Thursday, December 23, 2010

ObamaCare: no going back?

On December 21st Health and Human Services Secretary Kathleen Sebelius held a special news conference as an acclamation of ObamaCare. She concluded the news conference by stating "I think its important folks understand there is no going back". (1)

The "no going back" statement by Sebelius was an attack on the movement to repeal or de-fund ObamaCare.

However Sebelius missed the larger picture that first stage ObamaCare de-funding had already occurred and a showdown is in the offing for March 2011. That "no going back" had already been replaced with "going back".

What Sebelius failed to mention was the omnibus spending bill that perished in the Senate and was replaced with a continuing resolution also negated the first phase of ObamaCare funding. That is, ObamaCare requires $115 billion dollars to fund the expansion of regulators. This $115 billion expansion of departments such as Sebelius's Health and Human Services is a cost in addition to the reported $1 trillion dollar price tag for ObamaCare . The omnibus spending bill authorized the first $1 billion for the expansion of regulators. That $1 billion was never authorized as it ended with the omnibus spending bill.

Hence the continuing resolution that took the place of the omnibus spending bill precluded the $1 billion regulator expansion down payment. However, the continuing resolution expires in March 2011 and sets the stage for a showdown regarding the initial phase of funding for the $115 billion dollar expansion of regulators to administer ObamaCare.

(1) Wall Street Journal Political Diary, 12/22/2010, Joesph Rago.

Friday, December 17, 2010

ObamaCare: the tax aspect

Clearly ObamaCare is under assault from many directions. The current assault surrounds court actions regarding the mandate of required coverage. The court actions now enjoined by a majority of the individual states. The recent court ruling in Virginia declaring the failure to abide by the mandate to buy coverage is a penalty and not a tax and further declaring the mandate unconstitutional. (1)

Hence a judicial ruling states the cost charged for failure to abide by the mandate is a penalty and not a tax. Then what taxes are true taxes within the plan?

Cadillac tax

Many people are familiar with the term Cadillac Tax but what does it really mean and how many people will be affected now and in the future? The Cadillac tax is a 40% excise tax imposed on employer-provided insurance plans beginning in 2018. The tax is levied against the insurer or the employer if the employer has elected a self-insured plan. The tax is applied to the amounts in excess of the threshold as follow: the actuarial value in excess of $10,200 for individuals and $27,500 for families.

The initial amount of workers estimated to fall under the excise tax is 12%. However, the initial figures of $10,200 and $27,500 mentioned above are indexed to inflation as measured by the consumer price index (CPI). That's good right? Wrong. Medical-care inflation and subsequently medical insurance costs are rising much faster than the CPI. Hence the adjustment of the above figures will generally grow slower than the rate of premium increase hence more and more people will fall under the excise tax as time goes by.

Payroll tax

Medicare payroll taxes will increase from 2.9% to 3.8% for individuals earning over $200,000 and couples earning over $250,000.

Tax levied against investment income

Investment income of capital gains, interest, and dividend income will become subject to the 3.8% medicare tax beginning in 2013. The tax is levied on incomes in excess of $200,000 for individuals and $250,000 for couples.

Its important to remember that capital gains also include real estate. See the following post for additional details:

ObamaCare: Imposes a 3.8 percent tax on real estate sales‏

Tax on prescription drugs

A tax will be levied against pharmaceutical manufacturers on named brand prescriptions. The tax is based on a target revenue that needs raised according to the ObamaCare legislation. The target is $2.5 billion in tax revenue in 2011 moving up to $4.2 billion in 2018 then moving to a constant target of $2.8 billion thereafter.

Its very important to remember that taxes levied against firms are merely passed onto consumers in the form of higher prices.

Tax on medical devices

Basically all durable devices used by doctors, hospitals, outpatient clinics, general clinics, etc. will be subject to a 2.9% tax. Once again taxes levied against firms are merely passed onto consumers in the form of higher prices.

Tax (additional tax) on insurers

A tax will be assessed upon health insurers based on their particular market share. The assessment begins at $8 billion and moves up to $14.3 billion by 2018. Yes, you got it, taxes levied against firms are merely passed onto consumers in the form of higher prices.

Tanning bed tax

A 10% tax has been imposed on tanning salons and of course that tax is passed onto the consumer.

Tax deduction of uninsured medical expenses

If you suffer a casualty loss regarding uninsured medical expenses the deductible threshold has been raised from 7.5% of adjusted gross income to 10%. (2)

The world of ObamaCare taxes

Rather than merely adding up the taxes and coming up with a figure that might seem outrageous, maybe its better to seek insight about the many and several taxes using Thomas Sowell's observation that a tax is a tax on an economy. That is to say, a tax reduces economic activity hence it effects the greater economy of which you are a participant.

Starting at the beginning and concentrating on the advent of government and the advent of redistribution (tax) to create the protective society, ultra minimal state, minimal state…….at what point does the redistribution notion, at a very low level of redistribution (tax) required for the formation of the minimal state, become morphed into hyper-redistribution (hyper-tax) on the way to creating state and utopia/dystopian? Its when the side constraints of a minimal state “constitution” are circumnavigated. (3)

Moving forward in time to hyper-tax associated with the creation of the hyper-state, affairs regarding politicos propositions and associates taxes is explained by Thomas Sowell explains as follows:

(a) the propositions and associated tax employed/championed by politicos is based on first stage economic consequences,

(b) that first stage economic consequences of a proposition can generate favorable political attributes which the politico wants because short term first stage economic consequences match the short term political time horizon of the politico e.g. next election,

(c) however as time goes by second, third and so on down the line economic consequence occur. We end up labeling these consequences of the initial proposition and associated tax as cascading unintended consequences. These long term cascading unintended consequences are not a problem for the politico as he/she is long gone yet the public is stuck dealing with the long term cascading unintended consequences. (4)

Politicos have no interest in economics as their interest lies in a very short term political time horizon e.g. next election.

Politicos make for the very worst economists:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” - Frédéric Bastiat

Taking a look at the taxes associated with ObamaCare one can quickly see that the class warfare argument of collectivists is at work. That somehow the class of folks earning over $200,000 as an individual or $250,000 as a couple are clearly singled out. A particular class has been identified to tax and this class is associated with a greater class warfare argument put forth by collectivists.

