A Graduated System of Benefits

October 29, 2017

My kids will learn that they are the sons and daughters of charity parents.

Two weeks ago, I wrote about the measurement of the poverty rate in America. Why is our standard different than the one adopted by all other developed countries? What efforts have we made to alleviate poverty, and have those programs helped or hurt the poor?

Qualifications for benefits under various programs rely primarily on paid income. As a person exceeds certain thresholds of income, benefits are reduced or stopped entirely. Regardless of how we define a reduction in benefits, it feels like a tax to the recipients. Under these programs, the poor pay the highest tax – 100%. $1 earned above a certain threshold results in a $1 reduction in benefits. There is a very real incentive to hide reported income.

As I showed earlier, the poverty standard adopted by the U.S. undercounts the number of poor. On the other hand, income earned in the underground economy is not counted and results in an overcount of the poor.

We may associate “underground” with “illegal” but it includes both legal and illegal activities. A better synonym would be “unreported.” Workers in the unreported economy may include the kid down the block who mows our lawn, the guy who repaired our fence, the woman who walks our dog when we work late.

Almost all of us are part of the unreported economy whether we realize it or not. Recent estimates of the size of this shadow economy in the U.S. are from 7% to 11%. In dollar amounts, that’s $1.4 trillion to over $2 trillion. In less developed economies, it can be as much as 25%.

The tragedy of current programs is that they often discourage recipients from getting more work, or better paid work. The loss of Medicaid benefits dissuades a single mom with children from taking on employment unless she can find an employer who provides health insurance for her and her children. Many don’t.

Income above a certain threshold may disqualify someone from housing benefits. Under a Section 8 housing program, a low-income person pays 30% of their monthly income for housing (Section 8 FAQs). HUD, a Federal agency, and state agencies pay the rest of the rent. Section 8 housing is in short supply. The amount of paperwork and inspections required by HUD dissuades many real estate owners from enrolling their properties in the program.

These programs would improve by paying benefits on a graduated scale rather than using a qualifying threshold. Under the current system, a person making less than half the area’s median income, let’s say $24,000, gets housing assistance and other benefits. If they make above that, they may receive nothing under some Federal and state programs. That is the equivalent of a 100% – or higher – tax.

This graduated scale should apply to everyone. That includes the richest people on the planet like Bill Gates and Warren Buffett, who would also be eligible for housing vouchers, food stamps, for supplemental income and Medical benefits. As income increased, benefits would be gradually decreased. Bill Gates would be eligible for housing assistance, but his monthly benefit would be $0. For many of us, there would be no incentive to apply.

A graduated scale would help eliminate the quiet shame that some people experience when they receive public assistance. Like it or not, there is a stigma attached to being poor and receiving benefits.

A person with a disability can receive Social Security and Medicare. They can be quick to point out the fact. They are not on SSI, a program for low-income people. They are on Social Security. They paid into the insurance system. They got hurt. They are collecting on the insurance payments they made during a lifetime of work. Because they are disabled, they are on Medicare, not Medicaid. Medicaid is for poor people. If they are poor, it is only because they became disabled.

If I am a worker with a family to support and I make $11 per hour, or about $450 a week, my family is qualified to receive housing, food, medical and other assistance programs. I may be experienced in a few construction trades, but my tools were stolen last year. Perhaps I don’t have reliable transportation. I could make more money if I could get some tools or a more reliable car, but I can barely take care of my family. How can I get ahead?

A concrete contractor offers me a job paying $20 an hour for a project that will last the summer months for sure. However, the winter months may be a bit lean. The additional income will put me over the income threshold and my family will lose most of the benefits.

If I calculate the benefit my family currently receives in addition to my current $11 per hour wage as a janitor, I am receiving the equivalent of about $20 an hour. Even though I prefer to take the new job, I should continue to work at my current job for the sake of my family. Perhaps I can find a few jobs on the side, or “under the table,” but these are sporadic.

If I continue to stay out of the construction trades, my skills will atrophy. My self-confidence will erode. My kids will learn that they are the sons and daughters of charity parents.

