Sunday, September 27, 2009

Economic Stimulus, the Keynesian "Bucket" and It Will Somehow Be Different This Time

Keynesian supporters love to refer to stimulus as "a jump start of the economy". That deficit government spending will jump start the private sector and hence bring an economy out of recession. Jump start the economy? Its like attempting to jump start a car by draining the remaining charge from an already low battery. How so?

The jump start theory always comes with the lovely diagram of the "bucket". The bucket represents demand. The bucket's content is household, business, and government demand for goods and services. A recession is a bucket that is not full to the brim. The bucket is no longer full as the demand components of households and businesses has shrunk and hence its (according to Keynesians) the government's responsibility to increase its expenditures (increase its component of the bucket) in order to bring the bucket back to full.

Seems like common sense. However, the increased government deficit expenditure that attempts to fill the bucket is really draining the bucket simultaneously. Its counterintuitive. As the government increases deficit spending, private capital formation leaks out of the bucket (crowded out). Hence you try and try to fill the bucket but it remains below the brim.

Once you stop filling the bucket with government deficit spending, you now must pay for the deficit spending. Hence Keynesians raise taxes. The taxes then create another leak in the bucket as disposable income shrinks causing the demand for goods and services by consumers and businesses to shrink. Hence the bucket goes right back to the level that you began with before you started this wasted exercise.

Keynesians should wear the bucket over their heads.

Friday, September 25, 2009

The Socialized Medicine Scheme: Senate Finance Committee to vote on unknown scope of coverage and unknown price.

In the process of purchasing an insurance program one raises questions. Basically questions are raised concerning:

(a) the scope of coverage,

(b) policy language,

(c) the price of the insurance.

The answers to the above questions then become the factors regarding a cost/benefit analysis of the purchase or non-purchase of an insurance program.

In the Senate Finance Committee on Wednesday 09/23/2009 several Republican members asked to see the Max Baucus Health Care Bill’s final language so they can read the Bill before they vote on the Bill. Further, they wanted to have the price of the bill determined before they voted on the Health Care Bill. (1) (2)

The answer was NO. Really, the Democrats said NO.

Imagine for a moment that you entered an insurance broker’s office to discuss an insurance program. When you ask what the policy covers, you are told the scope of coverage is “unknown“. How in the world can you have an insurance discussion without knowing the scope of coverage?

Lets assume you then ask to see the policy language. If the scope of coverage is unknown then the policy language would have to be unknown as well.

OK, we don’t know what the policy covers, we can’t see the policy language, so out of frustration we ask what this unknown coverage costs? The answer is that the cost is unknown.

At this point, the rational consumer of insurance would leave this insurance discussion.

The Democrats in the Senate Finance Committee want to vote on a Socialized Medicine Scheme based on unknown scope of coverage, unknown policy language, and unknown price.




Tuesday, September 22, 2009

Socialized Medicine Schemes: unfunded consequences

Socialized Medicine Schemes are Generational Theft? What does this mean? How does the concept of Generational Theft apply to Socialized Medicine Schemes? Its the concept of future generations having a financial obligation related to benefits paid to today's generation.

There are several major Socialized Schemes that have been introduced over the past 70 years into the United States Economy. Regarding Socialized Medicine, several Socialized Medicine Schemes already exist: Medicare and Medicaid.

The most well known Socialized Schemes are: Medicare, Medicaid, and Social Security. These three Socialized Schemes are unfortunately suffering from a monumental problem: future benefits are underfunded by $53 Trillion Dollars. (1) Yes, that's $53 Trillion.

Someone, future generations, must pay for the $53 Trillion of unfunded future benefits of these Socialized Schemes. Why? Because they are "pay as you go" schemes. These plans basically have no reserve fund other than printing money. (2) These schemes based on pay-as-you-go are about to become pay-a-whole-lot-more-as-you-go. (1)

Wait a minute. How can a series of "insurance" plans be underfunded to the tune of $53 Trillion? You can't have underfunded insurance! That's not insurance?!? Exactly!

Wait a minute part two. Where are the reserves, surplus.....what kind of Capital have they invested in and what is the rate of return on the Capital? Not to worry, in regards to Social Security, the US Treasury has issued IOU's. (2) On second thought, worry.

