Tidbits Quotations on April 8, 2010
To Accompany the April 8, 2010 edition of Tidbits
Bob Jensen at Trinity University


Update Video from David Walker, Bipartisan Former Top Government Accountant Under President's Clinton and Bush

"U.S. Standard of Living Unsustainable Without Drastic Action, Former Top Govt. Accountant Says," Yahoo Finance, March 31, 2010 --- Click Here

Who will bail out America? A longtime budget hawk and currently CEO of the Peter G. Peterson Foundation, David Walker says America's growing long-term debt is dangerously close to passing a "tipping point" that could trigger soaring interest rates and a plummeting dollar. In a worst case scenario, that could trigger a "global depression," he says, warning: "Nobody's going to bail out America."

With the U.S. facing $50 trillion in unfunded liabilities and around $62 trillion in total long-term debt, what worries Walker most is what happens after the recession dissipates, as detailed here. "I'm less concerned with the short-term deficits than I am the fact that we're not doing anything about those structural deficits that people used to call long-term," says Walker, former U.S. Comptroller General and head of the Government Accountability Office. "But the long-term is here."

What's ultimately at stake may be nothing short of Americans' faith in government and our standard of living. "There is a way forward. There is hope," Walker says. "But we need to actually make some tough choices."

Walker, author of a new book, "Comeback America," argues the U.S. needs to tackle four key issues if the nation wants to recover:

Impose tough budget limits Reform Social Security Cut health-care costs Reform the U.S. tax system

The "Burning Platform" of the United States Empire
Former Chief Accountant of the United States, David Walker, is spreading the word as widely as possible in the United States about the looming threat of our unbooked entitlements. Two videos that feature David Walker's warnings are as follows:

David Walker claims the U.S. economy is on a "burning platform" but does not go into specifics as to what will be left in the ashes.

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html


U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/

The $61 Trillion Margin of Error, and What "Empire Decline" Means in Layman's Terms
This is a bipartisan disaster from the beginning and will be until the end

David Walker --- http://en.wikipedia.org/wiki/David_M._Walker_(U.S._Comptroller_General)

Niall Ferguson --- http://en.wikipedia.org/wiki/Niall_Ferguson

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News or The Wall Street Journal.

. . .

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

. . .

Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

Continued in article --- http://www.newsweek.com/id/224694/page/1


Niall Ferguson is the Laurence A. Tisch professor of history at Harvard University and the author of The Ascent of Money. In late 2009 he puts forth an unbooked discounted present value liability of $104 trillion for Social Security plus Medicare. In late 2008, the former Chief Accountant of the United States Government, placed this estimate at$43 trillion. We can hardly attribute the $104-$43=$61 trillion difference to President Obama's first year in office. We must accordingly attribute the $61 trillion to margin of error and most economists would probably put a present value of unbooked (off-balance-sheet) present value of Social Security and Medicare debt to be somewhere between $43 trillion and $107 trillion To this we must add other unbooked present value of entitlement debt estimates which range from $13 trillion to $40 trillion. If Obamacare passes it will add untold trillions to trillions more because our legislators are not looking at entitlements beyond 2019.


The Meaning of "Unbooked" versus "Booked" National Debt
By "unbooked" we mean that the debt is not included in the current "booked" National Debt of $12 trillion. The booked debt is debt of the United States for which interest is now being paid daily at slightly under a million dollars a minute. Cash must be raised daily for interest payments. Cash is raised from taxes, borrowing, and/or (shudder) the current Fed approach to simply printing money. Interest is not yet being paid on the unbooked debt for which retirement and medical bills have not yet arrived in Washington DC for payment. The unbooked debt is by far the most frightening because our leaders keep adding to this debt without realizing how it may bring down the entire American Dream to say nothing of reducing the U.S. Military to almost nothing.

Niall Ferguson,
"An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1

This matters more for a superpower than for a small Atlantic island for one very simple reason. As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon's present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.

Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP (some of the money presumably is going to keep me from expiring even sooner). But spending on everything other than health, Social Security, and interest payments drops from 12 percent to 8.4 percent.

This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis. According to a recent Rasmussen report, 42 percent of Americans now say that cutting the deficit in half by the end of the president's first term should be the administration's most important task—significantly more than the 24 percent who see health-care reform as the No. 1 priority. But cutting the deficit in half is simply not enough. If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.


"Social Security to See Payout Exceed Pay-In This Year," by Mary Williams Walsh, The New York Times, March 24, 2010 ---

The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.

“When the level of the trust fund gets to zero, you have to cut benefits,” Alan Greenspan, architect of the plan to rescue the Social Security program the last time it got into trouble, in the early 1980s, said on Wednesday.

That episode was more dire because the fund could have fallen to zero in a matter of months. But partly because of steps taken in those years, and partly because of many years of robust economic growth, the latest projections show the program will not exhaust its funds until about 2037.

Still, Mr. Greenspan, who later became chairman of the Federal Reserve Board, said: “I think very much the same issue exists today. Because of the size of the contraction in economic activity, unless we get an immediate and sharp recovery, the revenues of the trust fund will be tracking lower for a number of years.”

The Social Security Administration is expected to issue in a few weeks its own numbers for the current year within the annual report from its board of trustees. The administration has six board members: three from the president’s cabinet, two representatives of the public and the Social Security commissioner.

Though Social Security uses slightly different methods, the official numbers are expected to roughly track the Congressional projections, which were one page of a voluminous analysis of the federal budget proposed by President Obama in January.

Mr. Goss said Social Security’s annual report last year projected revenue would more than cover payouts until at least 2016 because economists expected a quicker, stronger recovery from the crisis. Officials foresaw an average unemployment rate of 8.2 percent in 2009 and 8.8 percent this year, though unemployment is hovering at nearly 10 percent.

The trustees did foresee, in late 2008, that the recession would be severe enough to deplete Social Security’s funds more quickly than previously projected. They moved the year of reckoning forward, to 2037 from 2041. Mr. Goss declined to reveal the contents of the forthcoming annual report, but said people should not expect the date to lurch forward again.

The long-term costs of Social Security present further problems for politicians, who are already struggling over how to reduce the nation’s debt. The national predicament echoes that of many European governments, which are facing market pressure to re-examine their commitments to generous pensions over extended retirements.

The United States’ soaring debt — propelled by tax cuts, wars and large expenditures to help banks and the housing market — has become a hot issue as Democrats gauge their vulnerability in the coming elections. President Obama has appointed a bipartisan commission to examine the debt problem, including Social Security, and make recommendations on how to trim the nation’s debt by Dec. 1, a few weeks after the midterm Congressional elections.

Although Social Security is often said to have a “trust fund,” the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year.

Now that accumulated revenue will slowly start to shrink, as outlays start to exceed revenue. By law, Social Security cannot pay out more than its balance in any given year.

For accounting purposes, the system’s accumulated revenue is placed in Treasury securities.

In a year like this, the paper gains from the interest earned on the securities will more than cover the difference between what it takes in and pays out.

Mr. Goss, the actuary, emphasized that even the $29 billion shortfall projected for this year was small, relative to the roughly $700 billion that would flow in and out of the system. The system, he added, has a balance of about $2.5 trillion that will take decades to deplete. Mr. Goss said that large cushion could start to grow again if the economy recovers briskly.

Indeed, the Congressional Budget Office’s projection shows the ravages of the recession easing in the next few years, with small surpluses reappearing briefly in 2014 and 2015.

After that, demographic forces are expected to overtake the fund, as more and more baby boomers leave the work force, stop paying into the program and start collecting their benefits. At that point, outlays will exceed revenue every year, no matter how well the economy performs.

