9. Require the president to propose annual limits on war spending.

10. Gradually reduce the government’s civilian work force by 10 percent

11. Freeze pay for federal workers and members of Congress for three years

12. Eliminate all congressional earmarks

13. Change Medicare physician payment formula to reward quality instead of quantity

14. Cut congressional and White House budgets by 15%

There was a lot of fuss about the commission's results immediately after the report was released, but, as is always so apparent, our politicians are more worried about being re-elected that actually solving a budget crisis, so instead of addressing said crisis by instituting some of the commission's suggestions, they again extended unemployment benefits. Speaking of budgets, let's remember that our government doesn't even have one right now. Another political move by the democrats as that causes the republicans to spearhead the effort and be the bad guy who cuts spending, thereby enabling democrats to return to congress on campaigns that shout, "Republicans want grandma to eat catfood!" All at the expense of our national solvency.

Sorry, got sidetracked.

Anyway, as I was saying, I'm sorely disappointed in a government that, when it gets reminded of it's infrugality (somebody tell Webster I just made up a word!), instead of looking itself in the mirror and admitting it's a spending addict, it runs off and spends some more.

So, in my own passive aggressive form of protest, I propose my own deficit cutting measures:

1. Flat tax. 22% tax on everybody. If you're on welfare, you get 22% of your welfare check taken back by Uncle Sam. I'm serious. Right now nearly half of Americans (including me thanks to a myriad of deductions) pay ZERO federal income tax. That's sick. Everybody needs some skin in the game. That way, next time we decide to give people in Atlanta a heat bill subsidy to fight a 50 degree cold front, we might think twice.

2. Eliminate nearly all tax deductions and definitely all credits. The IRS should never owe you money come April. I want to say no deductions at all, but I am tempted to believe that we can allow charitable contributions to be tax deductible (thanks a lot Dad).

3. Eliminate the capital gains tax. That's a tax on money that's already been taxed. I'll refer you to Nate here.

4. Set the corporate tax rate at 22%. A flat tax is a flat tax.

5. Change the social security eligibility age to 70 by 2020. In 2012 its 66; in 2014 it's 67 and so on. Frankly, I think we should phase it out entirely or at least return it to what it was initially (assistance to the elderly needy and widows).

6. Reduce the federal workforce by 15%. That's just over a 5% reduction of the size the federal workforce was in 2009.

7. Freeze pay for all federal workers and congress for 5 years then allow the maximum of an inflation matching increase each year thereafter.

8. Eliminate all earmarks. That should have been done ages ago.

9. Cut the federal budget by 15%. Not impossible.

10. Repeal the health care bill. The bill is bringing with it immense federal spending that will only further inflate the deficit. Once the bill is repealed, we can start over with real health care reform. The last bill only changed how we paid for health care and who paid for it rather than actually making health care more affordable.

I'm sure there are many additional things we can do to balance the budget and reduce the deficit.

While both my suggestions and those of the actual committee could be seen as "drastic", real action is necessary. I have serious doubts that anything genuine will be done. As we've already seen, it's more likely that we'll only see some token efforts and the can will keep getting kicked down the road. So, hopefully, we can get somebody who has real power to get this ball rolling. Somebody tell John Boehner, "YES WE CAN get the deficit under control."

Individual Mandate Say What!!!

Today Virginia Federal Judge Henry Hudson deemed the individual mandate of the health care law known as "Obama-care" to be unconstitutional. While other Federal Judges have ruled in favor of the mandate, a ruling in opposition to the mandate is likely to take the case to the supreme court.

While I don't pretend to be a constitutional attorney, I agree with the judge's conclusion that the mandate is unconstitutional. While congress does have the authority to regulate commerce, as the judge said, it does not have the authority to force you to create it. This judge basically said today that when a person purchases a good or service, that congress can regulate it, i.e, tax it, control the size and scope of the purchase, regulate how the transaction occurs, et cetera; but congress does NOT have the authority to create that purchase (force you to initiate it).

Spot on.

Constitutionality aside, there are some serious problems with the mandate. Simply legislating human behavior won't change that behavior.

Supporters of the bill say that forcing people to purchase health care is "ok" because it is (1) for their own good and (2) reduces the financial impact of the uninsured on the general tax base. If these guidelines justify the forcing of individuals to purchase health care, then why not anything else if it does the same?

For example.......

Purchasing life insurance could satisfy the above criteria. If everybody bought life insurance, then the number of single parents on taxpayer funded welfare would likely be lower and it's obviously good for the individuals who are separated from loved ones prematurely. So why not force everybody to buy life insurance?