Medicare, Medicaid, and Social Security have merely been given a Political Moniker of "insurance". By no means are these Socialized Schemes based on insurance theory-and- practice encompassing regulated insurance company solvency requirements , regulated insurance company reserve requirements, etc..

Look at a few definitions within the world of insurance:

(a) Reserves of an insurance company, according to the Insurance Information Institute is: A company's best estimate of what it will pay for claims. (3)

(b) Solvency of an insurance company, according to the Texas Coalition for Affordable Insurance Solutions, is the ability of an insurance company to pay future claims. In order to remain solvent, insurance companies must always keep an adequate surplus of funds in case an unforeseen increase in claims occurs. (4)

(c) Surplus of an insurance company, according to the Insurance Information Institute is:
The remainder after an insurer’s liabilities are subtracted from its assets. The financial cushion that protects policyholders in case of unexpectedly high claims. (5)

Socialized "insurance" Schemes aside, we have those expense Private Insurance Plans. Those plans that are in fact regulated and audited regarding surplus, reserves, and solvency.

In the Political-Economy argument of "expensive health insurance", if the term "expensive" is more related to "solvency" (Economics) than related to "Populism" (Politics), then "expensive" might be better distinguished as funded and solvent.

Those same Private Plans are the plans that leave no unfunded items to your children, grandchildren, and so on into the future. Why? Because they are Private Sector plans that are funded insurance plans.

Think for a moment about funded insurance plans. Real insurance plans. They do not come cheap! However, as a consumer of insurance, you purchased health insurance, as well as other types of insurance, so that you do not leave anyone with unmanageable future obligations, including yourself.

A wise question to ask yourself is: if the three major Socialized Schemes in the United States have a current track record of being underfunded by $53 Trillion, what would be the direction of the funding/underfunding of a Socialized Medicine Scheme?


(2) Milton Friedman, "Social Security Socialism," Wall Street Journal, January 26, 1999, A18.

(3) (5)


Monday, September 21, 2009

The Socialized Medicine Scheme: now its like Auto Insurance?

In regards to the socialized medicine scheme spearheaded by President Obama and supported by democrats, you have periodically heard a comparison of health insurance and auto insurance in the debates and explanations of Socialized Medicine.

In the Obama media blitz of 09/20/2009, during the Obama interview on NBC's Meet the Press, the comparison of health insurance and auto insurance has now come to the forefront as part of the Obama sales pitch for a socialized medicine scheme. Obama mentioned the following in his sales pitch: "'ve got an obligation to get health care just like you have an obligation to get auto insurance in every state". (1)

Health insurance and auto insurance is a good comparison? Or is a comparison of health insurance and auto insurance merely another characteristic of the "sales pitch"? What is the "obligation" in state mandated compulsory auto insurance vs. "obligation" within health insurance.

Compulsory auto insurance laws are required due to the bodily injury and property damage liability arising from the operation of vehicles. That is, the required auto insurance coverage mandated by state law is for the benefit of an exogenous party. Your "obligation" is that of liability to another party.

The owner of the auto insurance policy can not be liable to himself/herself and hence the coverage does not directly benefit the owner of the policy. One must remember that compulsory auto insurance laws do not require the policy owner to have physical damage coverage (collision and comprehensive coverage) that would in fact benefit the policy owner. The bottom line is, the vehicle owner is required to purchase coverage (obligation) that benefits others in the event of negligent vehicle operation.

Its also important to point out that compulsory auto insurance laws are not an end-all program. Regardless of the law, many operators still remain uninsured. Hence the policy owner is offered "uninsured motorist" coverage to benefit the policy owner if struck by the uninsured motorist. That is to say, regardless of the law, some vehicle owners continue to evade the law (evade "obligation").

Further, many states put "teeth" into the compulsory auto insurance law by requiring the Department Of Motor Vehicles to create a process of verifying insurance coverage on each and every vehicle. No coverage and you get fined. Continual coverage violations and they invoke tag blocks for 30 days or more (will not renew your vehicle tag). Although these processes do reduce the number of uninsured motorists, they do not eliminate uninsured motorists. Also, the process of verification creates an additional department within state Department of Motor Vehicles and a process there in, which comes with a very high price tag. In other words, "obligation enforcement" has a cost.

Health insurance is the exact opposite of compulsory auto insurance in regards to who benefits and what obligation exists. That is, health insurance is purchased for the direct benefit of the policy owner. Health insurance is not purchased for the benefit of an exogenous party. The "obligation" is to yourself. Your failure to purchase health insurance does not create a bodily injury or property damage liability to an exogenous party.