Mr. Greenspan recalled in an interview that the sour economy of the late 1970s had taken the program close to insolvency when the commission he led set to work in 1982. It had no contingency reserve then, and the group had to work quickly. He said there were only three choices: raise taxes, lower benefits or bail out the program by tapping general revenue.

The easiest choice, politically, would have been “solving the problem with the stroke of a pen, by printing the money,” Mr. Greenspan said. But one member of the commission, Claude Pepper, then a House representative, blocked that approach because he feared it would undermine Social Security, changing it from a respected, self-sustaining old-age program into welfare.

Mr. Greenspan said that the same three choices exist today — though there is more time now for the painful deliberations.

“Even if the trust fund level goes down, there’s no action required, until the level of the trust fund gets to zero,” he said. “At that point, you have to cut benefits, because benefits have to equal receipts.”

"What We Know That Isn't So," by John Stossel, Townhall, March 31, 2010 ---

Much government interference with our peaceful pursuits is based on junk science and junk economics. Politicians know a lot of stuff that isn't so. So do reporters.

Let me count some of the ways. (I'll elaborate on tomorrow's Fox Business Network show.)

Congress now spends your money on a host of intrusive new programs designed to make America "energy independent." President Obama recently announced $8 billion in loan guarantees for nuclear power plants.

I smiled when I heard. Finally, even Democrats woke up to the benefits of nuclear power. But Cato Institute energy analyst Jerry Taylor set me straight:

"If nuclear power made economic sense, we wouldn't need to subsidize it."

Affordable nuclear power, says Taylor, is a Republican fantasy. Promoting it makes no more sense than Nancy Pelosi's promotion of wind and solar power. "Take a Republican speech about nuclear power, cross out the phrase 'nuclear,' and put in 'solar' -- you've got a Democratic speech about energy."

All these "alternative" fuels are economically impractical. Natural gas is practical. And plentiful.

I thought the only reason that nuclear didn't pay for itself is the burden of excessive regulations and objections from silly environmentalists. Apply for permission to build a plant, and their cumbersome lawsuits impose ruinously expensive delays.

Again, Taylor set me straight. He says the nuclear industry itself is comfortable with today's level of regulation. The big problem today is not environmental rules, but simply the huge cost. The same high costs, he says, are found in countries that have long been friendly to nuclear power.

He also notes that when the Department of Energy proposed offering to guarantee 80 percent of the cost of new nuclear plants, the big investment banks told the department that even 80 percent loan guarantees wouldn't be enough. They needed 100 percent guarantees, or they wouldn't make the loans.

"To me that's a market verdict that you're supposed to respect. ... We need to leave these (matters) to markets. And in the marketplace, investors will not spend a single red dime on nuclear power because it's too expensive. ... It's not Jane Fonda or Greenpeace that killed nuclear power. It's Wall Street investment banks who've looked at the bottom line."

He's convinced me. Then he moved on to more Republican candy: the claim that drilling for oil in the Gulf of Mexico and Arctic National Wildlife Refuge (ANWR) in Alaska would dramatically lower oil prices and move us toward energy "independence."

Taylor says such drilling would do neither. Yes, it would create wealth. New offshore fields might produce a million barrels of oil per day. While that would be good, the benefits are oversold. "We consume 15 million barrels of oil a day. We produce 5. We'd go to 6." Nice, but no game-changer.

Of course, subsidizing wind and solar makes even less sense. Taylor calls them 12th-century technologies. They require lots of land to produce forms of energy that are hard to store and hard to move, and are too variable throughout the year. Even if we covered most of America with wind farms, there's no guarantee that they'd produce energy when we need it.

Other junk science abounds: banning plastic shopping bags, as 10 cities have done, is pointless. Plastic bags take up a tiny fraction of landfills. When supermarkets are stopped from handing plastic out, people looking to dispose garbage buy more big, black plastic bags.

Banning incandescent bulbs, as Congress has done starting in 2012, is also pointless. The ban will have only the tiniest effect on America's energy use. In addition, fluorescent bulbs often use as much power as incandescent bulbs because people leave them on longer.