The example above is all too common. If we had a gradual system of benefit awards, such a worker would be more inclined to take that better paying job. With a higher income, they might be able to get a loan for more reliable transportation. Their family might be able to afford more housing choices.

Who benefits under the current system? Whenever a poorly performing system stays in place, there is usually a small group of people who benefit under that system. They don’t want it to change.

Am I being a bit too cynical? No. It is Realpolitik. The practical benefits for one group of people outweigh any moral considerations by that group. In a later blog, I’ll look at who benefits from the current system.

The Gravy Train

October 1, 2017

In the newly published “The High Cost of Good Intentions” author John Cogan relates a 230-year history of Federal entitlements, beginning with veterans’ pensions after the Revolutionary War. For 150 years the expansion of veterans’ benefits was prompted by budget surpluses brought on by high import tariffs. Each was targeted to a small number of soldiers who had died or become wounded during a war. Each program expanded into giant giveaways to any soldier or state militiaman and their wives.

Republicans expanded Civil War pensions to secure control of federal and state legislatures at the turn of the 20th century. Twenty years later, FDR and the Democratic Party used the same strategy of benefits to wrest control from Republicans.  First, the old system of service for benefits had to be curtailed. Like previous pension programs, benefits for WW1 veterans had been extended to those with non-service disabilities. Immediately after assuming office in 1933, FDR persuaded Congress to give him emergency authorization to alleviate the financial crisis. FDR eliminated almost a half-million veterans with non-service disabilities from the pension rolls and reduced pensions across the board. For the rest of the decade Congress tried to reinstate veteran’s benefits over the Presidential veto.

In 1934, the administration launched the New Deal, a series of programs to alleviate Depression-era hunger and unemployment. For 150 years, military service had been the prerequisite for federal benefits. Under FDR need, not service, became the primary requirement. An act of compassion quickly became a political tool that secured Democratic control at both the federal and state levels. Under the newly introduced Social Security program, a small amount of tax paid during the working years now entitled an older voter to federal pension benefits. No military service required.

For eighty years, benefit programs have become a political football. Two-thirds of the ten legislative increases to the Social Security program have occurred in election years. Today the total cost of entitlements is 60% of the $4.2 trillion in Federal spending.

If asked to list the federal entitlement programs, how many could we name? In addition to veteran’s benefits for service to the country, there are:
Income replacement programs like Social Security retirement and disability;
Income supplemental programs for poor families, such as the earned income tax credit (EITC), unemployment insurance, SSI and TANF;
Health insurance programs like Medicare and Medicaid, and the ACA’s health insurance subsidies;
Food assistance and price support programs like food stamps (SNAP) and child nutrition (WIC);
Business and individual loan guarantees and subsidized insurance programs including Sallie Mae education loans, FHA mortgage programs, and flood insurance subsidies.
This list does not include the many tax subsidies handed out by Congress.

I found that I could open this book at random and be both informed and entertained. Mr. Cogan combines an engaging narrative style and extensive research to construct an epic story of human need and greed, and the politics of pork.

I’ll turn to another book, “The Framer’s Coup” by Michael J. Klarman for some related backstory. At the Constitutional Convention in 1787, anti-Federalists objected to the “general welfare” clause of the proposed Constitution. What was to stop the Federal government from becoming a charity funded by taxes, they asked?

Nonsense, Constitutional delegates James Madison and Edmund Randolph countered, pointing to the enumerated powers in the Constitution as a restraint on the Federal government. Just as the anti-Federalists feared, the Court has long adopted a liberal interpretation of the Federal government’s enumerated powers. In the 1819 case of McCullough v. Maryland, Chief Justice Marshall set a precedent that the Congress could enact legislation that was “convenient or useful” to the exercise of its enumerated powers.  After that decision, then ex-President Madison admitted that if the Constitution had clearly stated the signers’ intention to firmly restrict the power of the Federal government, the Constitution would not have been ratified.

