Month: November 2013

Retail, Housing, The Fed And More

Leave a comment

Last week I pointed to several contradictory outlooks for sales in the upcoming holiday season.  Bill McBride at Calculated Risk has several charts on the import and export volume at the port of Los Angeles.  The import data indicates that businesses were buying goods in late summer and the fall in anticipation of a good holiday season.  Both Home Depot and Best Buy reported better than expected earnings on Tuesday but Best Buy’s sales were less than expected.  The company cited increasing pressure from online retailers.  E-Commerce continues to take an ever increasing share of the retail sales market.

Amazon is now making more money selling other vendors’ products than it does its own.  Vendors typically turn over much of the sales, shipping and billing process to Amazon.  Businesses, including mine, are increasingly turning to Amazon for parts or supplies.  Why?  Amazon has become an easy to search portal for so many vendors and the prices are competitive.  Why spend time searching the web for long discontinued parts when Amazon has already done that?  What is even more surprising is the enormous volume of third party items that Amazon now stocks and, surprisingly, the items are received from Amazon, not the vendor.

On Wednesday, the monthly report of retail sales showed a .4% month on month gain, causing analysts at Morgan Stanley to reverse their earlier dour opinion of the coming holiday season.  The year over year gain is at 4% but retailers that target lower income consumers are experiencing some difficulties.  J.C. Penney reported sales and earnings that were disappointing.  After an earlier upbeat report from the home improvement chain Home Depot, Lowe’s reported strong sales and earnings, confirming the continuing strength in this sector.  Later in the week, Target issued a disappointing earnings report.  Will the ongoing decline in gas prices leave working class families with enough extra cash in their wallets this Christmas season?  Wal-Mart, Target and J. C. Penney hope so.

**************************
[Revised to clarify the two separate housing indexes below]

 October’s housing market index reading of 54 from the National Assoc of Homebuilders indicated continuing strength in the new home market.  This index is a composite of factors, including sales, inventory, builder expectations and traffic.  The series, like the industrial reports, is indexed so that 50 is the neutral mark, indicating no net growth.  Although the overall index has declined from the summer peak, both sales and expectations are in the strong to robust growth.

The Federal Housing Finance Agency tracks an index of home prices (only).  Major markets on both the east and west coasts are still below the bubble peaks of 2005 – 2006.

From 1983 to 1999, the average house cost 13 to 15 years worth of rent.  This baseline is a good rule of thumb when pricing out houses.  In 2006, at the height of the housing bubble, houses were selling for 25 years worth of the average monthly rental.  Los Angeles experienced a much greater price inflation during the 2000s than either SF or NYC.  Although the nationwide economy is growing steadily but slowly, Los Angeles has responded to the strong growth in manufacturing throughout the country. Asking rents for industrial properties in L.A. are rocketing upward this year, accelerating from the strong three year growth and exceeding the price levels of 2007.

http://www.loopnet.com/xNet/MainSite/Tools/WidgetHTML.aspx?WidgetType=50&CountryCode=US&StateCode=CA&State=California&CityName=Los+Angeles&SiteID=1&TrendTypeID=2&PropertyTypeID=40&ListingType=LEASE&PropertyType=Industrial&TrendType=Asking%20Rent Available Office and Industrial property in the LA area is at multi-year lows.

http://www.loopnet.com/xNet/MainSite/Tools/WidgetHTML.aspx?WidgetType=50&CountryCode=US&StateCode=CA&State=California&CityName=Los+Angeles&SiteID=1&TrendTypeID=5&PropertyTypeID=80&ListingType=LEASE&PropertyType=Office&TrendType=No.%20of%20Spaces

Los Angeles, CA Market Trends

**************************

http://www.loopnet.com/xNet/MainSite/Tools/WidgetHTML.aspx?WidgetType=50&CountryCode=US&StateCode=CA&State=California&CityName=Los+Angeles&SiteID=1&TrendTypeID=5&PropertyTypeID=40&ListingType=LEASE&PropertyType=Industrial&TrendType=No.%20of%20Spaces
The Consumer Price Index released Wednesday showed a tiny decrease in inflation for the month.  The year over year change was 1.7%, indicating that demand at many levels is positive but weak so that there is little pressure on prices.  On Thursday, the Producer Price Index (PPI) confirmed that the supply chain is experiencing very low upward pressure.

