BLS Jobs Situation Report 08/04/2012: Economic Gloaming

The Bureau of Labor Statistics [BLS] jobs situation report of 08/04/2012 showed 163,000 increase in non-farm payrolls in June. Yet the unemployment rate as measured by u3 rose to 8.3% and the u6 measurement rose to 15%. Further, the labor participation rate fell [again] hence the unemployment rate did not rise due to discouraged workers being attracted back to the labor force and hence flooding the denominator of the calculation. Conversely the labor force shrunk [again] by 150,000. Then why the twin reports of more jobs yet more unemployment? (1) (2)

The increased employment and the increased unemployment come from two reports that occasional differ yet generally trend together. The 163,000 comes from a survey of business whereas the 195,000 unemployed comes from the household survey. (3)

However, one report, a snapshot as it were, does not tell the story. It’s not one BLS report or any one report in particular, it’s a series of reports, combining the reports and the synthesis of the over-time reports resulting in a trend. Regarding the BLS of 08/04/2012 and considering the BLS six month trend and for that matter the three year trend, adding in the ongoing Euro zone woes and ECB reports, adding in ongoing Federal Reserve Open Market Committee [FOMC] statements and notes, and finally looking at the trends in ISM manufacturing and ISM services indexes (the former below 50 and the latter hovering around 50 with below 50 an indicator of recession) …..the totality of reports produces a trend or pattern, that Don Luskin CIO of Trend Marco likes to refer to as: The Not So Great Expansion.

This Not So Great Expansion and the continuation thereof is discussed by Dr. Art Laffer in the Wall Street Journal 08/05/2012 as an Op-ed entitled The Real 'Stimulus' Record . Dr. Laffer is channeling Hayek. He is discussing and reporting statistical data that suggests a "V" shaped recession was turned into an elongated "U" shaped recession aka bathtub shaped recession by the deployment of Keynesian policy. That is, Hayek's proposition that Keynesian policy merely extends recessions. (4) (5)

Regarding the economies reported on by Laffer in his statistical table, one needs to note that these economies can't climb the right side of the elongated "U". They can't climb the right side of the "U" due in part to [or mostly due to] the deployment of Keynesian policy.

Hence one merely ends up bumping along the bathtub bottom. One might call it "economic gloaming". Its a twilight were the sun never quite sets nor does the sun ever quite rise above the horizon.

Notes:

(1) BLS jobs situation report 08/04/2012

http://www.bls.gov/news.release/pdf/empsit.pdf

(2) The Jobs Report Bad News by Larry Kudlow

http://www.creators.com/opinion/lawrence-kudlow/the-jobs-report-bad-news.html

(3) Why Did Unemployment Rate Increase - Phil Izzo, WSJ

http://blogs.wsj.com/economics/2012/08/03/why-did-unemployment-rate-increase/

(4) The Real Stimulus Record, Art Laffer

http://online.wsj.com/article/SB10000872396390444873204577537244225685010.html?mod=hp_opinion#articleTabs%3Darticle

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

　

April 2012 Jobs Report: a jobs situation which is an abysmal failure of monumental proportions.

‘Mr. Obama argues that the economy is recovering slowly from a deep recession, and Congress should do more to spur growth. On Friday, he noted that the report continued more than two years' worth of job growth, while acknowledging the lingering weakness.

"After the worst economic crisis since the Great Depression, our businesses have now created more than 4.2 million new jobs over the last 25 months—more than one million jobs in the last six months alone," he told students at a suburban Virginia high school. "But there's still a lot of folks out of work, which means that we've got to do more."

He said he would urge Congress to "take some actions on common-sense ideas that can accelerate even more job growth." He didn't say what he would propose. Most of the ideas he has put forth in the past have gone nowhere, including more infrastructure spending and aid to states to keep public employees such as teachers employed.’ - Jobs Engine Sputters Again in April, WSJ, 05/05/2012 (1)

　

Robert Higgs of the Independent Institute has been pointing out that one should by-pass the “unemployment number” and focus on “total employed”. Total employed has not changed since the official end of the recession [06/2009]. Hence if one argues “..have now created more than 4.2 million new jobs over the last 25 months…” then somewhere in the vicinity of 4.2 million jobs have been destroyed. In the famous words of Billy Preston: nothing from nothing equals nothing.

Then we see the wonderful political phenomena of do something appear: ‘He said he would urge Congress to "take some actions on common-sense ideas that can accelerate even more job growth." ‘ That is, politicos need to show the voting public they are “doing something”.