Turn the dial forward to the present. In the expansion of the welfare state during the 20th and 21st centuries, the Supreme Court has never found that the Federal government has exceeded its enumerated Constitutional powers. The most recent example was the Court’s finding that, under the enumerated power of taxation, the federal government could force people to buy health insurance under the ACA program.

The liberal interpretation of those two clauses – “convenient or useful” and “general welfare” – has unleashed the Federal government, whose agencies have become an omnipresent force in every American’s life. Each month, politicians in Washington take tax money from one set of voters and give benefits to another cohort of voters. Everyone  who receives benefits convinces themselves that they have paid into the system in some way. When it comes to tax money, it has always been better to receive than to give.

As the benefits to the receivers slowly exceed the taxes from the givers, there will be a crisis, and then some urgent half-baked legislative fix will be passed. I wish there was a better way.  Oh wait, I forgot.  There is a better way.  Paul Ryan, Speaker of the House, introduced the plan last year. Now that Republicans control the Presidency, Senate and House, they will fix the problem and avert a looming crisis of entitlements.  Silly me.  I can focus on the baseball finals now and stop worrying.

Merry Christmas

December 21, 2014

In preparation for today’s solstice, the market partied on in a week long saturnalia.  The week started off on a positive note.  Industrial production increased 1.3% in November, gaining more than 5% over November of 2013.

Capacity utilization of factories broke above 80%, a sign of strong production.  Production takes energy.  I’ll come to the energy part in a bit.

The Housing Market Index remained strong at 57, indicating that builders remain confident.  Tuesday’s report of Housing Starts was a bit of a head scratcher.  After a strong October, single family starts fell almost 6%.  Multi-family starts fell almost 10% in October, then rebounded almost 7% in November.  Combined housing starts fell 7% from November 2013.

The market continued to react to the change in oil prices.  For the big picture, let’s go back a few years and compare the SP500 (SPY) to an oil commodity index (USO).  For the past five years, USO has traded in a range of $30 to $40, a cyclical pattern typical of a commodity.  In October, the oil index broke below the lower point of that trading range.

On Tuesday, oil seemed to have found a bottom in the high $50 range.  USO found a floor at $21, about a third below its five year trading range.  Beaten down for the past three weeks, energy stocks began to show some life (see note below).

Encouraging economic news helped lift investor sentiment on Tuesday morning. Some bearish investors who had shorted the market went long to close out their short positions. Growth in China was slowing down, Japan was in recession, much of Europe was at stall speed if not recession and the continued strength of the U.S. dollar was making emerging markets more frail.  While the rest of the world was going to hell in a hand basket, the U.S. economy was getting stronger.  Thee Open Market Committee at the Federal Reserve, FOMC, began its two day meeting and traders began to worry that the committee might react to the strengthening U.S. economy with the hint at an interest rate increase in the spring of 2015.  This helped sent the market down about 2% by Tuesday’s close.

Wednesday’s report on the Consumer Price Index (CPI) was heartening.  Falling gas prices were responsible for a .3% fall in the index in November, lowering inflation pressures on the Fed’s decision making about the timing of interest rate hikes.  The core CPI, which excludes the more volatile energy and food prices, had risen 1.7% over the past year, slightly below the Fed’s 2% target inflation rate.  Traders piled back into the market on Wednesday ahead of the Fed announcement Wednesday afternoon.  Back and forth, up and down, is the typical behavior when investors are uncertain about the short term direction of both interest rates and economic growth.

The Fed’s announcement that they would almost certainly leave interest rates alone till mid-2015 gave a further 1% boost upwards on Wednesday afternoon.  Twelve hours later, the German market opened  up at 3 A.M. New York time.  Early Thursday morning, the price of SP500 futures began to climb, indicating that European investors were reacting to the Fed’s decision by putting their money in the U.S. stock market.  Those of you living in the mountain and pacific time zones of the U.S. might have caught the news on Bloomberg TV before going to bed.  Maybe you got your buy orders in before brushing your teeth and putting your nightgown on. Very difficult for an individual to compete in a global market on a 24 hour time frame.  On Thursday, the market rose up as high as 5% above Wednesday’s close, before falling back to a 2.5% gain.