***************************

The PMI Flash Index, a preview of the upcoming report on the manufacturing sector, confirmed the continuing growth in the manufacturing sector.

***************************

The Job Openings and Labor Turnover Survey (JOLTS) by the BLS was released on Friday.  Unlike the timeliness of the monthly Employment report, this one lags by a month but does provide a more comprehensive analysis of the growth or decline in the labor market.  The BLS surveys employers at the end of the month, September in this case, for job openings and layoffs.  A job opening can be full time, part time, seasonal or temporary so the data can be skewed by seasonality factors.  The longer term trend, though, is apparent.

It may be several more years before job openings reach the level attained during the tech boom of the late ’90s.  Like the gold fever of the mid-19th century, investors poured money into a lot of ventures with little more than a napkin sized business plan.  This pattern of bubble and bust is fairly typical when game changing technologies emerge.  The spread of the telegraph and railroads led to horrific recessions in the late 19th century, culminating in the depression of 1893-94.  The rise of radio in the 1920s prompted speculative fever that contributed mightily to the crash of 1929, setting the stage for the bad monetary policy and haphazaard fiscal policies that fed the depression of the 1930s.  In the 1960s, a rush of investment in airlines and war funding helped fuel a frenzy of speculation that crashed in 1970.

******************************

In Washington this week, the Senate voted to change the rules for Senate confirmation of most executive and judicial appointments, the so called “nuclear option” that requires only a majority vote for confirmation.  This modification of the filibuster rule should have been done ten years ago when then Democratic Senate Minority Leader Tom Daschle led filibusters to block many of George Bush’s appointments.  Since then, the Senate has grown ever more dysfunctional, incapable of even ordering pizza.  Under the elitist filibuster rules, each Senator could act like a despot or one of the “Knights who say ‘Nee’!” in the comic movie “Monty Python and the Holy Grail.”  A Senator representing 300,000 people in Wyoming could nix or delay an executive appointment – this in a country of over 300 million. Sounds a bit like England in the 1770s. A lot of people died in the Revolutionary War so that America would not be a country ruled by a despot, be it a king or a Senator.

*******************************

The rule change makes the confirmation of Janet Yellen as the next chair of the Federal Reserve a near certainty. In a speech at the Cato Institute’s Annual Monetary Conference, Charles Plosser, President of the Philadelphia branch of the Federal Reserve, made a good case for some restraint by the Federal Reserve – not in the amount of debt the Fed purchases but the type of debt:

“[The Federal Reserve’s] purchase [of] specific (non-Treasury) assets amounted to a form of credit allocation, which targets specific industries, sectors, or firms. These credit policies cross the boundary from monetary policy and venture into the realm of fiscal policy.”

Mr. Plosser would rather see politicians, not central bankers, decide which industries to favor through bailouts or loan purchases.  In a democratic republic like ours, if the politicians in Washington want to bailout banks or the housing sector, they can do so by issuing general debt obligations, Treasuries, which the Federal Reserve can buy.  Gridlock in Washington has prevented them from reaching any consensus about these policies, leaving it up to the Federal Reserve to act in their place, to make political decisions which compromises the neutral stance that a central bank should have.

Now, we might say that the result is the same so what’s the big deal?  Knowing that Fed chairman Ben Bernanke would come to the rescue has allowed politicians to not make difficult compromises.  Why should they?   If Congress does less, the Fed does more.  Because it can be so difficult to enact their agenda through the political process, Presidents and political parties turn to the Fed as the fourth branch of government.

Plosser also questions the dual target of both inflation and unemployment that the Fed has assumed as its mandate.  The law states that the Fed should enact monetary policy that is “commensurate” with the “long run potential to increase production.”  Since the recession began in 2008, the Fed has adopted a series of “QE” short term measures designed to decrease unemployment and Plosser’s view is that these are not part of the job description.  Plosser will be a voting member in 2014.  His vote of restraint is unlikely to hold much sway with Janet Yellen, who is ready to keep the cornucopia money machine flowing.

****************************

In the Wall St. Journal’s Washwire Blog, Elizabeth Williamson writes that the White House is conducting a self-assessment in the wake of the health-law launch, “recognizing that administration officials missed warning signs and put too much trust in their management practices.”   What on earth has given this administration any reason to trust their management practices?  Was it their management of the attack on the U.S. consulate in Benghazi in September 2012?  Or perhaps the “red line” that President Obama drew with Syria, promising a military response if Syria used chemical weapons against its own people?  Or the terribly mismanaged mortgage relief program, HAMP, that former Treasury Secretary Tim Geithner put in place?