Hence, in the Obama sales pitch, you now have a comparison of insurance types that are exact opposites in regards to "obligation".


Wednesday, September 16, 2009

The Socialized Medicine Scheme: The "sales pitch" of low out of pocket costs

The current Socialized Medicine schemes being presented are being "pitched" as having very limited out-of-pocket costs. You have likely heard President Obama mention the low out-of-pocket costs in his Socialized Medicine stump speeches.

The four components that likely need explained regarding out-of-pocket costs, in a general sense, are:

(1) Doctor Office Co-Pays: the insured must make a payment, representing a portion of the total payment, at the point of service at the Doctor's Office. Generally, the covered event is the Doctor's charge and any basic tests that can be accomplished in the Doctor's facility. Typical Co-Pays are $25, $50, and $100,

(2) Out Patient Prescription Drug Co-Pays: the insured pays a portion of the prescription price based on a sliding scale. For example, a co-pay of $10 for generic drugs, $50 for named brands (many sliding scales exist),

(3) Major Medical Deductible: the amount of money the insured must absorb before coverage begins for those covered items not mentioned in (1) and (2) above.

(4) Major Medical C0-Insurance: after the Major Medical Deductible is satisfied, the insured participates in the further eligible charges over a specified range. For example, the insurer pays 80% of eligible charges and the insured pays 20% of eligible charges over the next $10,000 of charges after the deductible is satisfied. Stop Loss is the maximum amount the insured must pay under the co-insurance arrangement. In the example above, 20% of $10,000 is $2,000 which is Stop Loss.

Beyond all the other short comings of the Socialized Medicine Scheme discussed previously (see links below), attempting to "sell" a Socialized Medicine Scheme based on low-loss-cost -participation by the insured merely makes the Plan Cost much more expensive.

Think of it this way, as a sales pitch, having to pay very little out-of-pocket sounds great. However, the less the insured participates in the loss, means the more the insurer participates in the loss. The more loss exposure the insurer is faced with, the higher the premium.

The sales pitch of low out-of-pocket costs, like any "sales pitch", omits the remainder of the story. The remainder of the story is that low out-of-pocket costs translates into very high premium costs.

However, the premium cost story gets much uglier. Low out-of-pocket cost which translates into high initial premium cost becomes a cascading price spiral. Why? The low out-of-pocket costs further translates into over utilization. That is, with very little to be paid out-of-pocket, the insured is more apt to seek services. The more services used means more losses incurred meaning premiums must rise to cover the increased losses.

Further, the increasing cost spiral gets fueled by another aspect. Say premium "x" is charged for a low out-of-pocket plan. In a Socialized Medicine Scheme many individuals receive subsidized premiums. Hence certain insureds pay x -subsidy = y premium. These individuals not only have low out-of-pocket costs, they have low premiums due to the subsidy. Low out-of-pocket costs coupled with low subsidized premium generally escalates over utilization and hence more upward premium pressure.

The escalating price spiral receives even more fuel due to "forced participation". Consider those individuals forced to participate in the plan, who previously did not want to buy health insurance for any variety of reasons. These new "forced insureds" find the cost a burden. They also see the cost being forced upon them as a cost they need to recoup. The mind set becomes: if I have to pay "x" premium then I'll get "x" amount of services, further creating over utilization which further drives the price spiral.

As the Premium Price Spirals upwards, the sales pitch becomes "switch the pitch". Suddenly Co-Pays, Deductibles, etc., are raised to lower utilization rates to decrease the rate of the increasing price spiral.

However, these increased Co-Pays, Deductibles then become a situation argued as "fairness". That is, lower income participants complain they can not access the system due to high out-of-pocket costs. These participants want the Government to subsidize their Co-Pays and Deductibles.

Beyond the escalating price spiral brought to you by a Socialized Medicine Scheme, the "sales pitch" of everyone with low out-of-pocket costs is painting each risk with the same paint brush. That is, needs based insurance planning is being supplanted by a sales pitch. The Private Sector has long known that each individual has differing needs. Hence the plan discussed for each Individual Risk is an attempt to meet the Risk's (insured) need. For example, the multi millionaire can self insure, the self employed single carpenter who is 35 years old wants a high deductible catastrophe plan, the business with young middle income workers in their family years needs group coverage that includes wellness coverage, and so on.