However the "middle class", the mantra of the collectivist, is suppose to be focused on the class warfare associated tax of the higher income earners. However the middle class is duped as the many taxes levied against firms (as mentioned above) are merely passed on as higher prices to middle class consumers.

Further, the "middle class" which are generally employees of firms find less jobs available as rising taxes on upper income earners stifles private capital formation which is the engine behind long term private sector job creation.

In other words, the collectivist wants the middle class to view the tax as a redistribution technique (which it is) and that the redistribution is "beneficial" to the middle class. However the distributional nature of the tax misses the central point of stifled private capital formation leading to less jobs for the middle class. All the while the middle class ends up paying higher prices due to the taxes levied against firms merely resulting in higher prices.


The recent court ruling in Virginia states the fee charged for not adhering to the ObamaCare mandate is a "penalty" and not a tax. That the penalty is associated with the unconstitutionality of the mandate. However taxes in fact abound within ObamaCare.

The taxes within ObamaCare are framed as soaking the rich (class warfare argument) but in effect directly affect costs and job creation availability for the middle class.



(2) Bad Medicine, a guide to the real costs and consequences of the new health care law, Michael D. Tanner, Cato Institute, 2010

(3) Anarchy, State, and Utopia, Robert Nozick

(4) Applied Economics, Thomas Sowell

Saturday, November 20, 2010

ObamaCare: the demise of consumer directed health plans

Media outlet reports, insurers communicating to policyholders, and human resource departments communicating to employees are full of reminders to participants enrolled in consumer directed health plans: no longer will participants find over-the-counter drugs reimbursable beginning 01/01/2011. (1) Consumer directed health plans are specifically know as Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA), and Flexible Spending Accounts (FSA).

Why the removal of over-the-counter reimbursement?

Many commentators argue that ObamaCare removed the reimbursement merely as a government revenue measure. That removing the reimbursement then removed the tax qualification of the reimbursement and causes the participant to show more taxable income. Other commentators say that the removal of over-the-counter reimbursement is merely signaling the beginning of the end of consumer directed health plans.

Removal of over-the-counter reimbursement is not the entire story?

ObamaCare's removal of the reimbursement for over-the-counter drugs is really not the story. The story largely unreported is the purposely designed long term demise of consumer directed health plans under ObamaCare. More generally missing from the story is the long term demise of consumer directed health care decisions over the past forty years. Also under reported is that ObamaCare's removal of reimbursement for over-the-counter drugs works directly opposite of other government initiatives to bring drug costs down for consumer by accelerating the speed at which name brand drugs become generic drugs which in many cases also become over-the-counter drugs.

Consumer Directed Health Plans

What is a consumer directed health plan? Consumer directed health plans are a group of insurance plans based on the concept of utilization of health-care dollars at the point of service. That incentives are created for the consumer to make judgements regarding price and quality of health-care related items at the point of service. Currently its estimated that 46 million workers are covered under consumer directed health plans (2)

Consumers of health-care need incentives?

Why do consumers need incentives to judge price and quality in the realm of health-care? Don't consumers always judge price and quality? Why is health-care different than other consumer price and quality decisions?

Health-care price and quality decisions were the same as any other consumer decision until third party payer effects distorted the decision making process. What does third party payer effects mean?

An example likely best illustrates third party payer effects and the consequential distorted decision making process. If you have purchased "bread insurance" for those occasion in which you buy bread, is your decision to buy bread more based on price and quality or is your decision more based on the bread store accepting your "bread insurance"? If the store you have entered has stone ground whole wheat bread on sale for 50 cents a loaf, but the store will not accept your bread insurance, exactly how do you react? Do you buy the bread or do you seek another store that has a regular white bread priced a $2.00 a loaf however will indeed accept your "bread insurance"?

Remember, you have already paid your monthly premium for your bread insurance. Do you absorb an extra 50 cents and buy the best price/quality or do you purchase the $2.00 loaf and allow the pre-paid third party insurance to handle the transaction? The question is then: does a price distortion occur when third party effects enter the consumer's decision at the point of sale? Yes. "One of the biggest reasons for higher medical costs is that somebody else is paying those costs, whether an insurance company or the government" -Thomas Sowell. (3)

How pervasive is the third party effect?

Circa 1960 health-care costs were paid at a rate of forty five (45) percent on the dollar by health-care consumers at the point of sale. Circa 2008 the forty five percent has become fifteen (15) percent. Addressed alternatively, we have increased from 55% transfer payment level to 85% transfer payment level between 1960 and 2008. (4)

Consumer directed health plans are cost containment programs

Consumer directed health plans are an attempt to reverse the third party payer effect. That is, the plans encourage consumers to make decisions at the point of sale regarding cost/benefit rather than a third party effect causing the consumer to reject cost/benefit as someone else is paying hence cost/benefit takes a back seat.

Why are consumer directed health plans going to end under ObamaCare?

The removal of over-the-counter reimbursement for consumer directed health plans is merely the first signal of the demise of such plans. The health insurance scheme designated as ObamaCare does not specifically forbid consumer directed health plans however the internal workings of the scheme make consumer directed health plan non-viable. Why would such plans be non-viable? Three components of the ObamaCare scheme work to remove consumer directed health plans:

(1) high deductible plans, which are the hallmark of consumer directed health plans, are only allowable under ObamaCare based on a sliding scale of deductible and co-insurance based on income. That is, there is a maximum deductible and co-insurance allowable then those figures are reduced for lower income thresholds at 300 to 400% of the poverty level income then again at 200 to 300% of the poverty level income,

(2) the 80% minimum "medical loss ratio" (amount insurer is required to pay out in benefits for each dollar of premium). High deductible plans would likely never meet this requirement,

(3) first dollar coverage requirements of ObamaCare for "preventative services" does not correlate with a high deductible plan. That is, first dollar benefits, through the third party payer effect, defeats the high deductible plan's incentive of the health-care consumer making cost/benefit decisions at the point of sale. Further, a high deductible plan's cost structure is based on consumers paying first dollar benefits in exchange for a lower premium.