Hence we have nothing to show for doing something [stimulus, cash-for-clunkers, extended unemployment benefits, etc., etc.] therefore we need to do something about the something. -Or- “Government is the only enterprise on earth, that when it fails, it merely does the same thing over again, just bigger”. - Don Luskin

Then we have “how you feel about it today” economics:

“The job market was soft in April, given the tepid payroll job gain and the decline in labor force participation. But it isn't as soft as the data suggest, as it reflects payback from the very warm winter, which juiced up job gains earlier in the year,” said Mark Zandi, the chief economist for forecaster Moody's Analytics. “Underlying job growth, abstracting from the temporary effects of the weather, is over 175,000 per month. This isn't boom times, but it is solid enough to bring down unemployment further.”

“The decline in unemployment also reflects the expiration of the emergency unemployment-insurance program in an increasing number of states. Older workers losing unemployment insurance are leaving the workforce, contributing to the decline in labor force participation, and younger workers that were slow to take a job now have no choice,” Zandi said. “I expect the job market to reaccelerate later this summer and fall.” - The Sun News, Myrtle Beach, SC, 05/05/2012 (2)

　

　

Beyond Zandi being Zandi, think for a moment what he is alluding to when he states: “The decline in unemployment also reflects the expiration of the emergency unemployment-insurance program in an increasing number of states. Older workers losing unemployment insurance are leaving the workforce…”. That means that these older workers that were collecting unemployment benefits were only doing so to bridge to retirement with no intention of looking for/find a job in many, many cases. That is, he is confirming what many believe i.e. extremely extended unemployment benefits are a disincentive. However he is also raising the phenomena of “strategically unemployed” (akin to strategic default). That some of the unemployed remained strategically unemployed to gain maximum benefits before they qualified for yet another program e.g. social security.

If one takes job creation, plots it on a graph, and takes the twenty year historical trend, projects the trend forward from the end of the recession until today, we are 4.1 million jobs below trend. That is, one would need to create 4.1 million jobs today, right now, instantly to return to the twenty year job creation trend line! Then one would need to continue the job growth to continue on the trend line. Stated alternatively, the lack of job creation has created a very deep hole from which to climb out.

One finds oneself 4.1 million jobs below trend, finds an army of discouraged workers approaching 4 million, finds still millions counted as unemployed actively seeking jobs, extended unemployment benefits causing disincentives as well as shenanigans and the same number are employed today as the number employed at the end of the recession [06/2009] .....all of which exists despite the political maneuvers of "doing something" over and over again. In other words, the political mantra of “the economy recovering slowly” is political speak for a jobs situation which is an abysmal failure of monumental proportions.

Notes:

(1)http://online.wsj.com/article/SB10001424052702304743704577383713904032818.html

　

(2)
http://www.myrtlebeachonline.com/2012/05/04/2810374/april-jobs-report-suggests-slowing.html









　

Obama Mortgage Refinance Plan [White House market intervention-distortion #1,621]

‘President Barack Obama announced a package of proposals designed to jolt the housing market, his latest effort to reignite the economy after four years of foreclosures and falling home prices.

“This housing crisis struck right at the heart of what it means to be middle class in America: our homes,” Obama said in a speech in the Washington suburb of Falls Church, Virginia. “We need to do everything in our power to repair the damage and make responsible families whole.”

The president said his plan would make it easier for homeowners to refinance their mortgages into current low interest rates, which are now below 4 percent. Borrowers, even those who owe more than their homes are worth, would be able to refinance into loans guaranteed by the Federal Housing Administration.

To pay for the program, Obama will ask Congress for a tax on financial companies with more than $50 billion in assets. Congress has refused to act on similar requests twice in the last two years.

“No more red tape, no more runaround from the banks,” Obama said. “A small fee on the largest financial institutions will make sure that it doesn’t add to the deficit.” ’ (1)


Upon further review, the implicit underlying argument of the semi-bailout described above is that the market failed. However, if markets fail, then governments fail too.

Taking the if markets fail, then governments fail too argument to the externality phase, then both markets and government generate externalities. However, the negative externalities [neighborhood effects] associated with markets are often vilified (without regard to positive externalities) ending in a tax and/or regulation. How about government externalities?

Government, more succinctly politicos through the mechanism of government, and public policy, more succinctly politico policy, are always politically framed as only exhibiting positive externalities. Yet once notional politico policy becomes effective, several years hence, cascading unintended consequences occur which are in effect the externalities of politico policy aka government failure e.g. Medicaid, Medicare, social security, the multitude of other Great Society programs, public education K-12 etc., etc.