Thursday, September 10, 2009

The Socialized Medicine Pricing Scheme

Regarding Socialized Medicine vs. Private Sector Medicine: a debate has arisen regarding “pricing premium” within the Socialized Medicine Scheme.

In the Socialized Medicine camp is the position that older insured’s should not pay more than two times what a younger insured pays. Please see the USA Today report below regarding the 2 to 1 pricing scheme.

“Pricing” in the field of Insurance is based on a series of different items depending upon the risk insured. For example, in Life Insurance the components of pricing are Mortality/Morbidity, Expense, and Interest. Mortality/Morbidity is the risk. Expenses are the cost of maintaining and operating the insurance company. Interest is how much money the insurer can earn on premium flow and reserves.

“Risk” must be underwritten. That is, what is the characteristics of the risk that makes the risk more or less prone to loss. Take auto insurance as an example. A person with a clear driving record for 20 years is different than the recent DUI offender.

You can create millions of risk scenarios. Try this: price those million risks into an understandable underwriting and price pattern. Good luck! But its not luck. Its Actuary Science. Further, Private Insurers have hard data for risk comparison spanning + 100 years. All that data is poured over by the best mathematicians you can find, known as Actuaries.

Human health generally deteriorates over time. That is to say, an increase in risk occurs with age. How many 30 year old people take 3 prescriptions per day? How many 80 year old people take 3 prescription drugs per day? How many 30 year old people have had a hip replacement? How many 80 year old people have had a hip replacement?

If an insurer offered health insurance to 30 year old people based on the risk of 80 year old people, they would have no takers. If an insurer offered health insurance to 80 year old people based on the risk of 30 year old people, they could not take enough applications.

The basic problem with an arbitrary price arrangement, not based on risk, is that you end up under charging certain risks and over charging other risks. The undercharged risks swarm to the under priced insurance. The overcharged risks refuse to buy the insurance. The collection of insured’s becomes risk adverse to the insurer as the risk translates into losses (claims) that can not be supported by the premiums collected, based on the arbitrary price arrangement.

Hence the price charged for the risk must match the risk. It is an Axiom within insurance theory and practice.

The idea of charging younger people more money for a health insurance risk, and older people less money for a health insurance risk becomes a mis-matching of risk and price. Charging older people no more than two times younger people is a mis-matching of risk and price.

When you mis-match risk and price, you have violated an Axiom of Insurance. You have also asked for unintended consequences. Likely cascading unintended consequences as you have distorted demand and supply at the point of price. Artificially distorting price is always a bad idea in the field of Insurance as well as Economics.

If you set up an arbitrary price arrangement, not based on risk, one will notice that the Socialized Medicine Scheme “forces” the overcharged segment to buy insurance (forced participation). The forced-overcharged-segment then subsidizes the under charged segment. The risk of the entire group is constant, premium is sufficient, but one group merely becomes the fall guy for premium.

Generally, the over charged group will find ways to opt-out or merely fail to participate (fail to pay premium).

One will notice Socialized Medicine Schemes generally include a “fine” for not buying insurance. This “fine” requires the Socialized Medicine Scheme to have access to the participants financial and tax records (starting to sound familiar?). The access to financial and tax records of participants is necessary to levy fines.

The following is the Insurance experience of such overcharged plans : regardless of forced participation or fines, the system will break down as the overcharged segment will fail to pay premiums in such numbers that enforcement becomes extremely difficult. The undercharged segment, on the other hand, will increase in number.

The cost of Fine Enforcement drives costs/expenses that are then a drain to the Socialized Medicine Scheme. The missing premiums and subsequent missing fines then causes the plan's income to be lower than claims paid. In other words, you have a combined ratio (claims and expenses) that exceeds income.

The excess loss (claims) over premium collected must be paid by some entity (likely tax payers).

Friday, September 4, 2009

National Debt: non-sustainable political promises

Government deficits over the next 10 years were recently revised by the Obama Administration to $9 Trillion Dollars from the $7 Trillion Dollars estimate the Obama Administration made only a few months ago. Amazing! In a matter of months the Deficit has increased by 28%! How in the world did the US Government Deficit arrive at $9 Trillion Dollars?

Further, the National Debt stands at $11 Trillion Dollars with the daily increase in debt currently at $3 Billion Dollars.