Theoretically you could design a consumer direct health plan given the above parameters however the end result would be a plan with a low deductible, with many first dollar benefits, as well as a plan based on third party payer effects. That is, you would have designed a policy that looks just like the prescribed ObamaCare health plan. (5)

Counter to over-the-counter

ObamaCare is counter to other government initiatives designed to lower drug costs. One one hand you have the government striking deals with drug companies allowing drug companies to more freely advertise their name brand drugs with the drug companies shorting the patent period allowing drugs to go generic quicker. Meanwhile many generic drugs become over the counter drugs or even name brand drugs going direct to over-the-counter such as Zertec. On the other hand the ObamaCare scheme disallows over-the-counter drugs to be reimbursable under consumer directed health plans. Hence two centralized government schemes work directly counter to one another.


The removal of the over-the-counter reimbursement by the ObamaCare centralized planned scheme is merely the first stage of the demise of consumer directed health plans currently covering 46 million workers. The incentives produced by consumer directed health plans causing consumers to make cost/benefit decisions at the point of sale to overcome the third party payer effect will be purposely eliminated over time through the conscious designed central planning scheme known as ObamaCare. The ObamaCare required removal of reimbursement for over-the-counter drugs works directly counter to other measures of government to reduce drug costs.

Update 02/28/2011: The big problem with healthcare? It's not a market.


(1) Health-Care Reform Changes Flex-Spending Reimbursement Rules

(2) Employer Benefit Research Institute, December 2009.

(3) Alice in Health Care, Thomas Sowell,

(4) Back in the Old Days When the "Single Payer" Was the Patient, There Was "Self-Rationing".

(5)Bad Medicine, Michael Tanner, Cato Institute, 2010.

Wednesday, November 10, 2010

ObamaCare: purposely designed to end as a single payer plan?

Many commentators make a general argument that ObamaCare was purposely designed to end as a single payer plan. However the same commentators hop scotch over the concept of private insurance vs. social insurance reserves which needs examined as a component of the assertion that ObamaCare was purposely designed to end as a single payer plan .

That is to say, beyond the myriad of arguments against ObamaCare including the demise of consumer directed health plans, price fixing resulting in quantitative and qualitative reductions in service, a centrally planned market for health care through massive and expensive bureaucracy replacing price coordination in a decentralized economy, one point that gets little press time is the difference between private insurance and social insurance reserves.

What are insurance company reserves?

A simple definition is: "consumers make insurance claims in the future and depend on insurers to honor their earlier commitments. Reserves—the financial assets in which insurers invest their premium income—are often the most tangible sign of an insurance firm's staying power". (1)

A more complex definition is: "amount designated as a future liability for life or health insurance to meet the difference between future benefits and future premiums. net level premium is determined so that this basic relationship holds: the present value of a future premium equals the present value of a future benefit. This relationship, incidentally, exists in fact only at the point of issuance of a life insurance policy. After that, the value of future premiums is less than the value of future benefits because fewer premiums are left to be paid. Thus, a reserve must be maintained at all times to make up this difference". (2)

An alternate definition is: "[means amounts—] which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts (including life insurance or annuity contracts combined with noncancellable accident and health insurance) involving, at the time with respect to which the reserve is computed, life, accident, or health contingencies". (3)

Underwriting, Preexisting Conditions, and Reserves

The concept of "preexisting conditions" has become a hot political topic that is used in debate with much verbal virtuosity. However, preexisting conditions is actually a term that describes a condition of a risk uncovered through "underwriting". In private insurance, which is reserved to pay for future claims, underwriting directly effects reserves and ultimately pricing. The key in private insurance is "a reserved plan to pay future claims" which is achieved in part through underwriting.

On the other hand, social insurance programs are notorious for reserving for future claim paying ability through the taxation authority of a central government. That is, future claim paying ability shows up as future unfunded entitlements that are "reserved" through the ability of the central government to raise taxes to fund the unfunded future claims paying ability.

Reserves vs. Taxes

Social insurance can remove/reduce underwriting allowing for preexisting conditions as social insurance does not reserve their ability to pay future claims. If social insurance was required to reserve future claim paying ability, then suddenly underwriting and preexisting conditions would immediately be placed back on the table and permanently placed back on the table. Therefore, underwriting which uncovers conditions of a risk known as preexisting conditions can/are removed in social insurance as "tax" is the reserve.

The end game is by removing underwriting in social insurance, in effect, guarantees future tax increases as the reserve must increase to accommodate anti-selection due to the removal of underwriting. Anti-selection leads to adverse claim experience hence causing additional reserve needs to expand exponentially.

Private Insurers Reserves and Price Increases

Once you go through the above reserve comparison exercise regarding private insurance vs. social insurance, then you can proceed to the argument regarding ObamaCare being purposely designed to end as single payer plan. A major reason ObamaCare ends as a single payer plan through design is because private insurance can not possibly reserve to pay for future claims when underwriting is eliminated. Private insurance can raise prices in the short run but as they eventually see insolvency on the horizon due to reserve problems they merely exit and end operations.

Note: private insurers, even in the short run, will have difficulty raising premiums at a rate needed to increase reserves as ObamaCare is a price fixing scheme in regards to insurance premiums as well as health-care services. Any price increase by insurers are immediately met with angry inquiries such as those by Kathleen Sebelius of the H.H.S. . (4)

Meanwhile, while private insurers reserves become inadequate and private insurers exit, the exiting private insurance administration is dismantled. However, existing private insurance administration could be utilized as an administration source for ObamaCare. The organization and expertise already exists. But ObamaCare authorizes its own massive bureaucracy built from the ground up with little expertise hence the existing private insurance administration ends. Note that in the short run you have duel administration of exiting private insurers and ObamaCare bureaucracy which is an additional cost driver.


The single payer end game, a government administered plan, is in essence a non-reserved entitlement where "tax" is the reserve. Hence "tax" must increase as you have elected not to reserve to pay for future claims paying ability in a social insurance plan. Taxes will increase as anti-selection increases claims, due in part to the removal of underwriting, which means future claims paying ability must be further reserved. You either reserve or you tax. In social insurance you tax.


(1) Federal Reserve Bank of Minneapolis


(3)Cornell University Law School

(4) Sebelius Has a List, Wall Street Journal

Tuesday, November 2, 2010

ObamaCare: the general public is misinformed?

