The Green Divide

March 24, 2019

by Steve Stofka

Half of the country’s voters live on 80% of the land, which the political analysts color red. Half of voters live on the remaining 20% of land, which is colored blue. The needs, values and outlooks of those in the red are not the same as those in the blue. As the country’s population continues to migrate from rural to metropolitan areas, the country becomes ever more divided. As economist Paul Krugman wrote this week, no one knows how to fix the continuing economic decline in rural areas (Note #1).

A person’s views on an issue may depend on the state they live in. In the past several decades, immigration has had much more impact on California and the southern states. In 1980, 15% of California’s population was foreign born, almost four times the national average of 4.3%. In 2015, that share had doubled for both California and the nation as a whole. However, the national average is only a third of California’s numbers (Note #2). How does the nation adopt a single policy toward immigration when there are such differences in circumstances?

Regardless of our different experiences and outlooks, we are dependent on each other. 20% of Americans are on the Social Security and Medicare programs (Note #3). 24% are on CHIP and Medicaid (Note #4). 40% of the two million farms in America receive subsidies (Note #5). The transfers of money between Americans has reached 14% of GDP.


In 1962, Ronald Reagan took a stridently conservative tone when he warned that the Medicare program being developed in the Democratic Congress would lead to socialism and the destruction of American democracy (Note #6). Having married into wealth, he could afford a dramatic interpretation of social policy. Few Americans hold such extreme views today (Note #7).

The reasonable arguments of today might look oppressive to future generations, and progressive ideas seem natural to our descendants. Our ancestors had different views toward slavery, racism, voting rights and social programs than we have today. What has not changed is our distrust of those we regard as “other,” and our desire to make our principles universal for our fellow Americans. We want everyone to play by our rules, or our interpretation of the rules.

In the debates on the ratification of the US Constitution, some asked what the terms “provide for the …general welfare” meant (Note #8). Was the new government to become a national charity? The Federalists argued for the inclusion of the term to give the government a degree of latitude in changing circumstances. The anti-Federalists argued that this new government would eventually become the home of beggars and lobbyists wanting to promote their own welfare as the “general welfare.” In the past century, the phrase has become a constitutional bedrock of Supreme Court precedent underlying social programs. A person could argue that the size of social welfare spending and the extraordinary power of lobbyists in Washington has proven the anti-Federalist’s case.

America is the land of debate because the Constitution was structured to promote debate. While Americans had a platform to argue with each other, it was hoped that there would be less bloodshed, rebellion, and dictatorship (Note #9). Some days we might be less sure of that premise. As the circumstances of urban and rural America diverge further, we will struggle ever more to reach consensus. Each side will feel the need to impose its will on the other.  As we debate these issues, we should be just as careful of our own instincts as we are about the instincts of those on the other side of the debate.



1. Krugman op-ed on lack of solutions for the economic decline in rural America
2. Four decades of immigration numbers – pdf page 6
3. 62 million Americans on Social Security and Medicare – numbers here
4. 74 million Americans on CHIP and Medicaid – numbers here
5. 39% of 2.1 million farms receive agricultural subsidies
6. Reagan warns against Medicare
7. During the debate before the passage of Obamacare, some Tea Party members advocated a return to the days when we just let old people die.
8. U.S. Constitution, Section 8.1 “provide for the common Defence [sic] and general Welfare of the United States”
9. Former colonies of Great Britain have struggled with free speech issues. South Africans has only had freedom of expression for twenty years . Canada still does not have complete freedom of speech


Promises Made and Unpaid

November 11, 2018

by Steve Stofka

A tip of the hat to veterans on this holiday.

The Kaiser Family Foundation (KFF) regularly updates their map of the states that have not expanded Medicaid under Obamacare (Note #1). Here’s a screen shot.

All the non-expansion states except for Wyoming had per capital personal incomes below the national average.


Since these states have less per capita income, it is likely that more of the residents in those states qualify for Medicaid. During the initial phase of Obamacare, the Federal government picked up the tab for the additional costs. That share will gradually decrease to 90% in 2020, when the states will have to foot 10% of the expansion costs.

A ten percent share seems light. Why don’t these states expand their Medicaid eligibility? Let’s look beyond accusations of prejudice, which exists in every state.

The populations in most of these states are older. Poor seniors living in nursing homes qualify for traditional Medicaid, which costs each state much more than expansion Medicaid. The national average of state costs is 38%; the Federal government picks up an average of 62% of traditional Medicaid spending. Wyoming pays almost 50%, far above the average. Texas and South Dakota pay 44% and 41%. Oklahoma and Florida pay the average of 38% and the rest of the non-expansion states pay below average (Note #2).

The financial crisis ten years ago crippled state finances for several years and some have still not recovered. Since 2000, average per capita real income in the U.S. has grown only 1.2% per year. Medicaid spending has grown at more than three times that rate (Note #3). Residents in these poorer states have fared worse than the average. Revenues in those state have barely kept up with obligations. Officials in poorer states with older populations anticipate that funding difficulties will continue now that the first of the Boomer generation has turned 70. Given the political pressure to expand, how much longer will some of these states resist expansion?