People are ignorant enough about science that it's easy for politicians to scare them into supporting absurd regulations. For my show, I went to Times Square and asked if people would sign a petition demanding a ban on "dihydrogen monoxide," a colorless, odorless chemical that kills thousands. Most everyone signed.

They were embarrassed when they realized that dihydrogen monoxide is ... H2O. They eagerly endorsed a ban on water.

"What Am I?" By John Stossel, RealClearPolitics, April 7, 2010 ---

I used to be a Kennedy-style "liberal." Then I wised up. Now I'm a libertarian.

But what does that mean?

When I asked people on the street, half had no clue.

We know that conservatives want government to conserve traditional values. They say they're for limited government, but they're pro-drug war, pro-immigration restriction and anti-abortion, and they often support "nation-building."

And so-called liberals? They tend to be anti-gun and pro-choice on abortion. They favor big, powerful government -- they say -- to make life kinder for people.

By contrast, libertarians want government to leave people alone -- in both the economic and personal spheres. Leave us free to pursue our hopes and dreams, as long as we don't hurt anybody else.

Ironically, that used to be called "liberal," which has the same root as "liberty." Several hundred years ago, liberalism was a reaction against the stifling rules imposed by aristocracy and established religion.

I wish I could call myself "liberal" now. But the word has been turned on its head. It now means health police, high taxes, speech codes and so forth.

So I can't call myself a "liberal." I'm stuck with "libertarian." If you have a better word, please let me know.

When I first explained libertarianism to my wife, she said: "That's cruel! What about the poor and the weak? Let them starve?"

I recently asked some prominent libertarians that question, including Jeffrey Miron, who teaches economics at Harvard.

"It might in some cases be a little cruel," Miron said. "But it means you're not taking from people who've worked hard to earn their income (in order) to give it to people who have not worked hard."

But isn't it wrong for people to suffer in a rich country?

"The number of people who will suffer is likely to be very small. Private charity ... will provide support for the vast majority who would be poor in the absence of some kind of support. When government does it, it creates an air of entitlement that leads to more demand for redistribution, till everyone becomes a ward of the state."

Besides, says Wendy McElroy, the founder of ifeminists.com, "government aid doesn't enrich the poor. Government makes them dependent. And the biggest hindrance to the poor ... right now is the government. Government should get out of the way. It should allow people to open cottage industries without making them jump through hoops and licenses and taxing them to death. It should open up public lands and do a 20th-century equivalent of 40 acres and a mule. It should get out of the way of people and let them achieve and rise."

David Boaz, executive vice president of the Cato Institute, took the discussion to a deeper level.

"Instead of asking, 'What should we do about people who are poor in a rich country?' The first question is, 'Why is this a rich country?' ...

"Five hundred years ago, there weren't rich countries in the world. There are rich countries now because part of the world is following basically libertarian rules: private property, free markets, individualism."

Boaz makes an important distinction between equality and absolute living standards.

"The most important way that people get out of poverty is economic growth that free markets allow. The second-most important way -- maybe it's the first -- is family. There are lots of income transfers within families. Third would be self-help and mutual-aid organizations. This was very big before the rise of the welfare state."

This is an important but unappreciated point: Before the New Deal, people of modest means banded together to help themselves. These organizations were crowded out when government co-opted their insurance functions, which included inexpensive medical care.

Boaz indicts the welfare state for the untold harm it's done in the name of the poor.

"What we find is a system that traps people into dependency. ... You should be asking advocates of that system, 'Why don't you care about the poor?'"

I agree. It appears that when government sets out to solve a problem, not only does it violate our freedom, it also accomplishes the opposite of what it set out to do.

"Violent Liberal Hate Rhetoric: Fifteen Quotes," by John Hawkins, Townhall, March 30, 2010 ---

Jensen Comment
To be fair, there is a lot of violent conservative hate to counterbalance the left's hate.