Still, a word of caution.  Both long term Treasuries, TLT, and the SP500, SPY, have been rising since October 2013.

As long as inflation remains low and the Fed continues its zero interest rate policy (ZIRP), long term Treasuries and stocks will remain attractive.   Something has to break eventually.  ZIRP  helps recovery from the aftermath of the last crisis but helps create the next crisis.  Abnormally low interest rates over an extended period are bad for the long term stability of both the markets and the economy.

Sale – Energy Stocks – Limited Time Only

(Note: this was sent out to a reader this past Tuesday.  Energy stocks popped up 4 – 5% the following day, a bit more of rebound than I expected. The week’s gain was almost 9% and the ETF closed above its 200 week average.)

As oil continues its downward slide, the prices of energy stocks sink.  XLE, a widely traded ETF that tracks energy stocks,  has dropped below the 200 week (four years!) average.  (A Vanguard ETF equivalent is VDE).  Historically, this has been a good buying opportunity. In the market meltdown of October 2008, this ETF crashed through the 200 week average.  A year later, the stock was up 38% and paid an additional 2% dividend to boot.  Let’s go further back in time to highlight the uncertainty in any strategy. The 2000 – 2003 downturn in the market was particularly notable because it took almost three years for the market to hit bottom before rising up again.  The 2007 – 2009 decline was more severe but took only 18 months. In June 2002, XLE sank below its 200 week average.  A year later, the stock had neither gained nor lost value. While this is not a sure fire strategy – nothing is – an investor  is more likely to enjoy some gains by buying at these lows.


Emerging Markets Stocks

Also selling below the 200 week average are emerging market (EM) stocks.  These include the BRICs (Brazil, Russia, India, China) as well as other countries like Mexico, Vietnam, Turkey, Indonesia and the Philipines. When a basket of stocks is trading below its four year average, there are usually a number of good reasons. Several money managers note the negatives  for EM.   Also included are a few voices of cautious optimism.  Sometimes the best time to buy is when everyone is pretty sure that this is not the right time to buy.  Another blog author recounts two strategies for emerging markets: a long term ten year horizon and a short term watchful stance.  The long term investor would take advantage of the low price and the prospect for higher growth rates in emerging economies.  The short term investor should be cognizant of the fickleness of capital flows into and out of these countries and be ready to pull the sell trigger if those flows reverse in the coming months.



What are the characteristics of TANF families?  When the traditional welfare program was revised in the 1990s, lawmakers coined a new name, Temporary Assistance to Needy Families, to more accurately describe the program.  The old term carried a lot of negative connotations as well. Two years ago Health and Human Services (HHS) published their analysis of a sample of 300,000 recipients of TANF income in 2010.  Although the recession had officially ended in 2009, the unemployment rate in 2010 was still very high, above 9%.  It is less than 6% today.

There were 4.3 million recipients, three-quarters of them children, about 1.4% of the population. By household, the percentage was also the same 1.4% (1.8 million families out of 132 million households).  In 2013, the number of recipients had dropped to 4.0 million, the number of families to 1.7 million (Congressional Research Service)

In 2010, average non-TANF income was $720 per month, or about $170 a week.  To put this in perspective, this was about the average daily wage at that time The average monthly income from TANF averaged $392. Recipients were split evenly across race or ethnic background: 32% were white, 32% black, and 30% Hispanic. For adult recipients only, 37% were white, 33% black, and 24% Hispanic.

Rather surprising was how concentrated the recipients were. 31% of all TANF recipients in 2010 lived in California.  43.3% of all recipients lived in either New York, California or Ohio.  The three states have 22% of the U.S. population and almost 44% of TANF cases.

HHS data refutes the notion that welfare families are big.  50% of TANF families had only one child.  Less than 8% of TANF families had more than 3 children.  82% of TANF families also receive SNAP benefits averaging $378 per month.