One needs to examine government failure and associated externalities and the response. Rather than scrapping policy that fails, more policy is instituted to supposedly correct the root policy failure which merely continues to fail.

“Government is the only enterprise on earth that when it fails, it merely does the same thing over again, just bigger.” -Don Luskin, TrendMacro

“I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse.” - Milton Friedman


John B. Taylor, Stanford University economist, wrote a book entitled Getting Off Track, how government actions and interventions caused, prolonged, and worsened the financial crisis. Within this very short book [82 pages] Taylor makes a very convincing argument that government actions, became government failure and set the stage for financial shenanigans [externalities]. No government intervention, then no government failure, and hence no stage set for shenanigans. (2)

The negative externalities being mortgage loan brokers and other mortgage loan access points that engaged in shenanigans as the stage had been set by government through constant and prolonged interventions into the mortgage loan market. Consequentially, mortgages ended up resulting in ownership of homes, at the margin, by buyers who did not qualify. However, the negative externalities could have never occurred had not the environment been created for such negative externalities by government [politicos through the mechanism of government].

In a nutshell, beginning with the market intervention of the community reinvestment act, the promotion of ownership above historical standards by manipulation of GSE’s [Fannie, Freddie, etc.], government directed lowered loan standards, coupled with the Federal Reserve (government) creating a cheap money bubble 2002-2004 created the stage for shenanigans. That the cascading market interventions cause cascading market distortions.

Coming half full circle, we have politicos through the mechanism of government creating market intervention-distortion, creating government failure, causing negative externalities. No doubt mortgage lenders where involved as they took advantage of the environment created for shenanigans. However, rather than reversing course and ending market intervention-distortion policy, the politico, on queue, advocates more market intervention-distortion - or - “Government is the only enterprise on earth that when it fails, it merely does the same thing over again, just bigger.” -Don Luskin, TrendMacro

Now coming three fourth circle, one must examine the proposition that Markets never clear perfectly. Why? Serially uncorrelated errors. Hence no perfection can occur. The market clearing proposition is that quantity demanded will be in equilibrium with quantity supplied with price as the equaling agent. (3)

Closing the loop, paradoxically, intervention-distortion merely creates an environment that magnifies serially uncorrelated errors. That "imperfection" is the argument for intervention-distortion.... when in fact perfection becomes additional imperfection. (4)

In summary, a market never perfectly clears, but it clears in the most part as price changes to bring quantity demanded into equilibrium with quantity supplied. Hence constant distortions impede equilibrium therefore the market distorts and quantity demanded or quantity supplied, given no perfection, can not come into a dynamic equilibrium. In the case of the current housing market, constant and continuous market intervention distortion will leave the market out of equilibrium and delay market clearing, albeit imperfect.

Notes:

(1) Obama Plans Assistance for Rentals, Mortgage Refinancing, Bloomberg/Newsweek, 02/01/2012

http://www.businessweek.com/news/2012-02-01/obama-plans-assistance-for-rentals-mortgage-refinancing.html

(2) Getting Off Track, how government actions and interventions caused, prolonged, and worsened the financial crisis, John B. Taylor, 2009.

(3) After Keynesian Macroeconomics, Robert E. Lucas and Thomas J. Sargent.

http://www.bos.frb.org/economic/conf/conf19/conf19d.pdf

(4) Ibid

Compromise Defined

US Growth and Prosperity Trend Line: 17% below trend.

I Am John Galt. The new book by Luskin and Greta

Politico Kabuki Theater: Debate, Insight, and Political Civility

Debate: a discussion, as of a public question in an assembly, involving opposing viewpoints.

Insight: an instance of apprehending the true nature of a thing, especially through intuitive understanding; penetrating mental vision or discernment; faculty of seeing into inner character or underlying truth; an understanding of relationships that sheds light on or helps solve a problem.

“Civility” regarding political rhetoric and political discourse


In recent months a proposition put forth in the political arena has been “civility” regarding political rhetoric and political discourse. Some politicos point toward people supposedly acting in a violent manner due to heated political rhetoric. Other politicos say no connection exists between political rhetoric and exogenous violent events. Still other politicos point to the fact that US politics has never been “civil” and love to point toward the Jefferson -Adams uncivil statements/politics. Yet other politicos point toward continued uncivil rhetoric even after the issue of civility recently surfaced in the political arena e.g. Wisconsin protester rhetoric and Wisconsin democrats rants in the Wisconsin house.