ObamaCare has become increasingly out of favor with the general public. As more and more information surfaces regarding what is actually inside the ObamaCare bill, the general public has become increasing called for repeal of ObamaCare.

The following infamous statement by Nancy Pelosi, although a sadly uninformed statement, may have paved the future path of discontent with ObamaCare: "We have to pass the bill so yo can find out what is in it". (1) As the general public "finds" what is within the ObamaCare bill the more they dislike the content.

The general electorate is misinformed?

The counter argument of the framers and supporters of ObamaCare to the rising voices in support of repeal is that those opposing ObamaCare are merely misinformed. The argument has overtones of "they don't know what is good for them". Some framers and supporters of ObamaCare have gone so far to argue that ObamaCare was not "presented" correctly to the general public. In other words, ObamaCare needed "sold" to the general public.

Special Knowledge and Experts

Below is a link to EconTalk with Russ Roberts from 10/25/2010. The interview is with Thomas W. Hazlett a Professor of Law & Economics at George Mason University School of Law. (2)

The entire segment is very interesting however take a moment and listen to the five minute segment of 36:43 - 41:30.

The segment mentioned above is about buying consumer products that "signal". That is, the proposition you are what you buy, eat, listen too, etc.. Its related to the concept of conspicuous consumption. Roberts and Hazlett get into a discussion regarding Thomas Sowell's observations that self appointed experts within a field (cameras in this example) despise mass marketers and despise those that buy from mass marketers (Kodak cameras). That self appointed experts view buying from a mass marketer as saying something about "you" with moral tones attached. That buying from the mass marketer, although in the self interest of the novice camera user, is somehow making the purchaser a lesser person.

Lets take this notion and transpose it onto the field of political-economy and in particular the anointed/intelligentsia. That the self appointed anointed/intelligentsia think of themselves as experts of special knowledge. (3) That they alone come up with unique ideas. That they are the center of the manufacturing of unique, knowledgeable, and insightful ideas. In other words, they are the experts in Sowell's camera example.

The self anointed/intelligentsia only have one product to sell and that is “ideas”. As pointed out by many, the ideas are not empirically tested ideas but rather ideas based on “the way things ought to be”. That is to say, ideas based on “the way things ought to be” that basically paints the world in their author's own self image. Do the anointed/intelligentsia, who’s only product is ideas, attempt to shape their ideas as the "signal" mentioned above? The extension of which, is that if you espouse and repeat the ideas of these self appointed experts then you "signal" that you are a purveyor of unique, knowledgeable, and insightful ideas as well.

Conversely, propositions that challenge the ideas of the self anointed/intelligentsia are, as discussed above, labeled "mass marketed ideas". That buying into these labeled "mass marketed idea" says something about "you" with moral tones attached, as perceived by the self appointed experts within the field of ideas. That somehow you are a lesser person as you reject or counter the "signal".

In practice the anointed/intelligentsia want to frame counter arguments to their signal as being "the status quo". More specifically, the "cling to their bibles and guns" vilification exercise is merely an argument-with-no-arguments to create a baseless debate counter point to the long standing empirically tested ideas of the anointed's opposition aka the emperically based camp. In essence, what the anointed/intelligentsia label "the status quo", is really the widely held common sense and empirical arguments of their opposition.

For example, ObamaCare is based upon a price-fixing scheme. It widely known that price-fixing schemes result in quantitative and qualitative reductions in supply aka rationing. Therefore one might say that this particular emperical point and/or axiom is in fact a very important "status quo". Rather than the anointed/intelligentsia countering the price-fixing scheme argument they merely label the counter argument as "the status quo" which results in an argument with no arguments.

In the final analysis, emperically tested ideas and common sense ideas put forth by those countering the "signal" are bundled into the phrase "status quo" (with the conotation that the "status quo" is some sort of mass marketed idea). Next "status quo" is arbitrarily and purposely given negative overtones by the anointed/intelligentcia. However, and in fact, "status quo" is a totally baseless tag line used to put forth an argument with no agruments rather than an argument of facts.

Are Some Politicians the Self Anointed/Intelligentsia?

Many politicos fancy themselves as self anointed/intelligentsia and/or align themselves with those producing the "signal". A problem emerges that if your ideas are not empirically based and merely based "on the way thing ought to be" and consequently painting the world in your own self image, then what if the ideas are presented as a politico?

Robert Nozick in his book Anarchy, State, and Utopia discusses moral side constraints at length. He poses the question of do we know of a being with no moral side constraints? Yes we do: animals. That humans attach no moral side constraints to animals i.e. the law of the jungle. Hence the lion eating the zebra, the hawk eating the field mouse, the scavengers eating the remains of carcass…humans accept this behavior and add no moral side constraints.

Yet we have humans wanting to add moral side constraints regarding humans killing animals e.g. we should not eat meat with the argument based not killing the animal should be a moral side constraint. Hence we have the paradoxical argument of having a set of beings with no requirement of moral side constraints yet a separate set of beings are required to have moral side constraints regarding the set of beings with no moral side constraints.

Keeping the above mentioned paradoxical moral side constraint argument in mind, have humans allowed the same paradoxical argument to exist between politicians and the general electorate? In other words, falsifying, misrepresenting, and espousing half truth are not moral side constraint of politicians yet are moral side constraints of the general electorate.

If politicians have a separate set of moral side constraints, and have often been reported to falsify, misrepresent, and espouse half truth, then what if this same group tries to "sell" non- empirical ideas based on "the ways things ought to be" which consequently paint the world in their own self image? That is to say, would politicos falsify, misrepresent, and espouse half truths in order to paint the world in their own self image through the idea of "the ways things ought to be"?


The general public is misinformed in regards to ObamaCare? -Or- conversely, has the general public been purposely misinformed about ObamaCare?




