Quotes from “In God We Trust”

IGWT-tiny FB version

Those who say religion has nothing to do with politics do not know what religion is.

― Mahatma Gandhi

My politics is my religion, my religion is my politics.

― Mahatma Gandhi

I am quite sure now that often, very often, in matters concerning religion and politics a man’s reasoning powers are not above the monkey’s.

― Mark Twain

Never wage war on religion, nor upon seemingly holy institutions, for this thing has too great a force upon the minds of fools.

― Francesco Guicciardini

The fact is that a man who wants to act virtuous in every way necessarily comes to grief among so many who are not virtuous.

― Niccolò Machiavelli

Men are driven by two principal impulses, either by love or by fear.

― Niccolò Machiavelli

Happy New Year!

The Road to Hell is Paved

road to hell

This is a good article explaining a basic economic concept without once mentioning the word economics…from the WSJ:

ObamaCare and the Good Intentions Paving Co.

Perhaps you’ve noticed that the great plans of politicians tend not to work out as promised.

By Joseph Epstein

I opened my mail recently to discover that my already expensive supplemental health-insurance policy—for which I pay nearly $12,000 a year—has gone up roughly another thousand dollars. “Ah,” I thought, “the Good Intentions Paving Co. has come to my door at last.”

I first heard the phrase “Good Intentions Paving Co.” from the lips of Saul Bellow, though I cannot recall to what exactly he applied it. I don’t know that Bellow invented the term, but since his death in 2005 I have taken it up and found nearly endless uses for it. The phrase derives of course from the proverb holding that the road to hell is paved with good intentions.

ObamaCare is a nearly perfect example of the Good Intentions Paving Co. at work. A president and the leadership of his party decide that it would be a fine thing to bring universal health insurance to the nation—what a sweet notion, really—except when they enact the law it turns out to bring in its trail confusion, anxiety, probable loss of employment, added personal and public expense, and aggravation all round.

One might think the board of directors of the Good Intentions Paving Co. are all liberals, but they are not. One of the firm’s most impressive undertakings was hatched in the Oval Office among George W. Bush, Dick Cheney and Donald Rumsfeld. Why not, they decided, knock off a wretched tyrant and bring democracy to a Middle Eastern country and thereby stabilize the region—all in one bold action? Tens of thousands of violent deaths and many billions of dollars later, with car bombs regularly exploding in downtown Baghdad, and with Sunni and Shiite hatred not in the least abated, the Good Intentions Paving Co. deserves to take another bow.

The Good Intentions Paving Co. has a highly efficient public-relations department, which is especially good at giving its projects promising titles. Consider affirmative action. The firm’s executives who put that intention into play thought that by lowering college-admission standards for members of minorities, injustices would be redressed and the climb to equality secured. How could the Good Intentions executives have known that colleges would in turn lower their academic standards?

Now the American university, at least on the humanities and social-sciences side, is mired in the deepening mediocrity brought on by the establishment of departments for African-American studies, women’s studies, “queer theory”—everything but a Department of Homelessness.

Leave a child behind? Perish the thought. Or so the folks in charge of education at the Good Intentions Paving Co. must have concluded when they instituted their No Child Left Behind program. The program would entail constant testing, would hold the feet of teachers to the fire of palpable achievement, would bring everyone through the primary-grades educational system up to the mark. How bad could that be?

Yet again, though, good intentions went askew. The children were educated chiefly to take tests, some school superintendents cheated in reporting their schools’ test scores, the teachers unions went ballistic over what they felt were the impossible demands made upon their members. The plan of the Good Intentions Paving Co. once more didn’t quite pan out.

The company’s activities are not restricted to America. Its first big project in the past century was the Russian Revolution. The Good Intentions Paving Co.’s prospectus promised freedom for all, economic equality that would allow each citizen fulfillment of his needs, the permanent shutting down of class conflict with the rise of the dictatorship of the proletariat. Didn’t, you will have noticed, quite work out. Instead, the Russian people endured an unrelieved seven-decade nightmare under a series of repressive, mass-murdering Communist regimes. None of this, though, caused the stock of the Good Intentions Paving Co. to lose a point.