Politicos and the debate environment


Don’t be fooled. One must remember the “civility” proposition is put forth by and for politicos. Politicos always want to shape the environment in which they debate. The current “call to civility” has nothing to do with civility and has everything to do with shaping a debate environment.

Debate vs. Insight

Regardless of civil debate or non-civil debate, politicos rarely have anything to offer remotely resembling insight. Debate and shaping debate environment has nothing to do with insight.

Hence politicos want to shape a debate environment, perform the political Kabuki dance of debate, point-counter point, and give us the normal politico results of zero insight and plenty of politico smoke laden hot air.

You see, since insight is not a politico strong suit, they merely act the part of politicos and focus attention on “civility”, a non-issue issue, direct media attention to “civility” and go about their merry way debating into infinity and beyond with exactly zero insight.

Politicos are Politicos

Politicos want James and Jane Goodfellow to focus on a non-issue issue, shape their own political debate environment, and continue with their 2,362,222 rendition of the Kabuki dance of debate providing their audience with a never ending sting of opposing view points all the while shedding no light on how to solve problems.

The Kabuki dance of debate is to divert your attention. Its frustrated actors, also known as politicos, providing you political entertainment while solving zero problems. Maybe the following quote puts the politico Kabuki dance of diversion-debate-entertainment into perspective:

Remember, every single second on television, no matter what the apparent content, is entertainment. - Don Luskin

And About that "Lock Box" and Social Security.........

The video above is brought to you courtesy of Dr. Donald Boudreaux, Economics Department, George Mason University. An excellent two minute lesson regarding the wonderful world of social insurance and economic security. (1)

Yes, social insurance and economic security, that fun filled world of impossible promises brought to you by politicos past and present. Yes, those propositions based on "the way things ought to be" which are magic pixie dust carried in the pockets of forest nymphs in the economic pretend world of politicos.

Ah, Boudreaux is merely exaggerating to make a point. There has to be a lock box! There has to be value in that lock box! Where is that lock box and lets go inspect it!

OK! Off to see the wizard of lock boxes!

Social Security: There is No Trust Fund, Only IOU's - Don Luskin, Capitalism Magazine, April, 11, 2005

On Tuesday, President Bush had the most bizarre cabinet meeting any president is ever going to have. It was a meeting with an actual cabinet. A filing cabinet. A filing cabinet in Parkersburg, W. Va., to be precise.

Strange? Yes. But then again this is a very remarkable filing cabinet. By one way of looking at things, it contains $1.7 trillion dollars. But by another, it contains nothing at all.

Of course I'm taking about the filing cabinet in the offices of the Bureau of the Public Debt that holds the assets of the Social Security Trust Fund.

After the meeting, President Bush declared, "a lot of people believe that the Social Security trust is -- the government takes a person's money, invests it, and then pays it back to them upon retirement... It doesn't work that way. There is no 'trust fund,' just IOUs that I saw firsthand..."

In other words, there's nothing there.

The president's opponents were quick to look at it another way. Democratic congressional leaders Harry Reid and Nancy Pelosi said the same day, "It is simply wrong to suggest that the Social Security Trust Fund does not exist, or that the securities held by the Trust Fund are merely pieces of paper. For a president to even suggest that the federal government might, for the first time, default on a security backed by the full faith and credit of the United States unnecessarily misleads American workers..."

Who's right? Is the president right, that the Treasury bonds held by the trust fund are "just IOUs"? Or are the Democrats right, that those bonds are sacred obligations of the United States, just like any other Treasury bond?

Is the president raising valid concerns about the way Social Security is financed? Or, as the Democrats charge, is he threatening to default on the nation's debt?

Both the president and the Democrats are right in their own ways. But that means, necessarily, that both are wrong. I told you it was a remarkable filing cabinet.

Here's the truth about it.

The Democrats are correct that the Trust Fund's cabinet holds actual Treasury bonds, and those bonds are every bit as real as the Treasury bonds you probably have in your IRA or brokerage account. Those bonds -- the Trust Fund's and yours -- are backed by the full faith and credit of the United States, and a default on any of them would be an unprecedented and unthinkable catastrophe for our country.

And nothing whatsoever that President Bush has said should be construed as a threat to default on those bonds. So don't worry -- at least not about that. Period.