(3)Thomas Sowell, Intellectuals and Society

(4)Robert Nozick, Anarchy, State, and Utopia

Saturday, October 30, 2010

ObamaCare: the political-economy of the entitlement

The above video from Reason.TV draws some startling parallels between the Great Depression new deal programs and the current Obama administration social engineering schemes. (1)

A question posed in the video is: do bold persistent experiments [social engineering schemes] solve problems or merely create a wall of uncertainty for firms which are ultimately made up of households? Among many other factors, a closer look at past entitlements and the newly introduced entitlement of ObamaCare are worth a closer discussion regarding "do they solve problems". In fact, New Deal type social engineering schemes have become so enormously expensive that the unfunded future liability of such programs now stands at +$1oo trillion. That is, from FDR'S Social Security, to LBJ's Great Society programs of Medicare and Medicaid, to present day ObamaCare, politicos continue to promote New Deal type programs when in fact we can not afford such programs. Do these programs make the world a better place albeit at some unaffordable price? Or it short term politico fiction?

New Deal type programs, spending, and the constituency building proposition

Frédéric Bastiat (1859):

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”(2)

Regarding a federal budget out of control aka out of control spending, mainly do to redistribution schemes known as entitlements, many media articles and talking heads are posing the question: "..then what will you cut [from federal budget]"? Then comes the redistribution scheme questions and who will take the politically unpopular position to cut entitlements. Obama's Deficit Commission, of course, didn't touch redistribution/entitlements with a ten foot pole.

The root cause regarding reform of entitlement/redistribution schemes being such a hot potato topic [politically unpopular] may well be: the entire entitlement process was purposely set up, in the beginning, and further shaped as a hot potato topic. That is to say, New Deal type entitlements become perpetual as they are purposely shaped to be political hot potatoes that burn all that dare raise the issue of reform.

If one examines the proposition that FDR pushed government spending programs and entitlements in particular as schemes purposely designed as political constituency building through dependency, and that politicians that followed in FDR's foot steps pushed the same constituency building through dependency, then the dependency element in fact did build a constituency (an army of government spending dependents).

"Dependency" becomes an accustom environment. The accustom environment has been shaped as an "entitlement". That is, participants in such redistribution schemes have been convinced they are not dependents upon the system, rather, they have been convinced they are in fact entitled to the system.

When it becomes clear that entitlement-dependency/redistribution schemes need reformed, so clear that elementary math can be used to pinpoint the problem, the problem can't be discussed or confronted because: purposely formed constituency groups, who view themselves as the entitled, will act as a constituency and vote against any erosion of their entitlement due to self interest (or greed turned upside down).

The odd thing is that redistribution of income proponents, although patting themselves on the back that they have created a hot potato that can't be touched, do not realize that the redistribution system created as constituency building through dependency, becomes over time, an economic black hole. Hence in the long run the economic black hole (can you say +$100 trillion of unfunded future entitlements?) destroys the productive capacity of the economy and the system caves in under the weight of redistribution of income via constituency building through dependency. Therefore, the aims of redistribution and any final goal perceived by proponents of redistribution, can never be achieved as the purposely created hot potato is self defeating in that it produces a system that self destructs far short of any perceived goal.

Beyond Hot Potatoes

The New Deal and current social engineering "bold experiments" are no more than central planning programs. That a central authority plans the economy. However, the New Deal and current social engineering plans are failing.

Reviewing F.A. Hayek for a moment, once a centrally planned economy fails, the argument for the continued existence of the centrally planned economy becomes “equality of income”. In the planned central economy equality of income becomes an income distribution scheme. Of course this causes further failure of the centrally planned economy as income redistribution schemes cause a twin disincentive (a disincentive for producers within the economy and the built-in disincentive for the dependent recipient class). The redistribution schemes end in disaster, which Thatcher later noted in one sentence, as you end up running out of other people’s money. (3)

Now let us apply F.A. Hayek to the current situation. Obama’s schemes of central planning spending and social engenerringh have failed. New Deal and Great Society programs are in essence bankrupt. That is, on queue, the abundance promised by proponents of central planning have not come to fruition. Hence the next step would be to argue for the continuation of central planning by beating the drum of “equality of income”. That arguments along the class warfare lines and business bashing lines will be for equality of income and equality of outcome (social justice) through redistribution schemes (or one might say through even more redistribution schemes).

Hayek predicted the stages and current entitlement plans, a eighty year legacy of government intrusion into private sector attempting to centrally plan the US economy, and the current Obama administration social engineering, has reached Hayek's stage one where a centrally planned economy has failed. Now we have arrived at a Thomas Sowell favorite expression: "Then what next?". (4)

How do Constituency Building through Entitlements and Central Planning perpetuate?

Harold Demsetz’s book From Economic Man to Economic System and in particular chapter nine The Contrast Between Firms and Political Parties, on page 135 Demsetz writes: “Dollar voters get what they want from the market place. Ballot voters get less of what they want and get more of what political internal constituencies want”. Demsetz goes onto state “Political parties that win office satisfy the wants of larger constituencies than those that do not win office”. Also keep in mind that “constituencies” is used in a general sense by Demsetz to encompass both external (ballot voters) and internal constituencies (party members). (5)

However, at some unknown but certain point the entitlements and central planning fails. When failure arises the ballot voter (external constituency) sees the hidden agenda and feels betrayed and revolts.

Applying Demsetz to the current voter revolt one might point to “…and get more of what political internal constituencies want”. That what is commonly coined as “over-reach” has a sub component where the internal constituencies are perceived as going beyond what they originally presented to their own external constituencies. Hence in the current political environment the internal constituency is perceived to have had a hidden agenda and alienated the external constituency that depended upon the presented agenda.

Going back to Demsetz statement “Dollar voters get what they want from the market place. Ballot voters get less of what they want and get more of what political internal constituencies want”, we might merge this thought with H.L. Mencken's thoughts (paraphrasing): "good" social programs, through enlightened politico speakers, on grand missionary work, lead the ballot voter (external constituencies) to believe that internal constituency agendas will benefit them. All the while the “benefit” is a mirage. -Or- as H.L. Mencken observed: “.....the worship of Jackals by Jackasses.”


The US ballot voter, the vast external constituency, is seeing first hand that the promotion and implementation of central planning and redistribution schemes by internal constituencies are failing. That central planning through redistribution schemes are more apt to be political constituency building strategies by internal constituencies rather than problem solving strategies or making the world a better place for the vast external constituency.