In 2014, Federal and State spending on the TANF program was less than $30 billion, about 1/2% of the $6 trillion dollars in total government spending.  The Federal government spends a greater percentage on foreign aid (1%) than the TANF program. Yet people consistently overestimate the percentage of spending on both programs (Washington Post article).  The average estimate for foreign aid? A whopping 28%.  Cynical politicians take advantage of these public misperceptions.



Aiming to overhaul the health care insurance programs throughout the country, the Affordable Care Act (ACA) was a big bill.  No, it wasn’t 2700 pages as often quoted by those who didn’t like it.  The final, or Reconciled, version of the bill was “only” 900 pages.  The House and Senate versions were also about 900 pages each; hence, the 2700 pages.

At 1600 pages in its final form, the recently passed Omnibus Spending bill makes the ACA look like a pamphlet.  As  specified in the Constitution, all spending bills originate in the House.  Past procedure has been to pass a series of 12 spending bills.  Majority leader John Boehner has found it difficult to get his fractious members to agree on anything in this Congress so all 12 bills were crammed into this behemoth bill just in time to avoid a government shutdown.  Just as with the ACA, most members of the House and Senate did not have adequate time to digest the details of the bill.  The bill is sure to hold many surprises for those who signed it and we, the people, who must live under the farcical law-making of this Congress.  Here is a primer on the budget and spending process.


Home Appraisals

They’re back!  A review of 200,000 mortgages between 2011 and 2014 showed that 14% of homes had “generous” appraisals, inflating the value of the home by 20% or more.  Loan officers and real estate agents are putting increasing pressure on appraisers to adjust values upwards.


Personal Income

You may have read that household income has been rather stagnant for the past ten years or more.  In the past fifty years household formation has increased 78%, far more than the 50% increase in population.  The nation’s total income is thus divided by more households, skewing the per household figure lower.  During the past thirty years, per person income has actually grown 1.7% above inflation each year.  Inflation adjusted income is now 66% higher than what it was in 1985.

In 2013, the Bureau of Economic Analysis released median income data for the past two decades. Median is the middle; half were higher; half were lower.  This is the actual dollars not adjusted for inflation.  Except for the recession around the time of 9-11 and the great recession of 2008 – 2009, incomes have risen steadily.

The 3.7% yearly growth in median incomes has outpaced inflation by almost 25%.

Why then does household income get more attention?  A superficial review of household data paints a negative picture of the American economy. Negative news in general tugs at our eyeballs, gets our attention.  The majority of the evening news is devoted to negative news for a reason. News providers sell advertising in some form or another.  They are in the business of capturing our attention, not providing a balanced summary of the news.  In addition, a story of stagnating incomes helps promote the agenda of some political groups.


Merry Christmas and Happy Chanukah!

GDP, Profits, Inflation

December 22nd, 2013

Merry Christmas!

Last week I reviewed several decades of trends in corporate profits, as well as the 1990 change in measuring inflation that has helped increase corporate profits as a share of GDP.   (For those of you interested in the inflation controversy, here is an article that provides some additional insight.)  This week I’ll look at patterns in the economic growth of this country that sheds some light on recent events and provides some context to understand ongoing trends.

During the 30 years following World War 2, the economy grew at an annual rate of 3.7% after inflation.  Population growth was about 1% per year.  Productivity growth was about 1 – 1.5%.  Government spending, including debt, grew a bit more than 1%.  The chart below shows the compounded annual growth rate.

But I think the story is more clearly told by a different chart constructed from the same data.  The growth rate trend is more easily visible and it is the change in this trend that I will be focusing on.

During the 1970s, an economic trend known as staflation increasingly took hold. This period of high inflation, coupled with slowing growth and growing unemployment, was not thought possible by economists using theories proposed by John Maynard Keynes in the 1930s, during the Great Depression.  In 1974, economist Arthur Laffer first sketched out a theory that tax cuts would stimulate the economy.  As the Federal debt began to rise in the mid to late 1970s, few wanted to take a chance that lower tax rates would produce more revenue for the Federal Government.