This is only a partial list of the persistently poor management practices that have marked this administration.  It began with the poor preparation in advance of the March 2009 meeting with the nation’s largest banks, leading Obama and Geithner to offer generous terms to the banks when the banks would have accepted any terms in order to stay alive.  The crafting of the stimulus bill was an example of indecisive leadership and management at one of those rare times in history when both houses of Congress were controlled by the President’s party.  Using a basketball analogy, the administration blew a layup.

Now comes the news that the Obama administration wants to exempt some union health care plans from a “reinsurance tax” – about $63 per person per year – that all plans under the ACA health care law pay.  How will they do this?  By a carefully worded exemption that applies only to self-administered health plans.  A little background.  Many big companies self-insure and hire an administrator like Blue Cross to take care of the details.  Under the Taft-Hartley act passed after World War 2, employers often in the same industry may collectively construct or join what is essentially a health insurance trust, offering their employees insurance through the trust.  These plans are called “Taft-Hartley Multi-employer Health and Welfare Plans” and are really a benefit in the construction trade because they enable smaller employers to offer employees – usually these are unionized employees – a health plan at more affordable rates, taking advantage of the larger pool of insured offered by the trust.  It also enables employees to move from one company to another and retain their health insurance.  The plans are defined as self-administered even though the trust may contract out the details of daily management to a third party.   So here is a plan that fills a need and offers a benefit to both employers and employees.  Labor unions, like everyone else, want special treatment, of course, so they have been lobbying for an exemption from this rather small tax.  In September the Huffington Post reported that the unions were having little success in lobbying for another exemption – the ability of these plans to qualify for subsidies as though they were individual health care plans.

With a history of spineless leadership from an Obama administration that can’t say no but can’t say yes either, unions will continue to press for special treatment.  Finally, even they may get disgusted with an administration that can’t take a stand.

Like the Durango-Silverton narrow gauge train, the stock market chugs up the hill.  Production, sales and employment reports are either strong or not too bad or neutral but not bad.  Short, mid and long term volatility measures are subdued.  Gold has been drifting steadily down, nearing the lows of July.  Of course, some say that the time to get worried is when no one is worried.

The biggest worry for many in the coming week may be a dry turkey, or a heated discussion about politics.  Do pass the sweet potatoes if asked even if that so-and-so relative of yours is dumber than the potato.  Happy Turkey Day!

Trends and Bubbles

Leave a comment

November 17, 2013

This week the department store Macy’s reported sales growth that was above forecast.  Same store sales rose 3.5%, about 50% better growth than expected.  Macy’s attracts a higher income customer than Target, J.C. Penney or Wal-Mart.  On Thursday, Wal-Mart announced that their sales had declined for a third quarter in a row.  The holiday season depends on lower and middle working class folks, the kind who shop at Wal-Mart, to open their pockets.  Investment firm Morgan Stanley expects this retail season to be the worst since 2008 when the country was deep in recession. (Source)
What can we learn from a bird’s eye view of the growth in consumer credit?  At 5.6% year over year, it is stable.

Note the response time lag in this series.  The growth in consumer credit did not decline below 5% till months after the recession started.  Despite the loss of hundreds of thousands of jobs in the beginning of 2008, this net job loss represented less than 1% of the work force in mid-2008.  The job loss would mount into the millions but jobs are “sticky,” meaning that a downturn in the economy has a minor effect on most people most of the time.  After the fact, it is easy for us to point at some chart, arch our eyebrows in a knowing glance, and say “We can see the breakdown of the economy beginning here.”

On a long term chart, we can see a reduction in growth swings over the past thirty years.  Relatively flat income growth for a majority of workers has dampened the swings.  While good for household balance sheets, it means that we can expect less economic volatility but also muted growth for the next decade.

Expectations for the holiday season are not reflected in the price of retail stocks.  A basket of retail companies has grown about 40% this year and is up about 70% over two years.  It may be time to take a bit off the table in this sector.

The Consumer Financial Protection Bureau (CFPB) was created a few years ago to act as a watchdog over the credit practices of the largest banks.  On Tuesday, Richard Cordray, Director of the agency appeared before a Senate committee.  He confirmed that the agency collects a lot of anonymized data on 900 million credit card accounts each month as part of its supervisory role.  Questions should be raised whenever any government agency collects data on us.  How is the data protected?  Who has access to the data?  What about my privacy?