Al Gore Blasts Oil Drilling --- http://www.youtube.com/watch?v=yempe-dWtg4

"Rare Win For Big Oil," Investor.com, March 31, 2010 ---

The Law: An international court stunned Ecuador by ordering it to pay $700 million to Chevron for failing to honor treaty obligations. It's a jolt for the banana republic, which has gamed justice for years: The bill is due.

For Ecuador's President Rafael Correa, courts are a money tree from which to shake cash from "greedy" Western corporate investors.

In the mother of all conflicts of interest, his government has cheered on a $27 billion lawsuit by jungle activists against Chevron in Ecuador's own courts, claiming Chevron polluted the country and anticipating a cut of the expected winnings.

In that case, an Ecuadorean judge was caught on tape telling an oil contractor the fix was in about his coming ruling.

Instead of dropping the case as tainted, Correa sped forward, howling about "injustice," trotting out naive movie stars like actress Daryl Hannah to boost publicity, and using the anticipated payday as a substitute for economic development.

But Tuesday, Correa got a shock of reality from the Permanent Court of Arbitration in the Hague, which ordered his government to pay $700 million to Chevron in a separate lawsuit.

In this real-world judicial ruling, Ecuador was found guilty of violating the U.S.-Ecuador bilateral investment treaty by failing to resolve seven business disputes with Chevron dating from the 1990s.

"It shows what happens when they don't control the courts," said Chevron spokesman Kent Robertson following the $700 million ruling. "It does speak to the judicial climate in Ecuador."

It's of a piece with just about everything Ecuador has done in its dealings with foreign investors. Back in 2008, it defaulted on $10 billion in sovereign debt, not because it was broke, but because it didn't feel like paying. Calling debt "immoral," it set up a stacked government commission to rule that debt (but not the cash it brought in) illegally obtained. Then it stiffed the investors.

Now it's crying foul with the Hague ruling, waving the flag of nationalism and vowing to appeal. No doubt it knows there will be implications for its spurious $27 billion lawsuit against Chevron.

This shows local courts have protected a corrupt government for years — dishonoring contracts, violating private property and inventing charges — against a company that tried to help by investing in Ecuador after the country's state oil company failed.

For these reasons, Ecuador ranks rock bottom in the "2010 Index of Economic Freedom" in investment freedom, property rights and corruption. Now the country faces the shock of reality with a real court, an international one at that, calling it on its game.

Time to pay up. The gig is up.

"CIA says ACLU-backed plan endangered Gitmo officers," Washington Times, March 31, 2010 ---

A team of CIA counterintelligence officials recently visited the U.S. military prison at Guantanamo Bay, Cuba, and concluded that CIA interrogators face the risk of exposure to al Qaeda through inmates' contacts with defense attorneys, according to U.S. officials.

The agency's "tiger team" of security specialists was dispatched as part of an ongoing investigation conducted jointly with the Justice Department into a program backed by the American Civil Liberties Union. The program, called the John Adams Project, has photographed covert CIA interrogators and shown the pictures to some of the five senior al Qaeda terrorists held there in an effort to identify them further.

Details of the review could not be learned. However, the CIA team came away from the review, conducted the week of March 14, "very concerned" that agency personnel have been put in danger by military rules allowing interaction between the five inmates and defense attorneys, according to an intelligence source close to the review.

Continued in article

Note that I’m not in favor of repealing the recent legislation. But I am in favor of adding a public option so long as taxation and insurance premiums are added to fully cover the annual costs of health insurance. And let's stop the BS on the left and on the right side of this debate.

Fuzzy CBO Accounting Tricks
"ObamaCare by the Numbers: Part 2," by John Cassidy, The New Yorker, March 26, 2010 ---

This is a long and somewhat involved followup to my previous post on ObamaCare. . For those of you with O.A.D.D. (online attention-deficit disorder), I’ve provided an express and local version.