The 1980s began with back to back recessions and the highest unemployment since the 1930s Depression. Big spending and tax cuts during the 1980s dramatically increased the federal debt but did little  to spur growth.

During this 13 year period, profit growth slowed to 2.4%.  The myth that the 1980s was a high growth era continues to live in the minds of political pundits.  In a WSJ op-ed on Dec. 18th, Daniel Henninger referred to “the high-growth years of the Reagan presidency.”  Myths live on because they serve a purpose to those who cherish them.  The cardinal rule of politics is “Disregard the Data.”

In 1990, economists at the BLS adopted what is called a hedonic methodology to computing the CPI.  Used by other OECD countries, this supposedly more accurate assessment of the growth of inflation shows a lower growth rate of inflation.  This naturally increases the growth rate of inflation adjusted GDP. (GDP dollars each year are divided by the inflation rate to get the real growth rate.)

The conventional narrative is that the 1990s was an explosive growth period of new technology and growing globalization.  From the beginning of 1990 to the start of 2000, stock market values grew four times.  After the bursting of the internet bubble, 9-11, and the recession of 2001, the economy recovered.  By the mid-2000s, the unemployment rate was less than 5%.  While that may be the conventional narrative, the growth of the economy from 1990 to 2007 was just as slow as the period 1978 – 1989.

Remember that this slow growth would have been even slower if the BLS had not changed their methodology for measuring inflation.  To recap, the 30 year real growth rate of GDP after WW2 was 3.7%.  The following 30 year growth rate was 2.3%.  But that later 30 period is marked by a sharp rise in consumer borrowing.   Without that escalation in borrowing, growth would have been meager.

Families with two incomes borrowed against their homes, drove up the balances on their credit cards and still GDP growth was slow.  Let’s construct a fairy tale, what economists call a counterfactual.  What if the BLS had not changed to this new methodology in 1990?  What would be the growth rate of GDP using an alternate measure of inflation?

The resulting growth pattern is 0% for the 18 year period and is more consistent with the experiences of many workers and families in this economy.  The change in the measurement of inflation has greatly helped mid-size and large size companies.  An understated inflation rate reduces labor costs by reducing cost of living adjustments to salaries and wages.  In addition, companies can borrow at lower rates since many corporate bonds are tied to the inflation rate.  American companies did not engineer this revised methodology of measuring inflation but they have been the largest beneficiaries of the new policy.

In 2008, the financial poop in the popcorn popper began to pop.  In the past 5+ years, we have experienced less than 1% real growth, not enough to keep up with population growth.  Of course, most people are wondering “what growth? It sure doesn’t feel like growth!”

The story may be told more accurately by looking once again at a comparison of inflation adjusted GDP with an alternate version of GDP, one that more realistically reflects inflationary pressures.  This chart shows a decrease of 2% per year.

Did the BLS adopt this methodology under political pressure?  Perhaps.  More likely, it was an alignment of econometric theory with political and corporate interests.  The reduction in published inflation rates did slow the growth of payments to Social Security recipients and reduced Medicare payouts to physicians and hospitals, thus shrinking budget deficits.  The government saves money, corporations make extra money, but – quietly and slowly – families lose money.

Annual cost of living adjustments to Social Security checks have been reduced but the decreased income has forced more seniors to seek assistance through the food stamp program, now called SNAP.  A politically neutral change in the measurement of inflation thus becomes a way for politicians to introduce a means testing component to Social Security income.  Instead of reducing payments based on income, payments are reduced to all recipients and poor seniors are targeted for additional benefits.  Congress has increased eligibility for the food stamp program so that seniors who are dependent on that extra income can receive it in the form of food stamps.  If the BLS had not changed their methodology, seniors would receive appoximately 60% more each month and many wouldn’t need the food stamps in the first place.