Mr. Cordray noted that several other agencies as well as private industry collect this data.  Because the data is anonymized, we are little more than a number to  the agency, but there are several concerns.  Federal agencies have a great deal of legal power, enabling them to get a warrant to access  the data on anyone.  Cordray repeatedly assured the committee that no one at the agency is interested in our personal data but left off one adverb – “now.”  In the aftermath of 9-11, anti-war protestors found themselves turned away at airports or flagged for additional screening.  How did federal agencies know the travel plans of many protestors?  It does not take a team of FBI agents to trace the activities of any citizen when several federal agencies have our monthly financial activity at their fingertips.  Secondly, there is the matter of security.  How many parties does our data go through on its way to the agency?  Where and at what stage in the process of data aggregation is the anonymizing done?  Is our personal credit card info transmitted first to a separate third party anonymizer before being transmitted to the various agencies?  Is the raw data being transmitted to an agency which then anonymizes the data using a third party program or process?  In any case, it was clear that our monthly card transactions are making the rounds in both private industry and various government agencies.

The stock market continues to rise, prompting talk of a bubble.  If you have access, try to read “Is This A Bubble” by Joe Light in this weekend’s edition of the Wall St. Journal.   It is both informative and measured in its assessment.

 In February 2012, I mentioned the Golden Cross which had occurred in late January.  This long term indicator of market sentiment is a crossing of the 50 day moving average of stock market prices above the 200 day average.

Since then the market has risen about 40%.  Man, if I had only taken my own advice and moved all my investments and money into the stock market!  As the market continues to rise, more and more investors catch the “if only” disease and start moving money from safer investments into stocks.  This is why many of us tend to buy high and sell low.  Instead we should stay with the fundamentals of diversify, diversify, and lastly – diversify.  A long term indicator like the Golden Cross is not a signal to dump all of our savings into stocks – unless we are in our 30s and have lots of time before we need the money.  A more sensible approach is to adjust allocation upwards towards stocks and this depends on a person’s age, needs, and fears.  If a person has a 50% stock allocation, with the remaining 50% in bonds and cash (I’ll leave alternate investments out for right now), that indicates a moderate tolerance for risk.  They might shift the allocation to 55% stocks or 60% when they see a Golden Cross.   A person who has a 70% allocation to stocks, indicating a high tolerance for risk, might start adjusting to an 85% to 90% allocation.  Using this more moderate approach, a person would have lightened up their stock allocation in December 2007 when a reverse Golden Cross happened.

So what if someone has been very scared of the stock market and has only 10% of their savings in stocks?  Should they move some money into the market now?  That depends.  If the thought of making even a slight change leads a person to lose sleep, then no.  Should someone change their allocation of stocks from 10% to 50% now?  That is a major allocation change and should be done using dollar cost averaging.  This is a process where one takes money from one investment basket every month and puts it in another investment basket. There is also a psychological advantage to this approach.  As a person’s allocation percentage becomes a bit riskier, they can adjust to the additional risk in a measured way.

Tolerance for risk is a composite of several components:  psychological or emotional, future liquidity needs, age, and assets as well as income sources.  Too often, people think of tolerance for risk as an emotional response only.  While it is true that our emotions can cloud our measured response to risk, it is important to keep in mind that it is only one of the components.

**************

In answer to calls from his own party members, President Obama announced an administrative change to the Affordable Care Act (ACA) that allows those with policies in the individual health care market to retain their policies even if the policies don’t meet the minimum standards of the ACA.  Politicians, pronouncements and podiums – stir them together and voila!  The President’s pronouncement was little more than political cover at this late stage in the transition to Obamacare.  Only if the states allow it and companies decide to offer the plans will an individual policy holder be able to “keep their plan,”  as the President promised on numerous occasions in the past few years.

On Friday, the Energy and Commerce Committee released emails subpoenaed from CMS, the agency that administers Medicare and the ACA.   The emails contradict previous testimony by both CMS head administrator Marilyn Tavenner and HHS Secretary Kathleen Sibelius that only routine problems with the healthcare.gov web site were anticipated before the launch of the web site.  Ms. Tavenner testified that there were enough problems that they decided to delay the implementation of the small business plans on the web site but it appears that the problems went much further and top officials were alerted.