Only because it encourages—one might even say incites—feelings of virtue in those who are swept up by its projects does the Good Intentions Paving Co. stay in business. Meaning well, after all, ought to count for something. Unfortunately, when it comes to public policy, good intentions are only slightly better than bad intentions, and not always even that. The reason is that the Good Intentions Paving Co. has never been greatly interested in side effects, in the collateral damage that good intentions so often bring with them. Nor has the firm’s record been notable for taking into account human nature, with its obstinate refusal to obey the dreams of politicians, however alluring they may seem.

The Good Intentions Paving Co. is unlikely ever to be put completely out of business, but one must do what one can to slow its progress. A good place to start may be when making a New Year’s resolution for 2014, vow to resist the firm’s newest projects and policies, however warm and fuzzy they might appear. For instance, President Obama seems to have his heart set on raising the minimum wage. Sounds nice. Surely a step in the right direction. The boys at the Good Intentions Paving Co. are behind it all the way, which is reason enough to believe that it will affect hiring practices in the most deleterious way and cause who knows what other damage.

Fixing Healthcare Distortions


The first step is, the American public must understand that there is an alternative. Stand up and demand it.

This quote is excerpted from a great article in the WSJ by economist John Chochrane explaining the health market problem. Just realize that any time someone tells you the open, competitive (free) market doesn’t work, they are blowing smoke out their %#$.

The U.S. health-care market is dysfunctional. Obscure prices and $500 Band-Aids are legendary. The reason is simple: Health care and health insurance are strongly protected from competition. There are explicit barriers to entry, for example the laws in many states that require a “certificate of need” before one can build a new hospital. Regulatory compliance costs, approvals, nonprofit status, restrictions on foreign doctors and nurses, limits on medical residencies, and many more barriers keep prices up and competitors out. Hospitals whose main clients are uncompetitive insurers and the government cannot innovate and provide efficient cash service.

We need to permit the Southwest Airlines, Wal-Mart, Amazon.com and Apples of the world to bring to health care the same dramatic improvements in price, quality, variety, technology and efficiency that they brought to air travel, retail and electronics. We’ll know we are there when prices are on hospital websites, cash customers get discounts, and new hospitals and insurers swamp your inbox with attractive offers and great service.

The Affordable Care Act bets instead that more regulation, price controls, effectiveness panels, and “accountable care” organizations will force efficiency, innovation, quality and service from the top down. Has this ever worked?

It is unfortunate to say, but my impression is that a functioning healthcare market is not really what our national politicians want, at least not the statists calling for government-controlled healthcare. Instead they focus on dominating national politics by obliterating the opposition party. They can accomplish this if they can bind voters to government entitlements through dependency: “Vote for us or lose your benefits!” Without a viable opposition, single party government can then do what it wants according to their own interests, but ostensibly for the “good” of the people.

This has actually worked for the politicians of many socialist societies, until economic reality blows up the machine. (For a good case of how this is working in capitalist America see Detroit and Chicago…) The only thing that stops this is a voting majority that realizes we never receive something from government (ourselves) for “free.”

A True Healthcare Market?


There are many small fixes that can help repair the market for healthcare and health insurance – a market that has been seriously distorted for the past 30+ years. This article hits on the basic principle that catastrophes need a functioning insurance market based on actuarial probabilities, but healthcare maintenance is something we all need to SAVE for. Health savings accounts are a necessary component that the ACA attempts to excise. Why?

From Barron’s:

Unmanaged Competition


Making health care into a real economy

A reader recently asked, “If the Affordable Care Act isn’t the answer, what is?” Another asked, “Do you really want a health-insurance system without government regulation?” These are fair questions. We have found problems with the new health-care law—both operational and philosophical—to be so compelling that even the status quo ante seems preferable, but we also have a better vision.

Neither a benevolent dictator nor an army of bureaucrats can create an ideal system that serves all possible buyers of health care and properly rewards all who provide it. Only independent individuals can operate in a market, deciding what to buy and what to sell, finding prices that clear the market.

But a market cannot work when third parties stand over the supplier and the customer to fix prices or supplies. So the first element of a good U.S. health-care system must be that all Americans must purchase their own health-insurance policy.

Unlike Obamacare, this mandate should leave lots of room for competition and choice.

Limited Choice

Nearly all health care in the U.S. is paid for by third parties—government, employers, insurance companies—who have neither the provider’s nor the customer’s interests at heart. Individual choice is deliberately limited for the convenience of the real payers.

So the second element of a good U.S. health-care system must be that the citizens must make choices for themselves. Price and scope of coverage are the consumers’ business, not their government’s.