Thirteen states that have expanded coverage have adopted new revenue sources to fund the additional costs (Note #4). Most states fund their Medicaid spending, original and expansion, out of general revenues which are falling behind state promises. These include infrastructure repairs – roads, bridges, improvements and repairs to schools and other government buildings – as well as pension obligations. Officials of state and local governments made these promises decades ago, when per capita incomes were growing more than 2%. Annualized growth over a twenty-year period has not been above 2% since 2001.


Tax the rich is one solution offered, but that is a short-term solution. In the long-term, higher income growth is the sustainable solution. Until Democratic politicians can craft a coherent policy message that promises to promote stronger economic growth in these states, the voters will reject them.


1. KFF’s map of states that have turned down Medicaid expansion.
2. KFF’s breakdown of Medicaid costs per state.
3. A summary of inflation adjusted Medicaid spending from 2000-2012 showed a 4.1% annual growth rate – pg. 4. A state by state breakdown is on page 35. A 49 page report from Pew Charitable Trust.
4. A recent article showing the various sources of funding that expansion states are using.

Grandma’s Kids

May 27, 2018

by Steve Stofka

The birth rate has touched a 30-year low, repeating a cycle of generational boom and bust since World War 2. The first boom was the Boomer generation born in the years 1946-1964 (approx). They were followed by the baby bust Generation X, born 1964-1982. The Millennials, sometimes called Generation Y and born 1982 – 2001, surpassed even the Boomers in numbers. Based on the latest census data, Generation Z, born 2002- 2020, will be another low birth rate cohort.

These numbers matter. They form the population tide that keeps the entitlement system afloat. Social Security and Medicare are “pay as you go” systems. Older generations who receive the benefits depend on taxes from younger generations for those benefits. As the population surge of Boomers draws benefits, the surge of Millennials is entering their peak earning years.

To maintain a steady population level, each woman needs to average 2.1 births. During the Great Recession, the birth rate for native-born Hispanic and Black women fell below that replacement level. White and Asian women fell below that level during the recession following the dot-com boom in the early 2000s. Foreign born Hispanic and Black women are averaging a bit more than 2-1/2 births. The average of foreign born White and Asian women is just about replacement rate.

Around the world, birth rates are falling. Social welfare programs depend on inter-generational transfers of income. When a smaller and younger generation must pay for a larger and older cohort, there is an inevitable stress.

I will distinguish between social welfare programs and socialist welfare programs with one rule: the former require that a person pay into the program before being entitled to the benefits from the program. In this regard, they are like insurance programs except that private insurance policies are funded by asset reserves held by an insurance company. Government “insurance” programs are “pay as you go” systems. Current taxes pay for current benefits. The Social Security “reserve” is an accounting fiction that the Federal government uses to track how much it has borrowed from itself.

Examples of social welfare programs that require the previous payment of dues are: Social Security, Medicare, Unemployment and Workmen’s Compensation Insurance. Although the latter two are paid directly by employers, they are effectively taken out of an employee’s pay by reducing the wage or salary that the employer pays the employee. Employers who fail to understand this go out of business early in the life of the business. I have known some.

Examples of socialist welfare programs that are based on income, or need: Medicaid, TANF (Welfare), WIC, Food Stamps, Housing and Education Subsidies. There is no requirement that a person pays “dues” into a specific program before receiving benefits.

Health care in America is primarily a social welfare program with socialist elements. The Federal government does subsidize all employer provided health insurance and most private insurance through the tax system or the Affordable Care Act. However, most beneficiaries must pay some kind of insurance to access benefits. Under the 1986 EMTALA act, emergency rooms are notable exceptions to this policy. They are required to treat, or medically stabilize, all patients insured or not.

As Grandma begins to draw benefits from Social Security and Medicare, she relies on the earnings of her kids who form the core work force aged 25 – 54. Grandma has paid a lifetime of dues into the social welfare programs and wants her benefits. Grandma votes.

Her grandkids want government subsidies for educational needs and job training. They depend on socialist welfare programs with no dues. The grandkids don’t vote.

The kids are caught in a generational squeeze.  Their taxes are paying for both their parent’s benefits and their kid’s benefits.


Housing Trends

In the spring of 2008, there was an eleven month supply of existing homes on the market.
2010 – 8-1/2 months
2012 – 6-1/2 months
2014 – 5-1/2 months
2016 – 4-1/2 months
2018 – 4 months

In some cities, a median priced home stays on the market less than 24 hours.

Here is another generational shift.  Grandma and Grandpa now own 40% percent of home equity, up from 24% in 2006. Their kids, the age cohort 45 – 60, own 45%. Those under 45 have only 14% of home equity, down from 24% in 2006.


Brave New World

E-Commerce is now 9.5% of all retail sales, almost triple the percentage ten years ago. (Fed Reserve series ECOMPCTSA). In 2000, the percentage was less than 1%.