Henry Chao, the deputy CIO at CMS, was made aware of many major security, transactional and design problems with the web site during the summer but decided – or was pressured to decide – that the site would go live on October 1st regardless.  President Obama’s repeated selling point has been what he calls “smart” government. The rollout of the federal health care website has  revealed – once again – that the government in Washington has become too big and too top down to be smart, or effective.  To keep their campaign coffers filled, too many in Washington must placate those companies which fund those coffers, including special favors and bailouts for the elite on Wall Street.  To get the votes, they must placate the poor with programs and promises.

A conflict of interests and a clash of incentives makes most of the Washington crowd ineffective.  Turn on C-Span and watch the faces of the House and Senate Budget Conference (House and Senate).  These are intelligent, committed people who feel the pull of these different puppet masters, those political interests that keep them in their respective seats.   Each one of them earnestly wants to fix the problem – and that is the problem.  Much of the time, they are fixing the previous fixes they implemented.  This approach makes Congress feel important. I would suggest that they do little more than enact incentives and let their constituents craft the solutions.  Sure, the solutions will not be crafted with the superior technical expertise that Washington promises. Instead, they will emerge in a stumbling, hodge-podge way that will disenchant those who believe in the romantic notion of omniscient experts who engineer elegant solutions to social and economic problems.  I hope that one day the Washington elite will let Main St. try to figure out the solutions to some of these problems. We can do better.

Up, Down, Round and Round

Leave a comment

November 10th, 2013

Friday’s release of the monthly employment situation showed strong net job gains of 204,000 jobs and big upward revisions to the previously reported gains in August and September. The market should have reacted negatively to these positive numbers (yeh, go figure) in anticipation of the Fed tapering their stimulus program of monthly bond purchases.

But first we must go back to Thursday. The first estimate of real GDP growth in the third quarter came in above even the most optimistic forecasts at 2.8%, about a full percentage point above second quarter growth.  The primary reason for the gains though was the continuing build in inventories.  Inventory building is good in anticipation of robust sales but, as I’ll cover later, consumer spending has not been so robust.  The market reacted to the report with it’s largest daily loss in a few months.

On Friday, the employment report was released an hour before the market opened.  Trading began at the same level as Thursday’s close with little response to the strong job gains.  We can imagine that traders were twittering furiously to each other in the opening hour, trying to gauge the sentiment.  Buy in on strength in the employment numbers or sell on the strength in the employment numbers?  After the initial hesitation, the main index gained continuing momemtum throughout the day, with a final spike at the closing bell.

After digesting some of the numbers in the report, I think that traders realized how weak some of its components were, dimming the probability that the Fed will ease up on the gas pedal.  The Consumer Sentiment Survey, released a half hour after the opening bell, showed a continuing decline.  Within minutes, the market started trading higher.

The first number popping in the employment report is the 702,000 people who dropped out of the labor force.  To put that number in perspective, take a look at the chart below which shows the monthly changes in the labor force for the past ten years.  This is the second worst decline after the decline in December 2009, shortly after the official end of the recession.

This month’s .4% steep drop in the Civilian Force Participation Rate ties the record set in December 2009 when the economy was still on its knees.  The rate has now fallen below the 63% mark, far below the 66% rate of several years ago.

Employment in the core work force aged 25 – 54 actually dropped this past month.  Classifications of employment by age, sex, and education come from the survey of households, not employers, and may have been affected somewhat by the goverment shutdown. But the numbers of the past years show that there has been no recovery for this segment of the population.  In each lifetime, there are stages that last approximately twenty years.  This time of life should be  about building careers, building families, building assets and growing income.  I fear that for too many people in this age group, the slowly growing economy has not been kind.  This affects both a person’s current circumstances and dampens prospects for the future.

The headline job gains and classification of the types of jobs come from a separate survey of employers called the Establishment Survey.  Employers report their payroll count as of the 12th of each month.  Because they received paychecks, federal employees furloughed during the government shutdown in the first two weeks of October were still counted as employed in October.

There were some strong positives as well in this report.  Retailers added 44,000 jobs, above the average gains of 31,000.  This year’s gains have been the strongest in fifteen years.

The gains are about half of the eye-popping gains of the past fifty years, but they indicate a confidence among retailers.  Retail jobs are often the first job of many younger workers, who have endured persistently high unemployment during this recession. Here’s a glance at yearly job gains in the retail sector for the past fifty years.