The official projections for health-care reform, which show it greatly reducing the number of uninsured and also reducing the budget deficit, are simply not credible. There are three basic issues.

The cost and revenue projections rely on unrealistic assumptions and accounting tricks. If you make some adjustments for these, the cost of the plan is much higher.

The so-called “individual mandate” isn’t really a mandate at all. Under the new system, many young and healthy people will still have a strong incentive to go uninsured.

Once the reforms are up and running, some employers will have a big incentive to end their group coverage plans and dump their employees onto the taxpayer-subsidized individual plans, greatly adding to their cost.


For future reference (or possibly to roll up and beat myself over the head with in my dotage) I have filed away a copy the latest analysis (pdf) of health-care reform from the Congressional Budget Office. By 2019, it says, the bills passed by the House and Senate will have cut the number of uninsured Americans by thirty-two million, raised the percentage of people with some form of health-care coverage from eighty-three per cent to ninety-four per cent, and reduced the federal deficit by a cumulative $143 billion. If all of these predictions turn out to be accurate, ObamaCare will go down as one of the most successful and least costly government initiatives in history. At no net cost to the taxpayer, it will have filled a gaping hole in the social safety net and solved a problem that has frustrated policymakers for decades.

Does Santa Claus live after all? According to the C.B.O., between now and 2019 the net cost of insuring new enrollees in Medicaid and private insurance plans will be $788 billion, but other provisions in the legislation will generate revenues and cost savings of $933 billion. Subtract the first figure from the second and—voila!—you get $143 billion in deficit reduction.

The first objection to these figures is that the great bulk of the cost savings—more than $450 billion—comes from cuts in Medicare payments to doctors and other health-care providers. If you are vaguely familiar with Washington politics and the letters A.A.R.P. you might suspect that at least some of these cuts will fail to materialize. Unlike some hardened skeptics, I don’t think none of them will happen. One part of the reform involves reducing excessive payments that the Bush Administration agreed to when it set up the Medicare Advantage program in 2003. If Congress remains under Democratic control—a big if, admittedly—it will probably enact these changes. But that still leaves another $300 billion of Medicare savings to be found.

The second problem is accounting gimmickry. Acting in accordance with standard Washington practices, the C.B.O. counts as revenues more than $50 million in Social Security taxes and $70 billion in payments towards a new home-care program, which will eventually prove very costly, and it doesn’t count some $50 billion in discretionary spending. After excluding these pieces of trickery and the questionable Medicare cuts, Douglas Holtz-Eakin, a former head of the C.B.O., has calculated that the reform will actually raise the deficit by $562 billion in the first ten years. “The budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed,” he wrote in the Times. “So fantasy in, fantasy out.”

Holtz-Eakin advised John McCain in 2008, and he has a reputation as a straight shooter. I think the problems with the C.B.O.’s projections go even further than he suggests. If Holtz-Eakin’s figures turned out to be spot on, and over the next ten years health-care reform reduced the number of uninsured by thirty million at an annual cost of $56 billion, I would still regard it as a great success. In a $15 trillion economy—and, barring another recession, the U.S. economy should be that large in 2014—fifty or sixty billion dollars is a relatively small sum—about four tenths of one per cent of G.D.P., or about eight per cent of the 2011 Pentagon budget.

My two big worries about the reform are that it won’t capture nearly as many uninsured people as the official projections suggest, and that many businesses, once they realize the size of the handouts being offered for individual coverage, will wind down their group plans, shifting workers (and costs) onto the new government-subsidized plans. The legislation includes features designed to prevent both these things from happening, but I don’t think they will be effective.

Consider the so-called “individual mandate.” As a strict matter of law, all non-elderly Americans who earn more than the poverty line will be obliged to obtain some form of health coverage. If they don’t, in 2016 and beyond, they could face a fine of about $700 or 2.5 per cent of their income—whichever is the most. Two issues immediately arise.