Criminals break into homes and assault and kill people all too often. Pursuing, trying, convicting, and incarcerating these individuals is done at massive taxpayer expense. Homeowners would clearly be better off if they were able to defend themselves, so why not require everybody to purchase a firearm and ammunition? Additionally, as a tool is no good to the untrained, we should also force everybody to go to a personal protection firearm school as well. Imagine the taxpayer dollars, not to mention the taxpayers, that would be saved.

Taxpayers spend billions of dollars subsidizing public transportation. It would be much cheaper if we simply built a bunch of private toll roads and required everybody to purchase a car and to drive the tollroads. When the roads get jammed, we'll just widen existing roads and build new ones. Sounds great.

Many people retire poor. It's a shame that some people are forced to eat catfood in their latter years. Wouldn't it be great if we forced everybody to buy into a government controlled retirement fund? That way people would be able to retire knowing that at least they can eat. Oh, wait, that's social security....[retro turntable screeching] ...REMIX!!!!..... Times have changed and inflation has gone up so far that social security alone is clearly not enough to retire. Perhaps we should force everybody to purchase a privately owned retirement account as well so they can once again retire with confidence.

Finally, food stamps, WIC, and other food subsidies cost the taxpayer billions. If these people would just buy their own d@mn food things would be much better for everybody, right? So why don't we just pass legislation forcing people to buy 3 meals a day worth of food?

These examples are ridiculous, I know. However, I chose them for a reason. Many of the rebuttals that show how ludicrous those ideas are also show the insanity of the health care law.

Requiring people to buy life insurance won't solve poverty caused by providers passing away. Some people won't buy adequate coverage.

Requiring people to purchase a firearm goes against the morals of many. For example, a neighbor of mine would rather die than lift a finger in self defense. Many people have religious or personal objections to the requirement.

If everybody drove to work we'd have to build more roads. Expensive. In the meantime, the roads we do have would get worn out and would be incredibly crowded. Crowding and quality would become an issue.

Simply requiring people to buy food won't solve the problem. Some people can't afford it.

Social security was intended, initially, to provide for those who could not afford their own retirement. Widows, the poor, etc. Unfortunately, the program was expanded, and expanded, and expanded. Now it's barely viable. But making people buy another retirement account won't solve people retiring poor. Once again, some simply can't afford it. Additionally, some will just do the minimum then rely on the existing failsafe for their livelihood anyway.

So why is the health care mandate a bad idea? A few reasons: Some won't buy enough coverage anyway, many object to it, crowding and quality of care can become an issue, some people simply can't afford it, and...oh yeah...some people can't afford it, and, as a result, will instead do the bare minimum then rely on existing failsafes (Medicare, Medicaid, CHIP) for their livelihood anyway.

Evil Insurance Companies

The other day a friend of mine posted this story on facebook.

I find the way that some proponents of the health care bill use insurance companies as a straw man to be a bit interesting.

For example, in the article that I linked to earlier, a young man got sick, eventually used up his 2 million dollar cap and was denied future coverage, then died. An unfortunate story for sure, but my question is not regarding the tragedy his situation, but the way it and stories like it are used as an argument for the health care reform bill. In this case, it wasn't the insurance companies fault that the young man died, it was nobody's fault. The family had coverage up to 2 million dollars, but use up all that funding before treatment was successful. Getting angry at the insurance company for stopping payments once you've maxed your benefit is akin to being angry at the life insurance company because it only paid out the $100,000 your spouse signed up for even though you still have bills. It just isn't valid. Unfortunate, but invalid.

Insurance companies in general should not be demonized for what they do. If anything they should be applauded. For example, my family of four has high deductible health insurance that costs us around $500 / month. My employer pays the first $190, so I pay just over $300 / month. In a worst case scenario, my family would be obligated to pay the first $5,000 and then 20% of all remaining bills each year until we have paid $11,000 each year until our lifetime cap of $5,000,000 was reached. In a hypothetical situation where somebody contracted an illness that gave us bills totaling $50,000 / year (not that far-fetched), we would pay around $4,000 in premiums and another $11,000 in bills each year in exchange for $39,000 / year of payments by the insurance company. I don't think I'll even make $50,000 this year, so the possibility of finding that much money laying around each year is slim.

Insurance companies provide a means for people to pay for emergency expenses that they otherwise couldn't afford. It's a transfer of risk. Without an insurance company, many of us would be unable to afford some of the treatments /medications that we need. However, in order for a premium to be established, a maximum payout needs to be established as well. The higher the maximum payout, the higher the premium. An unlimited payout (as the reform bill requires) would require much higher premiums. We can't have our cake and eat it, too.