As the holiday shopping season gets underway, all eyes will turn to the retail sector as an indicator of the consumer’s mood.  The U. of Michigan Consumer Sentiment Survey, released Friday, showed a continuation of an erosion in consumer confidence.  After peaking during the early summer at 85, this index has declined to 72, about the same levels as late 2009 when the economy was particularly weak.  The Expectations component of this survey, which reflects confidence in employment and income, has declined to about 63.  Gas prices have been declining, inflation has been near zero, and stock and home prices have been rising but this survey shows a steady decline in confidence.  The government shutdown probably had some effect on the consumer mood but the budget battles are not over.  This is the 7th inning stretch and few are standing up to sing “America The Beautiful.”

Professional Services and Health Care have been consistent leaders in job growth for the past few years but gains in these sectors have declined.  The unemployment rate notched up to 7.3% from 7.2%.

In a catch up effort after the recent government shutdown, the Dept of Commerce released data on factory orders for both August and September.  While the manufacturing sector as a whole has been strong, the weakness in new orders in these two months indicates a tempering of industrial production in the near future.

When adjusted for inflation, the level of new orders is still below the levels of mid-2008.

If we zoom out ten years, we can see that we at about the same levels as late 2005.

ISM released their monthly non-manufacturing survey, showing sustained and rising strong growth at just over 55, up a point for the previous month.  I’ve updated the CWI that I’ve been tracking  since June of this year.  A three year chart shows that even the troughs are part of a sustained growth pattern.  Furthermore, the span of the troughs keeps getting shorter, indicating a structural growth in the economy.

Let’s look back six years and compare this composite index of economic activity with the market.

The monthly report of personal income and spending released Friday showed less than 1% inflation on a year over year basis.  For the second month, incomes increased at an annualized rate of 6%, yet consumer spending remains sluggish.  The chart below shows the year over year growth in spending for the past twenty years.

A longer term graph shows the current fragility in an economy whose primary component is consumer spending.

Both the manufacturing and non-manufacturing portions of the economy continue to expand.  Employment has risen consistently at a level just above population growth.  Inflation is tame but so is consumer spending.  Income is rising.  Budget battles loom.  Expectations for holiday retails sales increases are modest.  Will the Fed ease or not ease?  The medium to long term outlook is positive, but with a watchful eye on any further declines in the momentum of consumer spending growth. The short term outlook is a bit more chaotic.  We can expect further wiggles in the stock market as traders rend their garments, struggling  with Hamlet’s dilemma: To buy or not buy?  To sell or not sell?

HealthCare.gum

Leave a comment

November 3rd, 2013

In this week’s title is the new government top level domain name: gum for gummint or gummed up.  But before I get into that, a few side notes on the economy.

On Friday, the Institute for Supply Mgmt released October’s ISM manufacturing report, which again showed that the manufacturing sector of the economy is humming along.  The monthly report on Factory Orders will be released this coming Monday, followed by the non-manufacturing ISM report on Tuesday.  The non-manufacturing sector has slowed from robust growth readings during the summer but are expected to still be a strong 54 to 56.  I’ll update the CWI that I have been charting since the spring.

On Wednesday, the payroll firm ADP released their estimate of job growth in the private sector during October.  The 130,000 net job gains came in under expectations and ADP noted a downward revision of about 12% for the previous months employment gains.  Normally, the BLS releases their monthly employment report on the first Friday of each month but because of the government shutdown that report will not be released till this coming Friday. The disappointing growth in the private sector shown in ADP’s report and fallout from the government shutdown in October has diminished expectations of job growth in the coming BLS report.  Previous estimates of 160-180,000 job gains have shrunk to 120-140,000.  The economy has been expanding yet employment gains have been moderate, a puzzlement to a lot of economic models.  The stagflation of the 1970s contradicted several prominent economic models at that time and the current persistent weakness in employment growth has got to be causing some head scratching by labor economists.

The continuing computer dysfunctions at healthcare.gov have commanded the spotlight these past two weeks.  There are about 15 million people, or 5% of the population, who purchase individual health insurance plans. About 50% of individual plans are not renewed each year, either by choice of the insurance company or the insured.  In the industry, this is referred to as the “churn rate.”

The Affordable Health Care Act, a/k/a Obamacare, enacted minimum standards for health insurance plans.  Existing plans were grandfathered in with a few caveats, one of them being that there was no change in rates since the act was signed into law in 2010.  Of course, most plans have annual rate revisions, voiding any grandfathering provisions.  Some estimate that as many as half of all individual policy holders have received cancellation notices from their insurance carriers.