Even if the fines are vigorously enforced, many people may choose to pay them and stay uninsured. Consider a healthy single man of thirty-five who earns $35,000 a year. Under the new system, he would have a choice of enrolling in a subsidized plan at an annual cost of $2,700 or paying a fine of $875. It may well make sense for him to pay the fine, take his chances, and report to the local emergency room if he gets really sick. (E.R.s will still be legally obliged to treat all comers.) If this sort of thing happens often, as well it could, the new insurance exchanges will be deprived of exactly the sort of healthy young people they need in order to bring down prices. (Healthy people improve the risk pool.)

If the rules aren’t properly enforced, the problem will be even worse. And that is precisely what is likely to happen. The I.R.S. will have the administrative responsibility of imposing penalties on people who can’t demonstrate that they have coverage, but it won’t have the legal authority to force people to pay the fines. “What happens if you don’t buy insurance and you don’t pay the penalty?” Ezra Klein, the Washington Post’s industrious and well-informed blogger, asks. “Well, not much. The law specifically says that no criminal action or liens can be imposed on people who don’t pay the fine.”

So, the individual mandate is a bit of a sham. Generous subsidies will be available for sick people and families with children who really need medical care to buy individual coverage, but healthy single people between the ages of twenty-six and forty, say, will still have a financial incentive to remain outside the system until they get ill, at which point they can sign up for coverage. Consequently, the number of uninsured won’t fall as much as expected, and neither will prices. Without a proper individual mandate, the idea of universality goes out the window, and so does much of the economic reasoning behind the bill.

The question of what impact the reforms will have on existing insurance plans has received even less analysis. According to President Obama, if you have coverage you like you can keep it, and that’s that. For the majority of workers, this will undoubtedly be true, at least in the short term, but in some parts of the economy, particularly industries that pay low and moderate wages, the presence of such generous subsidies for individual coverage is bound to affect behavior eventually. To suggest this won’t happen is to say economic incentives don’t matter.

Take a medium-sized firm that employs a hundred people earning $40,000 each—a private security firm based in Atlanta, say—and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

Even if the government tried to impose additional sanctions on such firms, I doubt it would work. The dollar sums involved are so large that firms would try to game the system, by, for example, shutting down, reincorporating under a different name, and hiring back their employees without coverage. They might not even need to go to such lengths. Firms that pay modest wages have high rates of turnover. By simply refusing to offer coverage to new employees, they could pretty quickly convert most of their employees into non-covered workers.

The designers of health-care reform and the C.B.O. are aware of this problem, but, in my view, they have greatly underestimated it. According to the C.B.O., somewhere between eight and nine million workers will lose their group coverage as a result of their employers refusing to offer it. That isn’t a trifling number. But the C.B.O. says it will be largely offset by an opposite effect in which employers that don’t currently provide health insurance begin to offer it in response to higher demand from their workers as a result of the individual mandate. In this way, some six to seven million people will obtain new group coverage, the C.B.O. says, so the overall impact of the changes will be minor.

The C.B.O.’s analysis can’t be dismissed out of hand, but it is surely a best-case scenario. Again, I come back to where I started: the scale of the subsidies on offer for low and moderately priced workers. If economics has anything to say as a subject, it is that you can’t offer people or firms large financial rewards for doing something—in this case, dropping their group coverage—and not expect them to do it in large numbers. On this issue, I find myself in agreement with Tyler Cowen and other conservative economists. Over time, the “firewall” between the existing system of employer-provided group insurance and taxpayer-subsidized individual insurance is likely to break down, with more and more workers being shunted over to the public teat.

At that point, if it comes, politicians of both parties will be back close to where they began: searching for health-care reform that provides adequate coverage for all at a cost the country can afford. What would such a system look like? That is a topic for another post, but I don’t think it would look much like Romney-ObamaCare.  

Read more: http://www.newyorker.com/online/blogs/johncassidy/2010/03/obamacare-by-the-numbers-part-2.html#ixzz0jrFSFK3j

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