Other stories that attack insurance companies talk about individuals who are already sick and can't get affordable coverage. It is an unfortunate truth that if you are already sick, then nobody will insure you at the same rate as a healthy guy. The Oracle of Omaha once said that he would insure anybody no matter the risk so long as they were willing to pay a high enough premium. As I said earlier, insurance is a transferral of risk. If the risk is more definite (you're already sick), then you'll end up paying more. The point of insuring oneself is to purchase it before you need it.

The fact of the matter is that the insurance companies are being used as a straw man to get people emotional over the "crisis" at hand. If proponents of the legislation can get enough people angry at insurance companies with their pathos-based rhetoric, then they might get enough people stirred up to do something. Many pathos-based arguments require an antagonist. If we remember, it wasn't insurance companies who were the bad guy first. It was the evil doctors who would cut off your leg or take your tonsils out because it paid better. But since that line didn't poll too well, it's the insurance companies that are out to get you now. Pathos works well over the short term, but not as well over the long term. That may be why we see President Obama running around right now trying to drum up support for legislation that has already passed. He got people riled up enough about it feel justified about the bill's passage, but finds his support waning.

By defending the insurance companies in general, I am in no way defending all of their practices. Though I believe that as a whole the health insurance industry should be applauded, there are some practices that occur that disturb me. Ask any capitalist and they'll tell you that some regulation is necessary. That said, here are some things that I believe need to be addressed with insurance companies. Dropping people as soon as they get sick is one aspect that must be addressed. Another would be hiking rates as soon as a person gets sick. At the minimum, an insurance company should keep your rate as it is until the your term is up (usually annually).

That said, here are some things I would propose if I were to sponsor a health care reform bill (yes I know some are already suggested):

Allow insurance companies to offer their services across state lines:

One of the ways to reduce cost would be to allow more competitors in a single marketplace. Simply letting the free market do what it does best would help to reduce cost.

Increase tax credits for medical expenses:

Allowing individuals to reclaim a larger portion of their medical expenses in the form of tax credits would reduce the felt cost.

Increase the maximum contribution limit for HSA accounts and broaden their approved uses:

HSA accounts are tax deductible savings accounts that accompany a high deductible insurance program. It's not the account as much as the high deductible plan that it accompanies that is a great solution; however, increasing the maximum annual contribution limit would make them more desirable. The current health care reform restricts the use of the account. Restricting their use is only a gimmick to limit tax deductions.

Educate about prepay options:

Too few are aware of the options that are available to them through prepaid medical expenses and high deductible health insurance plans. Prepaying for anticipated medical expenses can save consumers quite a bit of money.

Educate about HDHPs:

High deductible health insurance plans enable consumers to obtain health insurance at a lower premium. This is done by requiring the consumer to pay for more of his initial medical expenses out of pocket. This simple plan can help to reduce the direct cost of health care

to the consumer

by dissuading consumers from going to the doctor for every little case of the sniffles. Directly paying for more medical expenses also helps the cost of care self-reduce because consumers who pay for more upfront will shop clinics and hospitals until they find one that charges less. (Capitalism at work)

TORT reform:

The amount of preventative medicine that a doctor performs because he is either afraid of a lawsuit or his liability insurance requires it has a wearing cost on health care. I'm not a fan of caps on payouts for lawsuits (how can you put a dollar figure on pain and suffering). But I am a fan of loser pays. Just knowing you'll pay the legal bills for yourself and the guy you're suing if your lawsuit doesn't stick will reduce the number of frivolous suits.

Expand who qualifies for group plans:

Allow families, churches, and other organizations to form organizations that can apply for group coverage just like a business can. That way losing your job doesn't mean losing your health insurance.

State safety nets:

States should also be encouraged to research and experiment with "safety nets" for those who are high-risk / un-insurable. If a few states each experiment with different methods, perhaps we can find some workable solutions without too much negative impact to the nation as a whole from the experiments that didn't work as well.

Many things, in addition to what I mentioned above, are low(er) cost ideas that can be implemented to reduce the cost of health care. As smart as I think I am, I'm sure that the ideas on my list are not solely my invention. I'm also certain that the proponents of the health care bill know that the options I mentioned above would help reduce the cost of health care. So why aren't they enacting them?

I can only think of one reason. The designers of the health care bill don't want to make health care more affordable. At least, that's not their first priority. They want to be in charge of health care. The current bill is quite simply a tool to drive insurance companies out of business and will act as a funnel to government run health care. A bill that does nothing to actually reduce the cost of health care while requiring an insurance company to insure the un-insurable, insure everybody to an infinite sum, and pay for care without obligation from the consumer while providing "oversight" of premium increases says wrecking ball to me.