Only 18 states have set up their own health care exchanges and these have functioned fairly well over the past month.  The “hub” portion of healthcare.gov acts in the background to connect these state exchanges to data from various government agencies.  A majority of states, including all states dominated by Republican legislatures, opted not to set up their own exchanges but to use the federal health care exchange at healthcare.gov.  This much more visible portion of the health care IT infrastructure has been a disaster since it opened on October 1st. Many individual plan policy holders in states without an exchange must access this web site to shop for insurance policies and apply for federal insurance subsidies.  For many the web site has been inaccessible or there were long delays in creating accounts on the site or they were constantly dropped off the site.

There was little to no support for Obamacare among Republicans and this dysfunctional web marketplace underscores a lack of faith in the big government that Democrats extol.  Note to Democrats:  a crippled web site is not the way to win friends and influence people.

In control of the House, Republicans control the agendas of the various committees and subcommittees.  Note to Democrats:  don’t screw up when the other party has control.  In congressional hearings, Republican reps presented numerous examples of constituents angry over the largely non-functioning federal health care site.  Democrats were angry as well – less so at agency officials appointed by a Democratic President and more so at Republicans, arguing for everyone to come together to solve these problems.

After failing to make their point by shutting down the government for a few weeks, House Republicans have taken a more moderate stance of letting the Democratic health care insurance apparatus implode.  Had the Republicans – and Democrats – not been posturing at their podiums during the shutdown, Republicans might have paid more attention to the healthcare.gov site problems during the first week of the government shutdown and adopted this more moderate stance sooner.   Note to Republicans: get out of the way when your opponent is falling on his sword.

In the political wrangling over the passage of the Affordable Care Act, President Obama famously repeated, “If you like your insurance, you can keep it.”  What he should have said was “Nothing in the new health care act will force you to change plans,” but that indicates some nuance.  Nuance is the first soldier to fall in political campaigns.  Words are daggers; as kids we learn that lesson well.  To pass the Politician Exam, candidates learn three things about the use of words:  how to conceal, cajole and cut with them.  In Politician School they learn “Keep It Simple, Stupid” and think that the Stupid are the voters.  In sales, the quip is aimed at the salesperson, a “memo to self” reminder that the more one becomes practiced in the art of selling a particular good or service, the more complicated and less effective one’s presentation can become.

Politicians tend to talk to voters at the level of the least intelligent among them, so it comes as no surprise that President Obama kept it beguilingly simple, to the point of an almost falsehood.  Yes, if an insurance company kept a policy exactly as it was three years ago, then it was grandfathered in.  An insurance carrier has little incentive to keep a person or family in the same risk pool when the carrier can cancel the policy, issue them a new policy at higher rates justified by the fact that the person or family is now in an unrated risk pool.  President Obama might have thought that the subject of risk pools was just too complicated for simple minded voters.  Several years ago, politicians in Colorado found that voters were very interested in and could comprehend risk pools when it involved changes to auto insurance.  In response to legislative changes, I have had at least two policy cancellations and reissues by my auto insurance carrier.  Because the market for auto insurance is very competitive, rate changes were small.  Not so in the market for individual health insurance.

My state, Colorado, has set up its own exchange.  In Estes Park, a husband and wife with a family of four kids will save almost $600 a month with a health insurance plan they purchased on the exchange.  Their deductible will drop from $12,500 a year to zero.

For each anecdote illustrating the benefits of Obamacare, there will be at least one example of financial hurt.  For 14 years as a self-employed person I carried an individual health policy, so I am well aware of the benefits and problems of these policies.  To get an initial policy, I answered a lot of questions about myself, my habits, my family’s medical history, and my family’s parent’s medical history.  I peed in a cup and had blood taken to get a policy renewal.  Applications are an average of 23 pages according to testimony in recent hearings.  Contrast that length with the typical two page application for an employer-sponsored health care plan. In short, there were and are a lot of very big and persistent problems in the individual health insurance market.

Many individual plans are sold to small business owners or self-employed professionals, an independent lot who do like being able to pick and choose an affordable plan that meets their needs. Despite the negatives, individual plans did not suffer the onerous burden of government regulation.  Media attention to the problems in individual plans has been scant because almost 90% of people with health insurance get their insurance through an employer or through Medicare or Medicaid.