With this history in mind, let’s turn to this week’s revisions of GDP and corporate profits for the third quarter ending in September.  The real, or inflation-adjusted, growth of 3rd quarter GDP was raised to a 4.1% annualized growth rate in the third quarter, largely on upward revisions of consumer spending.  Contributing to stronger GDP growth has been a worrisome increase in company inventories, which probably influenced the Federal Reserve’s decision this week to keep any tapering of their QE bond purchases to a minimum.

Corporate profits for the third quarter were revised higher as well.  As a share of GDP, corporate profits continue to reach all time highs.

How likely is it that economists at the BLS will change their methodology to reflect inflationary pressures before we make choices in response to rising prices?  The subject is not easily encapsulated in a sound bite or a short slogan on a placard.  In the 1992 presidential race, independent candidate Ross Pierot was able to use charts to make a point with many voters but few politicians are very good at the easel and unlikely to bring up the subject in the public forum.  Families and workers will continue to suffer and politicians will create more social benefit programs to help those hurt by problems that politicians themselves have either created or failed to address.  Large and mid sized businesses will continue to enjoy the additional slice of pie.


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.

Mortgage Mosh Pit

In my series of Federal teat suckers, I’ll now look at the housing market.  If you are a homeowner with a 30 year mortgage, it might surprise you to find that you are on the home stamp program, a program that may pay you each month about the same as the average food stamp recipient.

President Obama has recently spoken about a 5 – 7 year transition of the mortgage market from federal quasi-governmental agencies like Fannie Mae and Freddie Mac to the private market.  The problem is:  private market lenders do not want to loan money to homeowners for thirty years.  A 30 year mortgage has no prepayment penalty so that the homeowner can pay off the loan at any time and refinance when rates are lower.  In the private market, lenders – and bondholders – like to be paid more interest when they tie up their money for longer periods of time and 30 years is a very long time. A history of the 30 year mortgage.

Let’s compare Joe homeowner to one of the largest and most dependable companies in the world – Johnson and Johnson (J&J).  For more than a 100 years, this company has regularly paid dividends to their stockholders and paid off their bonds.  In August 2010, the company sold 30 year bonds at 4.5% (Source).  Joe homeowner could get a 30 year mortgage for about 4.4% at that time.  What would you choose if you had the money?  Loan it to J&J or loan it to Joe homeowner for his mortgage?  In a realistic private mortgage market, Joe homeowner, with a good credit rating, would need to pay 2 – 3% above what Johnson and Johnson is paying simply because Joe is a riskier bet than J&J.  But that higher interest rate would price a lot of potential homeowners out of the market. 

The monthly mortage payment (PI) on a $250,000 30 year loan at 5% interest is $1342.  At 7%, the monthly payment is $1663, more than $300 higher.  At 8%, the monthly payment is $1834, a $500 free monthly premium to the homeowner.  So why do banks and mortgage companies loan money on mortgages?  Because the Federal government backs 90% of the mortgages in this country.  The government and its quasi-government mortgage agencies effectively loan the credit rating of the richest country on the planet, the United States, to little Joe homeowner, enabling him to save hundreds of dollars each month on his house. 

In Colorado in 2007, a low income family of 3 received a little over $400 a month in food stamps (Source).   Food does not build equity –  homes do.  The government’s home stamp program pays Joe about as much as the food stamp family and lets him keep any home appreciation – or lately, depreciation.  In addition to the home stamp program, the federal government has a stamp tax program that enables Joe to write off most of his mortgage payment for the first ten years since it mostly interest.  Not only does Joe get $300+ a month in savings on his mortgage but gets an additional $150+ a month in reduced income taxes. 

Until the meltdown in the housing market, the thinking was that real estate values always went up so the government was happy to loan its credit rating to homeowners at little or no cost.  Happy teat-sucking homeowners voted for the politicians who continued these home welfare programs. Then, in 2007, the unthinkable happened.  First home prices stopped rising, then started to decline in some markets.  Then the banking crisis of 2008 hit and price declines accelerated, leaving many recent homeowners “underwater”, owing more money on their house than it was worth.  Job losses and continuing price declines led many homeowners to walk away from their homes.  As of mid 2010, Fannie Mae and Freddie Mac had “borrowed” $148 billion from the Treasury (Source) to make up for the losses.  Mega-banks have written down billons and some estimate that the default total will approach $1 trillion.