Health insurance is too complicated to be left to policy makers, and if we have a real market, the business will be even more complicated because every insurance company—and new ones—will create more policies tailored to the consumers’ various preferences. In a free market for health insurance, we will have at least as many different styles of health insurance as there are flavors and prices of canned soup in the supermarket.

Insurance, like banking and other potential Ponzi schemes, does need government auditing and supervision, to ensure soundness but not to limit variety.

The current U.S. health-care system is parsimonious. Americans are fearfully aware that their health-insurance coverage may have holes and that they won’t know where the holes are until it’s too late. Some procedures may be excluded from coverage; some health-care providers won’t accept certain types of insurance. Hospitals and doctors do not compete on price; many don’t disclose their inflated official prices, except on the bills; few if any disclose the discounts they offer to the real payers.

Many doctors refuse to accept patients covered by the two biggest government programs, Medicare and Medicaid, both of which have arcane systems for setting what they will pay, regardless of providers’ billed prices.

On the other hand, the U.S. health-care system is not just parsimonious; it is also notoriously wasteful. Insurers, including the government Medicare plan, carefully define what services they will pay for and arrange with providers how much they will pay, but they do almost nothing to limit the number of allowable services they will pay for. Providers living under price fixing make it up on volume.

Plentiful Funds

We often hear that the health-care industry constitutes one-sixth of the U.S. economy, heading for 25% of the economy as the population ages. Less frequently are we reminded that the federal government’s taxpayers and lenders are already paying for half of health-care expenditures. Almost never does anyone note that the federal government’s per capita expenditures on health care for about half its citizens are enough to run a universal health-care system like that in the United Kingdom.

We should not want a government care system filled with problems like the U.K. system; the point is that the current U.S. health-care system already has more than enough money sloshing around to provide excellent care for all Americans.

So the third element of a good U.S. health-care system is to subject health-care to the discipline of consumer discretion.

David Goldhill, CEO of GSN, the cable-TV-network company, is the author of a terrific recent book on the American system: Catastrophic Care: How American Health Care Killed My Father—And How We Can Fix It. Most of the book is devoted to the ills of the current system, which Goldhill sums up as, “All of us are spending insane amounts of money, yet the system makes us feel like paupers.” The health-care industry has hardly any accountability to the customer, and thus it offers terrible service, high prices, limitations on supply of doctors and hospitals, excessive errors, underinvestment in information technology, and lack of coordinated care.

Readers will be encouraged to jettison the current payment systems and the current payers, perhaps to take up these reforms:

Market Power
  1. Employers should not be allowed to provide health insurance, and the federal government should provide direct subsidies only for low-income consumers.
  2. High-deductible catastrophic insurance should be encouraged, not limited. That would lower premiums so that citizens could create Medical Savings Accounts for most of their routine care. Those too poor for this system should receive government subsidies for their insurance premiums and their savings deposits, putting them on the same footing as other citizens when they choose their providers of health care and health insurance.
  3. Medical underwriting should be encouraged, not outlawed, with those who are uninsurable participating in assigned-risk pools subsidized by the federal government.
  4. There could also be a direct subsidy to providers, by which the government would pay a percentage of every bill for every payer with income less than the median income. The share should be significant but not so large that patients would lose their price sensitivity and their incentive to shop.

The essence of our health-care system has been to confuse everyone into thinking they have control without paying for it. In health care as in other things, if we pay for what we get, we may get what we pay for.

Only The Tip of the Iceberg

ACA costs

It seems too easy to pick on Obamacare these days, but a careful review of the warnings by informed market analysts on what the ACA would mean for the healthcare system shows they were well articulated and the results are now coming to pass. This is an excerpt from an article today by economist Michael Boskin printed in the WSJ: ObamaCare’s Troubles Are Only Beginning.

BTW, this can be fixed by applying what we know about competitive private markets. It will not be fixed by trying to circumvent these markets with bureaucratic laws and technocratic engineering.

The repeated assertions by the law’s supporters that nobody but the rich would be worse off was based on a beyond-implausible claim that one could expand by millions the number of people with health insurance, lower health-care costs without rationing, and improve quality. [Blogger note: This was naive wishful thinking at best and otherwise deliberate deceit.] The reality is that any squeezing of insurance-company profits, or reduction in uncompensated emergency-room care amounts to a tiny fraction of the trillions of dollars extracted from those people overpaying for insurance, or redistributed from taxpayers.