(1)Reason.TV, 10/28/2010,

(2)Library of Economics and Liberty,

(3)Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach

(4)Applied Economics, Thomas Sowell

(5)From Economic Man to Economic System, Harold Demsetz

Monday, October 25, 2010

ObamaCare: Hayek's central authority paradox

The Paradox
Many argue that as an economy becomes larger and more complex that a central authority needs to handle the economic decisions. In other words, central planning is necessary as the large economy and complex economy appears as chaos and the apparent chaos needs “organized”.

F.A. Hayek pointed out and argued successfully that as an economy becomes larger and more complex that decentralized decision making by individuals is the route to pursue. That no central authority is capable of gathering all the knowledge necessary to run a dynamic economy. Hayek was proven correct by the dismal results of the former Soviet Unions and their central planning. Hayek pointed out that the mundane knowledge of households and firms (decentralized authority) is the correct way to handle large complex economies. (1)

That it’s a paradox that as size grows and what some view as chaos that needs organized by a central authority is exactly opposite in that decentralized authority is the route. The chaos is not chaos. Apparent chaos is an economy based on price signals and the mundane knowledge of the individual households and firms is the best and most timely knowledge base to react to the price signals.

Large Central Authority and Large Mistakes
However, what gets little press time in the above Hayek argument is the sub-topic he raises about size and mistakes. That a centralized authority would be by definition absolutely enormous. The enormous centralized authority has to make assumptions leading to plans. If the assumptions are poor or incorrect, then the mistakes are of the enormous variety affecting many. If decision making is decentralized, then large numbers of households and firms make plans also based on assumptions. At any one time good and poor plans are devised. However, in the decentralized model only small decentralized mistakes occur affecting few.

Larger and Larger Government (Government Creep)
If one takes Hayek’s centralized authority with its inability to collect complete and timely knowledge, then takes the poor plans leading to enormous mistakes proposition, then larger and larger government becomes more apt to fail due to partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes. One might point to the recent $800 billion stimulus as a plan based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes. When the enormous mistake occurs many are harmed e.g a 17.3% u6 unemployment measurement.

Running in the Background
As government enlarges as a percentage of the economy then of course the centralized decisions of government increase as well. Hence in the foreground we have a decentralized private sector functioning within an economy based on price using mundane up to the minute information to devise plans. Functioning in the background is a centralized authority (government) based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.

Centralizing Authority in the Health-Care Sector of the Economy
Health-Care is currently a decentralized mundane dynamic knowledge sector being replaced by ObamaCare which is a centralized authority based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.

It would likely be Hayek's contention that problems occurring within an economic sector, what ever those underlying reasons are regarding the perceived problems, the underlying reasons for the problems are not solved by applying centralized authority based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.


(1)Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach

Thursday, October 21, 2010

ObamaCare: governments fail too

Governments fail too

Many times you read articles or see news reports regarding "market failure". That some how the market has failed. What you intuitively know but is rairly reported is that "governments fail too". Both markets and governments fail basically because they are both made up of human beings that make errors. Some errors are unfortunately by design.

In a recent Kudlow Report segment Don Luskin, chief investment officer of Trend Macro made this instant- classic statement: "Government is the only enterprise in the world that when it fails, it does the exact same thing over again except bigger". (1)

Luskin is not alone. Milton Friedman also observed: "The government solution to a problem is usually as bad as the problem". (2)

Do we know of government failures?

We do in fact know governments fail. John and Jane Goodfellow have first hand experience from a simple trip to your local Department of Motor Vehicles that takes hours, to the out of body experience of trying to read and fill out you annual federal tax return. We also know government failure in a more complex proposition of unfunded future entitlements of Medicaid, Medicare, and Social Security that are now in excess of 100 trillion dollars.

Why are market failures reported yet government failures are under reported?

It boils down to the "painting" of the subject matter. What exactly is the difference between politicos through the mechanism of government creating a cheap money bubble while simultaneously promoting purchases of single family housing units by low income marginal buyers and a financial advisor promoting a novice, part-time retail stock investor, with very modest means, into making risky trades using a margin account? (3)

The point being that both are highly risky practices especially for the type/kind of participants involved. One risky practice is promoted by the government while the other risky practice is promoted by the private sector.

If the outcome for both situations end in disaster, the government promoted activity is painted as merely public policy failure experiment albeit in-your-best-interest, helping the little guy, and social justice didn't work in this particular isolated incident. The other disastrous outcome from the private sector is painted in exact opposite terms where "greed", getting over on the little guy, and the-system-is-rigged are the overarching themes of the incident as well as the incident not being isolated but portrayed wide spread within the entire economic system.

In the larger picture, cases of government promoted failure and private sector promoted failure, yield only one report: "markets fail". The "governments fail too" proposition plays second fiddle and is only pointed out by a handful of people. Hence the public at large are feed the "markets fail" concept and the "governments fail too" proposition remains widely under reported.

ObamaCare and governments fail too

F.A. Hayek wrote extensively that centralized command and control programs only worked in the hunter/gatherer stage of economic evolution. When small groups of forty or so controlled a hunting/gathering region, centralized authority might have worked. Harold Demsetz has also written extensively regarding the subject. (4) (5)

However, both Hayek and Demsetz point out that when economies evolved into millions of people, the market became based on the individual, individuals in number that are far removed from the forty or so hunter/gather stage. That millions of unique individuals, through no master centralized plan, began to base information on "price" through no particular grand design. That an economy based on price, price being reflective of scarce resources with alternative uses, allowed the unique millions of individuals, within a vast economy, to communicate, economically speaking, in the universal language of "price".

Hayek went further and postulated that the summation of mundane knowledge of individuals was greater than the knowledge of any centralized authority. In effect, no centralized authority could mimic the knowledge of millions of unique individuals with specific mundane knowledge of their unique abilities, needs, wants, and desires. Thomas Sowell has also dispelled the myth that the knowledge of a centralized authority can supplant the billions of mundane knowledge decisions made everyday by individuals with specific mundane knowledge particular to each and every price decision. (6)

History repeats itself but market failure receives a front page headline

A quote by Ronald Reagan has been widely disseminated within the United States over the past half century: "....government is not the solution to our problem, government is the problem". Actually Reagan went on in his statement to basically summarize Hayek's position of centralized authority being unable to organize an economy. You can hear those remarks in the link below:

When ObamaCare, the first major entitlement introduced since LBJ'S Great Society programs, and with Social Security, Medicaid, and Medicare all basically bankrupt, many, many individuals in US society immediately recalled Reagan's remarks. That yet another entitlement stacked atop a bundle of bankrupt entitlements smacked of "..government is the problem".