In a recent Bloomberg article, “About $600 billion of the [Option ARM – Adjustable Rate Mortgage] loans were made from 2005 through 2007, according to industry newsletter Inside Mortgage Finance. Of those packaged into bonds, some 20 percent have been liquidated at losses to investors, and almost half of the remaining ones are at least 30 days delinquent, in foreclosure or have been seized by lenders, according to data from JPMorgan.” “A model developed by JPMorgan Chase & Co. analysts predicts that 70 percent of remaining option-ARM loans that were bundled into bonds will eventually default.” 

The federal government will continue to be pumping in money to the home stamp program for years.  The $148 billion already pumped in is just a down-payment on this program.  In his 2012 Budget, Obama wants to spend $85 billion on the Food Stamp program called SNAP, an annualized increase of 7.5% over 2010 spending.  If only we could hold the increases in the cost of the home stamp program to those levels.


This past week the Census Bureau released their annual estimate of median income and poverty.  For 2009, the poverty level increased from 13.2% to 14.3%.  Economists and policy makers have been debating the definition and calculation of poverty since the introduction of the social welfare programs of the Great Society  in the 1960s.  Since the mid-nineties, many have called for a revision of the calculations that gives weight to cost of living variances in the country.  To most people, that makes sense.  Because it makes sense, it is a political hot potato.  The thresholds of poverty are used to determine eligibility for a number of federal programs.  Adjusting  those thresholds would qualify many more people for assistance in some areas, particularly larger metropolitan areas, while disqualifying some in rural areas where the cost of living is less.

How does the Census Bureau measure poverty?  They include all cash income but non-cash items like Medicaid, food stamps and housing subsidies, like Section 8, don’t count as income. (Source)  To qualify for housing assistance, the family’s income may not exceed 50% of the median income for the county or metropolitan area in which the family chooses to live.  The rent subsidy is generally the lesser of the payment standard minus 30% of the family’s monthly adjusted income or the gross rent for the unit minus 30% of monthly adjusted income.

Let’s look at two “traditional” families of four in Denver, Colorado, where wages and cost of living are only slightly above the national average. (Source)

In Family A, Dad works a regular job as a laborer for $12 an hour for 35 hours a week, slightly more than the median hours worked per week, earning about $22000 per year.  Family A’s income is at the poverty level, qualifying them for housing assistance, Medicaid, food stamps and other assistance programs for meeting their monthly bills.  Family A’s adjusted income per HUD standards is gross income less about $500 per dependent, or $20K.  They would pay 30% of that for rent, $6000, for an apt renting for about $9600 annually, receiving about $3600 in tax free income.  In addition, they would get about $325 in food stamps  per month, or another $4000 in untaxed income.  In addition, Dad would get $34 per week in Earned Income Credits, paid by his employer, for an annual total of about $1800.  Since they qualify for Medicaid, this family would have no or minimal health insurance premiums. This family would pay no federal or state income taxes but they would be subject to the FICA payroll tax of about $1650 per year. This family’s net effective income is about $30K.

In Family B, Dad works for $22 per hour for 35 hours a week, earning an annual gross of $40,000, about 16% – 18% less than the median household income for Denver but about equal to the median wage.  This family’s income is in the 40th percentile of Denver area income, slightly above that percentile for the country as a whole.  This family does not qualify for either  housing assistance, Medicaid, food stamps, the energy assistance program LIHEAP or the Earned Income Credit. Dad pays 50% of a $1200 HMO family medical plan which his employer offers, an annual cost of $7200.   This family pays about $120 per year in federal and state income taxes and $2500 in FICA taxes.  This family’s net effective income is also $30K.

Two families – one at the poverty level of income, one slightly below the median income level – have approximately the same level of disposable income.  Either there are a number of families classified as poor who really aren’t poor or about 40% of the households in this country are effectively at or below the poverty level.