There's one very important thing, though, that makes the Trust Fund's Treasury bonds different from yours. You aren't an agency of the US government, but the Trust Fund is. That means when you invest in Treasury bonds, they represent a debt owed by one party to another -- in this case, the government to you. But when the government itself invests in Treasury bonds, those bonds represent a debt owed by one party to itself.

You can't owe money to yourself. What would it even mean to borrow 20 bucks from yourself today and promise to pay it back to yourself on Tuesday?

Here's another way to think about the problem. Social Security is a commitment by the government to make payments to people in the future. The Trust Fund exists, supposedly, to secure that commitment by setting money aside today -- so that in the future, the money doesn't have to come from taxes, borrowing, or spending cuts. Fine -- in principle. But when that money is invested in Treasury bonds, those bonds themselves will have to redeemed in the future, and the money to do that will have to come from taxes, borrowing, or spending cuts.

Of course that makes the Trust Fund's Treasury bonds no different from yours or mine -- they all have to be repaid someday from taxes, borrowing or spending cuts. But my point is that when the Trust Fund holds them, it doesn't accomplish anything. Whether the Trust Fund holds Treasury bonds or nothing at all -- or for that matter, whether or not the Trust Fund exists -- to pay benefits in the future, the government is going to have to tax, borrow or cut spending.

So in that sense, President Bush is absolutely correct when he says "There is no 'trust fund.'"

That makes the Democrats wrong when they fret that Bush's statement amounts to threatening to default on government debt. Think again about the 20 bucks you lent yourself. Suppose you refused to repay yourself when Tuesday rolled around -- is that a default? Would you sue yourself to recover the money you owed yourself?

In other words, since the existence of those Treasury bonds doesn't really affect the government's wherewithal to pay benefits one way or the other, then it would make no difference whatsoever if the Trust Fund simply surrendered them, or for that matter tore them up and threw them in the ocean.

Given Dr. Boudreaux video depiction and Mr. Luskin's analysis, we must give equal time to the forest nymphs and their pockets of pixie dust. Who better to reply then Jacob Lew director of the White House's Office of Management and Budget!

"When more taxes are collected than are needed to pay benefits, funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government — and are held in reserve for when revenue collected is not enough to pay the benefits due." (3)

Ah ha! We write I.O.U's to ourselves! Suppose we could call these I.O.U'S written to ourselves a real "Lew Lew". Ops! Spell check corrects it to: a real "Lou Lou".

Notes:

(1)http://www.xtranormal.com/watch/11226537/?listid=18148621

(2) http://www.capitalismmagazine.com/politics/social-security/4190-social-security-there-is-no-trust-fund-only-iou-s.html?print

(3)http://www.usatoday.com/news/opinion/editorials/2011-02-22-editorial22_ST1_N.htm?loc=interstitialskip

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:

http://www.youtube.com/watch?v=cEuiI2PbSWQ


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.

Notes


(1) http://www.cnbc.com/id/15838446/

(2) http://thinkexist.com/quotes/milton_friedman/

(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

The Socialized Medicine Scheme: Cadillac Health-Care Plans

Proponents of the socialized medicine scheme
want to pay for the $1 trillion price tag of
socialized medicine by levying a tax on so called
Cadillac health-care plans (1). What is a Cadillac
health care plan? Will everyone end up with a
Cadillac health-care plan? Who will pay the tax?
What is the amount of the tax?



Cadillac health-care plans defined

The term "Cadillac" was first used to define a category of health-care plans in the 1970's. The term was used again in the 1980's. Then it was used extensively in the 1990's when Hillary Care was proposed. Basically the term was meant to distinguish the perception of luxury health-care plans.(2)

However, the proponents of the current socialized medicine scheme have arbitrarily defined a Cadillac health-care plan in terms of the level of annualized premium. Individuals have a Cadillac plan if the annual premium exceeds $8,000. A family is deemed to have a Cadillac plan if their annual premium exceeds $21,000. (3)

Will everyone end up with a Cadillac plan?

In order to find the answer to the the question posed above you first need to understand a predominant phenomena of taxation. The phenomena is: when you introduce or increase a tax on an item you will get less of that item. For example, if government levied a $1 tax on a loaf of sliced bread, consumers will demand less sliced bread and hence sliced bread supply will fall as demand for sliced bread falls.

Therefore, if government levies a tax on Cadillac plans, then demand for Cadillac health-care plans will fall hence we will have less Cadillac plans. Employers will buy more modest plans for their employees. (4) In other words, employers will exercise tax avoidance.