A better question is what is the US Government going to do about the approximately $62 Trillion, at present value, of unfunded obligations in the areas of Medicare, Medicaid, Social Security and Military Pensions?

How did all this debt pile up? Why is the debt still piling up? How was all this debt allowed to pile up?

In a very broad Marco Economic sense, and in a very broad Political-Economy sense, one clearly needs to examine the inter-relationship between the Political Class, the Producer Class, and the Recipient Class.

The Political Class has been making an argument since the 1930's that the Producer Class has a "moral obligation" to transfer income and wealth to the Recipient Class.

The Recipient Class comes in several varieties. In some instances the Recipient Class collects Welfare, Food Stamps, Tax Credits, Medicaid. In other cases the Recipient Class collects Social Security and Medicare. In other cases the Recipient Class is the Military receiving deferred compensation regarding Military Service Pay. There are also Temporary Recipient Class members such as those receiving Unemployment Insurance.

Its important to point out that the Recipient Class members are in many cases past Producer Class members. That is, a worker or military personnel are within the Producer Class for many years then end up in the Recipient Class in retirement.

Its also important to point out that some Recipient Class members are permanent Recipient Class members such as the extremely unskilled worker and the Welfare Class (those constantly on Welfare through out their working years).

The "wealth" of the Political Class is a factor in this discussion. The wealth of Political Class generally comes in several varieties and needs examined. There are the inherited wealth types such as Rockefeller, Kennedy and Kerry. You have life long Politicians such as Byrd, Rangle and Dodd who accumulate wealth during their extended terms as Politicians. Further, new money wealth Politicians such as Barack Obama and John Edwards exist. The point being, and made by many over the years, is that wealthy Politicians have no financial obligations. They are so wealthy that paying taxes, paying bills, putting children through college, etc., are minor inconveniences.

The wealth of many in the Political Class puts them in a position that money is of no matter and they move into the altruistic/moralization area. It could be argued in the assent to self actualization in the realm of financial resources an additional step exists beyond self actualization regarding finance, which is: the moralistic/altruistic stage.

The wealthy Political Class (sometimes referred to as the Political Elite or Elitists) then begin to moralize to the Producer Class. That the Producer Class must, by moral reasoning, subsidize the Recipient Class.

The wealthy Political Class then enlists other Politicians that have moral/altruistic/collectivism on their agenda.

The Political Class then saddles the Producer Class with obligations to the Recipient Class. The "moral obligations" of the Producer Class to the Recipient Class translate into income and wealth transfers to the Recipient Class. In other words, these supposed moral obligations have a price tag.

At this point there becomes a disconnect.

The Political Class wants to promise so much to the Recipient Class that economic activity of the Producer Class would be so depressed, the economy would constantly be in recession. Taxes would be so high that incentives for the Producer Class would be so low, economic activity would fall. A constantly depressed economy would threaten the electability of the Political Class.

What kind of tax increases would be required to sustain such past and future promises? How about 50%. (1) A 50% tax increase would send the economy into a major tail spin now and in the long run.

Therefore, all of the past and future Moral Obligations that the Political Class has saddled the Producer Class with, as transfers to the Recipient Class, have been "financed". In other words, the wealth and income transfers from the Producer Class to the Recipient Class were promises that were not economically sustainable on a current account basis, hence the obligations were financed.

Its highly likely the financed promises were in fact financed to extend the political careers of the Political Class.

There is an unknown, yet certain point, where the financed promises accumulate to a level that is not sustainable. The unknown, yet certain point of non-sustainable financed promises, that began in the 1930's, has arrived.

Think of this argument for a moment. The argument by Pro Health Care Reform proponents is that Health Care costs are rising too quickly and need reined in via reform. Health Care costs are not rising any faster than Government Debt. However, the Government Debt increase is never mentioned in the same breath as Health Care Cost increases.

The bottom line is that the promises of Politicians to the Recipient Class do not match the ability of the economy and the Producer Class to pay for such promises. Since prior promises are not affordable, and given the unsustainable debt level, future promises have to go on hiatus for years and years to come. Sorry, no more promises. In effect the size and scope of Government needs reversed. Prior promises need reduced to match what is affordable. In the mean time the smaller government and smaller promises yield savings that need directed to reduction in Debt. It may take 20 or 30 years to reduce debt to levels that make financial sense.