A week ago, a Congressional oversight committee questioned CGI, the general contractor for the healthcare.gov web site, and OSSI, a contractor for the backbone of the system.  This past week, another Congressional committee questioned Marilyn Tavenner, the head administrator for CMS, the government agency that administers Medicare and Medicaid, and Katherine Sebelius, the Secretary of HHS.  Both have apologized for the fiasco and have promised a tireless effort to get it right, bringing in teams of experts from private industry, including Google and Facebook, to work on the problems.

Ms. Tavenner worked for 25 years in the big hospital chain HCA, then a four year stint in Virginia’s HHS, before becoming a Deputy Administrator, then the head Administrator at CMS.  Congresspeople on both sides of the aisle gave her a lot of respect.  During the hearing with Ms. Tavenner, there were several points raised.  While I took notes, I did not fact  check the claims.

CMS projects an enrollment of 7 million by March 2014.  Of these 7 million, approximately 2.3 million need to be younger to make the policies actuarially sound.
Before the web site launch on October 1st, the CMS conducted small scale tests of the site for two weeks in September that showed no major problems.  In testimony the week before, both CGI and OSSI said that a project this size requires several months of testing before launch.
CMS made the decision not to release initial application or enrollment numbers on healthcare.gov till mid-November, claiming that the numbers were unreliable.  Republican members of the committee claimed that this was a delaying tactic to hide the fact that the numbers of enrollees so far is very low.
Ms. Tavenner insisted that their goal was to have the site running smoothly by the end of November, giving those who have had policies cancelled effective on Jan. 1st ample time to sign up for new plans.
If a person is not concerned about the availability of subsidies, they do not have to sign up, i.e. create an account on the web site, simply to find out what plans are available and at what rates.
Health care costs and coverage over the next twenty-five years are the primary concerns of small businesses.  (Side note: for most of the 2000s, premiums in the Colorado small business market were increasing by 9 – 15% each year.)
In August, CMS decided to delay the “Shop and Browse” rollout of insurance plans for small businesses on healhcare.gov till later in the year.  They also decided to delay the Spanish version of the web site as well as the capability of Medicare and Medicaid transfers.  Even with the delayed implementation of some of these components of the web site, the site has been dysfunctional.
On October 24th, Mother Jones reported that it was possible that social security numbers could be hacked on the healthcare.gov web site.
Charley Rangel, a Democratic Congressman from New York, stressed the need for health care access for children, reminding Republicans that they need a stock of healthy children to fight their wars.  An example of the verbal tennis match that ensues at some Congressional hearings.
Under the medical loss ratio clause of Obamacare, $3.4 billion has been returned to policyholders by insurance carriers.
17 million children with pre-existing conditions can no longer be denied coverage.
Medicare patients have saved $8.3 billion by the closing of the “donut hole” in Part D prescription drug coverage.
Lloyd Doggett, a Democratic rep from Texas (Texas has everything, including Democrats), continues to ask for Navigator progress reports.  Navigators are licensed by CMS to help people sign up for Obamacare and it was not clear how much supervision CMS has over these Navigators.
Ms. Tavenner denied reports that Navigators are not required to undergo criminal background checks.
Current Medicare claims are 18% below CBO projections from a few years ago.  There has been a slowing of medical costs for the past few years.  If someone leans to the left, they attribute that to the enactment of the ACA.  If someone leans to the right, they attribute the reduction to the recession.

I noticed a pattern during the hearings and the distinction has been confirmed in some polling.  Democratic voters and their representatives focus on health care access, while Republicans focus on health care costs.  This difference in focus helps explain why each side often talked past the other during the hearings.

The longer that the web site is not functioning properly, the more that voters will punish Democratic reps in the 2014 elections.  Many districts are rigged – er, engineered – to be no contest for one party or the other.  Democratic reps in contested districts are hoping that the current problems are fixed asap and praying that no more problems emerge before the election.

And finally, a side note on food stamps.  The House reduced food stamp benefits by 5% this week.  Lest you think that Republicans are all about smaller government, think again.  Yahoo reported  that Republicans want to impose restrictions on what foods and drinks a person can buy with food stamps.  Whatever became of the Party of Personal Responsibility?  Although President Obama has said he would veto the plan, it indicates that Republicans as well as Democrats are parties of Big Gummint.  Put your money in the gumball machine and hope your flavor comes out.