However, a problem then occurs for the revenue stream needed by proponents of the socialized medicine scheme. As the Cadillac tax reduces the number of Cadillac health-care plans , then tax revenue will fall as less taxable items exist to in fact tax. Its the Laffer Curve and associated arguments by Dr. Art Laffer. (5) What then?

This problem has been solved by socialists by merely not indexing for inflation the $8,000 individual and $21,000 family thresholds mentioned above. (6)

Looking back in time, an income earner once suffered tax bracket creep. That is, inflation pushed up wages of the income earner and the income earner being also a tax payer, moved from one tax bracket into another tax bracket due to inflating wages. However, prices were inflating simultaneously. Hence the income earner's purchasing power remained unchanged with wages following prices. Yet the income earner's tax bracket changed and the income earner paid more tax thus suffering diminished purchasing power due to tax bracket creep. That is, constant purchasing power as wages follow prices yet higher taxes ended in dimished purchasing power.

Tax bracket creep was deemed unfair and hence the introduction of tax brackets indexed for inflation.

Ah the evil of it all! What is good for the goose is not good for the gander when it comes to tax revenue needed to fuel the $1 trillion dollar socialized medicine scheme. Socialists have merely gone back to the taxation concept of tax bracket creep. In this case one might call it health plan creep.

The Kaiser Family Foundation states that the average family plan premium is $13,375. (7) Kaiser goes onto to mention the average price increase for family health care plans from 1999-2009 was 8.7%. Hence the average family plan will become a Cadillac plan by 2015. (8)

Its rather simple mathematics to see that everyone will eventually have a Cadillac health-care plan.

Stepping back for a moment, and looking at the term "Cadillac" from the perspective of Political-Economy, socialists are simply using the specific term "Cadillac" as a sham. Its merely a term used for a class warfare and misdirect strategy. Socialists are using the term Cadillac to make John and Jane Q. Public think only people with very rich benefits aka Cadillac plans are going to carry the water for the funding of the socialized medicine scheme. Hence John and Jane Q. Public are class warfare baited and their attention is directed away from the fact that John and Jane Q. Public will soon, themselves, have a Cadillac plan. Oops! Oh yes! The dollar threshold of a Cadillac plan is unadjusted for inflation hence through the compounding of inflation everyone ends up with a Cadillac plan.

Hence John and Jane Q. Public's modest benefit plan soon morphs into a Cadillac plan due to inflation. Like tax bracket creep, socialists have now introduced health benefit plan creep. Its merely a matter of time when everyone has a Cadillac plan. Which means its merely a matter of time when everyone pays the tax. John and Jane Q. Public are being duped.


Who pays the tax and at what tax rate?

Another phenomena of tax is that the ultimate payer of any tax is always the consumer. (9) (10)All taxes are passed onto consumers. Hence the concept that the Cadillac tax will be levied against insurance companies is yet another class warfare and misdirect argument to throw John and Jane Q Public off the real subject at hand.


What is the tax rate? Try 40%. (11)

Summary
Within a very short period of time, all consumers of health care insurance, through health benefit plan creep, via non-indexed thresholds and inflation, will have a Cadillac plan and the consumer of health benefits will be taxed at a 40% rate.



Notes:

(a) the picture above is the Titanic beginning sea trials 04/02/1912. Seemed appropriate.

(b) the Cadillac tax has been proposed by politicians through expert analysis and confirmation by MIT economist Jonathan Gruber. However, it has been uncovered that Gruber has a major conflict of interest. Please see the following post by Donald Luskin of Trendmacro entitled Where's the Outrage:
http://www.poorandstupid.com/2010_01_03_chronArchive.asp#3413284275177039725
References:

(1)http://www.nytimes.com/2009/10/13/health/policy/13plans.html?_r=1&hp

(2)http://www.slate.com/id/2232434/

(3) http://www.nytimes.com/2009/10/13/health/policy/13plans.html?_r=1&hp

(4)http://www.healthbeatblog.com/2009/12/fact-check-the-cadillac-controversy.html

(5)http://en.wikipedia.org/wiki/Laffer_curve

(6) http://www.nytimes.com/2009/09/21/health/policy/21insure.html

(7)Ibid

(8) http://www.nytimes.com/imagepages/2009/09/21/business/21insure_graphic_ready.html

(9) http://www.sweethomenews.com/article/20284-consumers+pay+tax+hikes

(10) http://www.heritage.org/Research/Taxes/cda04-12.cfm

(11) http://www.nytimes.com/2009/10/13/health/policy/13plans.html?_r=1&hp