Upon review, ObamaCare is merely a centralized authority trying to mimic billions of mundane decisions by unique individuals. ObamaCare attempts to manipulate price which would simply cause individuals to receive the wrong price signals regarding the allocation of scarce resources with alternate uses. Moreover, ObamaCare is a price fixing scheme that ends, as do all price fixing schemes, with a qualitative and quantitative reduction in supply aka rationing. (7)

Oddly enough, "Governments fail too", regarding the introduction of yet another vast entitlement, was elevated, through the voices of millions, to the forefront. Millions upon millions of citizens want to investigate "government failure" before it becomes government failure. Upon further review and investigation, the failure of ObamaCare has become daily reports. That the plan is unravelling daily and possibly for the first time "governments fail" may be stopped before it happens.




(3) Getting Off Track, John B. Taylor

(4) Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach

(5) From Economic Man to Economic System, Harold Demsetz

(6) Applied Economic, Thomas Sowell

(7) Basic Economics, Thomas Sowell

Friday, October 15, 2010

ObamaCare: the ultimate third party decision

The YouTube video above is a Fox Business Network interview with William Poole. (1) Poole is an economist and past chief executive of the Federal Reserve Bank of St. Louis and currently is with the Cato Institute. (2) Your focus should be from 2:35 of the interview until the end of the interview.

Poole is merely stating the empirical evidence of Medicare funding in particular, and entitlement funding in general, being completely unsustainable at any possible tax rate within a market economy. In other words, the current unfunded future entitlements of +100 trillion dollars is not possible to finance. Note that Poole is discussing current unfunded entitlements before the addition of the ObamaCare entitlement.

Poole mentions "the federal government promises" when referring to entitlements. Federal government promises likely can be stated more concisely as: past and present politicos making promises, through the mechanism of government. In other words, government is merely the mechanism to deliver promises of politicos.

Promises made by politicos through the mechanism of government are related to discussions long made by Thomas Sowell regarding the concepts of political time horizons and third party decisions. (3) (4) (5) (6) (7) Sowell points out that politicos have a short term political time horizon. Politicos match their short term political time horizon to economic policy that yields short term economic consequences. That leaves the rest of us to live with the long term cascading unintended economic consequences of such policy. Or alternatively, politico promises are based on short term economic effects that match the short term political time horizon (the next election) with the long term cascading unintended economic effects of the promise accumulating into a series of politico promises that can not possibly be financed (we have arrived at the zenith of accumulated cascading unintended economic consequences related to politico promises).

Politicos are making third party decisions for first party promise participants and first party promise tax payers. Current and future participants as well as current and future tax payers are left to pick up the pieces of the promise with the third party (politicos) paying no direct cost for purposely matching short term economic effects with their short term political time horizon (reelection). That is, the first party suffers from the third party decision, with the third party (politicos) walking away and suffering no direct cost for their third party decisions.

ObamaCare is arguably the ultimate third party decision. With current potential participants and current potential tax payers standing as the majority in opposition, the third party purposely made a minority decision and imposed that decision upon first party (you).

With entitlements in general, and medicare specifically, being unsustainable at any possible tax rate in a market economy, certain politicos went to their playbook and exercised the game plan of matching short term economic effects to a short term political time horizon. However, passing additional entitlement legislation in a known unsustainable finance environment and against the majority of the electorate, will likely turn out to be a promise too far.




(3) Economic Facts and Fallacies, Thomas Sowell

(4) Applied Economics, Thomas Sowell

(5) A Conflict of Visions, Thomas Sowell

(6) Intellectuals and Society, Thomas Sowell

(7) Basic Economics, Thomas Sowell

Saturday, October 9, 2010

ObamaCare mandate, Wickard v. Filburn, and the auto insurance argument

Wheat and the ObamaCare mandate?

U.S. District Judge George Caram Steeh ruled on 10/07/2010 that Congress has the authority, in regards to ObamaCare, to mandate that individuals carry health insurance. The decision was based in part on a 1942 court decision:

"Steeh invoked the New Deal era case of Wickard v. Filburn (1942), which substantially broadened the authority of Congress to regulate under the Commerce Clause. The high court agreed with the federal government that Roscoe Filburn’s decision to grow excess wheat for himself would affect interstate commerce, because the farmer would not be forced to buy extra wheat under a New Deal regulatory scheme designed to increase wheat prices during the Great Depression. "(1)

Expressed alternatively:

"So the Supreme Court has allowed Congress to prohibit a farmer from growing wheat for his own use and a sick woman from growing her own medical marijuana. The Court majorities have reasoned that the restrictions on intrastate activities are necessary and proper for Congress to be able to control the interstate markets in wheat or marijuana. (Wickard v. Filburn; Gonzales v. Raich)."(2)

Another observation is:

"In just a few perfunctory pages, Judge Steeh dismisses this argument on the theory that the Commerce Clause allows Congress to regulate economic decisions, and not just economic activity. Thus, the decision not to purchase health insurance is ripe for regulation. As Professor Barnett points out, "Judge Steeh offers no limiting principle to the “economic decisions” theory," and does not even acknowledge the profound implications of government regulation of all "decisions" that might in some way affect economic activity." (3)

More court challenges

The Michigan case is merely the first of a long line of court decisions to come as the ObamaCare mandate is being challenged on many fronts. Matter of fact, the Obama Administration has attempted to block courts from even considering the constitutionality of the mandate. "So far, the Obama administration is 0 for 3 in its efforts to block courts from considering the constitutional merits of the health control law." (4)

Debating the mandate and auto insurance?