The Affordable Care Act’s disastrous debut sent the president’s approval ratings into a tailspin and congressional Democrats in competitive districts fleeing for cover. If the law’s continuing unpopularity enables Republicans to regain the Senate in 2014, the president will be forced to veto repeated attempts to repeal the law or to negotiate major changes.

The risk of a complete repeal if a Republican takes the White House in 2016 will put enormous pressure on Democratic candidates—and on Republicans—to articulate a compelling alternative to the cost and coverage problems that beset health care. A good start would be sliding-scale subsidies to help people buy a low-cost catastrophic plan, purchasable across state lines, equalized tax treatment of those buying insurance on their own with those on employer plans, and expanded high-risk pools.

ZIRP: A Ticking Time Bomb


The public pension debacle is attributed mostly to the failure of politicians to reign in public union demands in favor of courting their votes with over-generous contracts. But one of the hidden risks of the Fed’s Zero Interest Rate Policy is to greatly increase the risks of municipal and state budget crises as pension investments fall far short of their required returns and are forced to bear far more risk than is prudent. (This also applies to private pension plans.) This analyst calculates that these risks have increased ten-fold.  The financial casino we’ve created hides a ticking time bomb.

From the WSJ:

The Hidden Danger in Public Pension Funds

Their investments expose government budgets and taxpayers to 10 times more risk than in 1975.

By Andrew G. Biggs
The threat that public-employee pensions pose to state and local government finances is well known—witness the federal ruling earlier this month that Detroit’s pension obligations are not sacrosanct in a municipal bankruptcy. Less well known is that pensions are larger and their investments riskier than at any point since public employees began unionizing in earnest nearly half a century ago.

Public pensions have long been advertised as offering generous, guaranteed benefits for public employees while collecting low and stable contributions from taxpayers. But with Detroit’s bankruptcy filing, citing $3.5 billion in unfunded pension liabilities, and with four of the five largest municipal bankruptcies in U.S. history occurring in the past two years, reality tells us otherwise.How much riskier are public pensions now? According to my research, public pensions pose roughly 10 times more risk to taxpayers and government budgets than in 1975. And while elected officials—a few Democratic mayors included—are now pushing for reforms, even they may not realize the danger.

In 1975, state and local pension assets were equal to 49% of annual government expenditures, according to my analysis of Federal Reserve data. Pension assets have nearly tripled to 143% of government outlays today. That’s not because plans are better funded—today’s plans are no better funded than in 1980—but mostly because pension plans have grown as public workforces have aged.

The ratio of active public employees to retirees has fallen drastically, according to the State Budget Crisis Task Force. Today it is 1.75 to 1; in 1950, it was 7 to 1. This means that a loss in pension investments has three times the impact on state and local budgets than 40 years ago.

And pensions can expect to take losses more often because of increased investment risk. Public plans have historically assumed roughly an 8% rate of return. But thanks to falling yields on safe assets, pensions must invest in riskier assets to have any hope of getting 8% returns. A one-year Treasury bond in 1975 yielded a 5.9% return. In 1980, it offered 14.8%, and in 1985 an investor could expect 6.5%. Today, the Treasury yield hovers at 0.1%.

Meager yields leave America’s enterprising public-pension plan managers with a choice: Accept a lower return—forcing higher taxpayer contributions—or take on more risk to keep 8% returns flowing. My estimate, based on Treasury yields and analysis from economists at the Office of the Comptroller of the Currency, is that a pension today must build a portfolio with a standard deviation—how much returns vary from year-to-year—of 14%. Such high volatility means that a fund would suffer losses roughly one out of every four years.

By contrast, in 1975 a plan could achieve 8% expected returns with a standard deviation of just 3.7%. Those portfolios would lose money once every 65 years. This level of risk varied little through the 1980s and 1990s: An 8% return portfolio in 1985 would require a standard deviation of 2.7%, and 4.3% in 1995. Risk began inching upward after 2000 and has increased rapidly since the recession as low-risk assets continue to fall.

These figures aren’t theoretical. They represent public pensions’ decades-long shift from safe bonds to risky stocks, along with the recent growth of “alternative investments” such as hedge funds and private equity. These alternatives are, according to Wilshire Consulting, 60% riskier than U.S. stocks and more than five times riskier than bonds.