Needless to say the debate over the ObamaCare mandate will resurface as the Steeh ruling is further discussed and the remaining court rulings come to fruition. Along the way you are going to hear a debate point that the ObamaCare mandate is nothing more than the same mandate as owning auto insurance. The rebuttal to this debate point will be that you have the ability to avoid owning auto insurance by merely not owning a vehicle. These debate points have already surfaced on CNBC'S The Kudlow Report on Friday 10/08/2010 as articulated by Matt Miller and Betsy McCaughey. (5) You can view the debate by going to this link:

The debate point regarding ObamaCare mandate and auto insurance

In the coming months, when you hear the debate point put forward that the ObamaCare mandate is akin to owning auto insurance, you should consider the following: that the debate point has a major flaw which is based on "obligation". The debate point makes the implicit assumption that you have an obligation to own auto insurance and hence that same "obligation" exists in the ObamaCare mandate. (6) (7)

The fatal debate flaw is the implicit assumption of obligation. In other words, the debater is hanging their debating hat on auto insurance and the ObamaCare mandate as being equivalent obligations of the buyer. That each buyer of auto insurance has the same obligation as each buyer of health insurance hence "obligation" is being presented by the debater as equivalent obligations regarding auto insurance and health insurance.

What is your obligation to own auto insurance? Your obligation is that of liability to another party, a third party obligation. What is your obligation to own health insurance? Your obligation is to yourself, a first party obligation. Hence one obligation is to a third party whereas the other obligation is to a first party (you). In other words, the debater is comparing obligations that are not equivalent. That is to say, the debater defeats himself/herself by presenting "obligation" as a focal point of the debate then making the incorrect obligation comparison which then negates their own argument.

For further information regarding the "obligation" aspect please visit these two links:









Tuesday, September 28, 2010

ObamaCare: you can't be dropped when you are sick?

Proponents of ObamaCare along with President Obama have made the claim that you no longer have to be worried about losing your health insurance when you are sick. (1) That statement carries the implicit assumption that people were in fact somehow losing their health insurance in the past when they were sick. The statement paints a picture that someone in the middle of an illness, in need of insurance benefits, are suddenly cut off because they are sick.

Does this sound familiar?

"But the problem that plagues the health care system is not just a problem for the uninsured. Those who do have insurance have never had less security and stability than they do today. More and more Americans worry that if you move, lose your job, or change your job, you'll lose your health insurance too. More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won't pay the full cost of care. It happens every day." -Barack Obama September 9, 2009 (2)

Painting a picture

Lets paint that picture onto a canvass. John Q. Public has a health insurance plan through ABC insurance company. John has paid his premium for years. Suddenly John has a kidney stone. John enters treatment and about half way through treatment John is booted off his health insurance because he is "sick". Sounds rather sinister.


The practice of insurers dropping coverage is actually known as "rescissions". Recissions is an underwriting review process based on insurers sometimes reviewing an individual's initial application and cancelling the policy if the application is found inaccurate.(3) (4)

How widespread?

Exactly how widespread is this "rescissions" process? One hundred thousand rescissions per year? Half a million rescissions per year? If you no longer have to worry about losing your health insurance because you are sick, and this is a major talking point regarding ObamaCare, then the phenomena has to be affecting a major portion of the population. Right?
Wrong. Sorry, its yet another ObamaCare riddle.
"According to a congressional report, there were actually fewer than 5,000 recissions per year, and at least some of those were actual cases of fraud....". (5) (6)
Hence the talking point of "losing your health care when you are sick" is really the subject of less than 5,000 annual recissions based on inaccurate applications "and at least some of those were actual cases of fraud..".
If Paul Harvey was here, you know exactly what he would say.
(3) Bad Medicine, Cato Institute, M. D. Tanner, page 7.
(5) Bad Medicine, Cato Institute, M.D. Tanner, page 7

Sunday, September 19, 2010

ObamaCare and the government delivery system

Why choose a government delivery system?

Who can forget the above flow chart of the bureaucracy associated with ObamaCare. Tens of thousands of additional government workers will populate a new mega bureaucracy produced by ObamaCare and another 16,000 IRS agents to enforce ObamaCare penalties/fines.

The above flow chart begs a question: why choose a government delivery system? That is, why choose a delivery system that is managed by a monopoly, that is very well known as a highly inefficient system, a system that has been known to breed corruption and waste, that is full of red tape that frustrates the end users of the system?

The government delivery system as the first choice rather than last choice

Robert Nozick in his book Anarchy, State, and Utopia puts forth the following observations:

(a) people tend to forget about the possibilities of acting independently of the state,

(b) presumably what drives people to use the state's system of justice is the issue of ultimate enforcement,

(c) similarly, people that want to be paternalistically regulated forget the possibilities of contracting into particular limitations on their own behavior or appointing a particular paternalistic supervisory board over themselves. (1)

What Nozick is observing the use of the state as the first choice rather than a last choice. That the state is used for enforcement. That those subscribing paternalism have a quest to broaden their paternalism to all individuals rather than focusing upon themselves.

Conflict of Visions

Thomas Sowell has described a conflict of visions. That two broadly defined groups exist: the empirical camp vs. the anointed/intelligentsia camp. The empirical camp is based on the concepts that the vast collection of mundane knowledge possessed by individuals based on experience and empirical evidence, individual and property rights, and individual freedom to choose - is in direct conflict - with vision of the anointed/intelligentsia group who's position is based on "special knowledge" which is a non-empirically proposition based upon "the way things ought to be" delivered through verbal virtuosity resulting in painting the world in one's own self image. (2) (3)

The mega state vs. the small state

Although the two groups described by Sowell are clearly in conflict of visions, both groups subscribe to Nozick's points (a) and (b) described above. To one extent or another both groups choose the state to deliver their vision. The difference being that the empirical group wants a smaller state to deliver and enforce their vision whereas the anointed/intelligentsia adds Nozick's point (c) yet wants everyone to subscribe to paternalism through an all encompassing state to deliver and enforce their vision (rather than self imposed paternalism upon only themselves).

Delivering the vision

ObamaCare is in fact a "vision" of the anointed/intelligentsia. Beyond the laundry list of short comings associated with ObamaCare, beyond an attempt to mold a health-care system based on "the way things ought to be", the chosen delivery system, the state (government), will never deliver the "vision". That is to say, no matter how well a construct or how poorly a construct, the "vision" can not be delivered through a monopoly, that is a well known highly inefficient system, a system that has been know to breed corruption and waste, that is full of red tape that frustrates the end users of the system.


(1) Richard Nozick, Anarchy, State, and Utopia. Page 14.

(2) Conflict of Visions, Thomas Sowell.

(3) Intellectuals and Society, Thomas Sowell.