Larger pensions and riskier investments combine to increase risk to state and local budgets. The standard deviation of public pension investments equaled 1.8% of state and local budgets in 1975. That figure crept upward to 2.2% in 1985, and reached 5.8% in 1995. Today it stands at 19.8%. Pension investment risk to budgets has risen roughly tenfold over the past four decades.

As pension plan managers in Detroit, California and elsewhere can attest, there aren’t easy solutions. Mature pensions should move their investments away from risky assets, but many plan managers are doing the opposite in a double-or-nothing attempt to dig out of multitrillion-dollar funding shortfalls. In most instances, significant benefit cuts for current retirees who made the contributions asked of them is difficult to justify and legally problematic.

The only real option, then, is to make structural changes, including more modest benefits and increased risk-sharing between plan sponsors and public employees. But that will only happen if elected officials accept that they can’t continue with business as usual without accumulating tremendous risk.

Mr. Biggs is a resident scholar at the American Enterprise Institute.

pension bomb

Stuck Inside the Box


The president’s recent economic address reveals that we’re still stuck inside the box on thinking about economic policies. The linchpin of his address was to advocate for an increase in the federal minimum wage and another 99-week extension of unemployment benefits. These are rather innocuous and bankrupt ideas – notable for their insignificant and contentious economic effects.

On the other hand, Obama (and most politicians of both parties in Washington) have tacitly approved of a monetary policy of cheap credit that has enriched the financial sector and large corporations, while penalizing savers and lenders. This has been a massive hidden tax on savers and lenders by eliminating interest income, unduly rewarding borrowers and speculators. The result has been to reflate the banks’ balance sheets while discouraging lending and turning Wall Street into a casino.

Obama’s response is to try to redistribute taxpayer revenues to his constituencies hurt by the foregoing economic policy that he supports. But raising the minimum wage and extending unemployment benefits does absolutely nothing to increase job creation and rebalance the inequalities promoted by the Fed’s monetary policy. If this sounds familiar, it should because this policy remedy is the hair of the dog that bit us with the financial crisis of 2008: cheap credit and debt used to fuel another asset bubble, while promoting bread and circuses to keep the masses complacent.

Think of what this all boils down to: enrich the 1% in order to save the economy and then try to compensate by calls to “tax the rich” in order to increase public transfers through tax and redistribution. This policy is unworkable and unsustainable, as the 1% has the power and means to shelter their assets from confiscation.

But why promote policies that enrich the 1% unjustly to begin with? Yes, it’s because the 1% include almost our entire political class. The irony is that this policy contradicts the political goal of a fair and just society based on merit. Furthermore, the policy exacerbates the problem of a winner-take-all society that is creating an über-class of one-percenters, while robbing the middle and lower classes of the dignity of meeting their own needs.

Think Outside the Box

Let’s take the example of unemployment insurance. The problem is that unemployment insurance, like all insurance, invites moral hazard, where the subsidy can reduce incentives to find gainful employment, or, more frequently, take a job at a lesser wage. (Unemployment is a market outcome that seeks to reduce the price of wages in order to reach a full employment equilibrium – this is not to suggest it is not a political and social problem.) Of course, unemployment insurance is an efficient way to absorb the transition costs of reallocating labor and jobs to more productive sectors (i.e., to turn car mechanics into tech workers). The problem for policy is to separate the true need from the moral hazard. Self-insurance is the most effective way to internalize and eliminate moral hazard costs completely (we know if and when we’re shirking and we know we’re paying the full cost of that from our own pockets). So consider economist Martin Feldstein’s recommendation below:

“Economist Martin Feldstein long ago proposed a better plan to create a self-insurance component of unemployment insurance with tax dollars going into an employee trust fund for each worker that could be drawn during a bout of unemployment. Workers could keep whatever money was left over at retirement, which would encourage workers to become re-employed more quickly after losing a job.”

Self-insurance insures that workers act in their own best financial interest that also coincides with the desired social interest. This same idea can be applied to private retirement saving in lieu of Social Security and to healthcare savings in lieu of a massive government subsidized Affordable Care Act.

More important is to reform the tax code to encourage personal savings to meet self-insurance needs. For example, those savers and lenders being decimated by the Fed’s Zero Interest Rate Policy are paying almost a 100% “tax” on savings interest. How does that square with our leaders’ supposed  desires to help the middle and lower classes meet their financial needs? Rings pretty hollow.