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.

Young Beasts of Burden

October 8th, 2017

The Federal Reserve recently released their triennial survey of household income, debt and wealth. Rising asset values have lifted the fortunes of many, but younger families are struggling.  I’ll show a reliable indicator of recessions as well as some trends peeking out behind the numbers. The incomes below are denoted in inflation adjusted 2016 dollars.

The good news is that lower income workers have recently seen some income gains, which the Federal Reserve attributes to the enactment of minimum wage laws in 19 states at the start of 2017. However, single parent families have struggled with income gains, as they have for three decades. The decade from the late 1990s to the financial crisis in 2008 lifted the incomes of single parents but they have struggled during the recovery. Median incomes for this group remain below the 2007 level.


That this group needed back-to-back historic asset bubbles in order to see some income gains shows just how vulnerable they are.

Much has been written about income inequality among households. During booms, there is a growing inequality even among those in the top 10% of incomes. The median in any data set is the halfway point in the numbers, and is usually less than the average of the numbers. If the numbers are evenly distributed the median is closer to the average and the percentage of median to average is high.  When there are a lot of outliers that raise the average far above the median, as in home prices, the percentage is lower.  During boom times there is growing inequality, even among the top 10%  of incomes. (Data from survey)


The growth of inequality of income obeys a power law distribution. Think of a 1’x1’ square. The area is 1. Now double the sides to 2’x2’. The area quadruples to 4. Triple the sides to 3’x3’ and the area increases by a factor of 9. Let’s imagine that the area inside of a square is money. How fair is it that the 2’ square has four times the money that the 1’ square has? Politicians may pass tax and social insurance laws to take some of that money from the 2’ square and give it to the 1’ square.  The redistribution of income and wealth can’t change the fundamental characteristics of a power law distribution. Despite the political rhetoric, solutions are bound to be temporary.

The income figures most cited are for households but this data has only been collected since the mid- 1980s. A fall in real median income usually precedes a recession except for the latest fall in 2014 when oil prices began to slide.


Let’s turn to the data for family household income that has been collected since the mid-1950s. What is the difference between a household and a family? By the Census Bureau definition, a family household consists of at least one person who is related to the householder by blood, marriage or adoption. A fall in family income has preceded every recession except a mild one in the 1960s. Family incomes rose very slightly just before that recession, due in part to a new optimism about the presidency of JFK and the promise of tax cuts.


Because this family income data is released annually at mid-year, this indicator is usually coincident with the start of a recession. However, it has proven quite reliable in marking the start of recessions.

Non-family households are not related. This includes roommates or a childless couple living together but not married. Non-family households are generally younger and their income is less than the income of family households. Over the past three decades, the ratio of the incomes of all households to family households has declined.


Although younger people are experiencing slower growth in incomes, they will face increasing pressure to meet the demands of older generations expecting social insurance benefits like Social Security and Medicare. As the oldest Americans begin living in nursing homes in increasing numbers, they are expected to put an ever-growing burden on the Medicaid system (CMS report).  It is the Medicaid system, not Medicare, which covers nursing home costs for seniors after they have depleted their resources. Although the number of nursing homes and certified nursing home beds have declined slightly in the past decade (CMS Report page 21), Medicaid spending still increased a whopping 10% in 2015 as enrollment expanded under Obamacare.

Colorado Governor John Hickenlooper has said that many states are expecting an increase in Medicaid spending on nursing home care as the first of the large Boomer generation turns 75 at the beginning of the next decade. CMS expects total health spending to increase 5.6% per year for the next decade. The last time we had nominal GDP growth that high was in 2006, at the peak of the housing boom.

The demands of both low income families and seniors on the Medicaid system will strain both federal and state budgets.  The federal government can borrow money at will; states are constitutionally prevented from doing so.

What will drive the high growth needed to sustain the promises of the future?  New business starts are at an all-time low (CNN money). How did we get here? The financial crisis caused the failure of many small businesses, many of which are funded with a home equity loan by an entrepreneur.  Home equity loans are down 33% from their peak in early 2009. At the end of last year, the Case-Shiller home price index finally regained the value it had in 2006. In the past decade there has been no home equity growth to tap into.


Imagine a couple in their late 30s or early 40s who bought a home 10 to 15 years ago. They may have only recently recovered the value of their home when they bought it. One or both may long to start a new venture but how likely are they to take a chance? In some of the bigger metro areas where home prices grew much stronger during the boom, prices are still below their peak ten years ago.


The market has priced in a tax cut package that will lower corporate taxes. Investors are expecting a third or more of those extra profits in dividends. Investors are expecting a compromise that will enable companies like Apple to “repatriate” their foreign profits to the U.S. and for that money to be used to buy back stock or pay down debt, both of which are positive for stocks. The IMF projects 3.6% global GDP growth in 2018. There’s good cause for optimism.

Investors have not priced in the long term effects of this year’s hurricanes, the volatility of commodities, the future risk of conflict with North Korea, the risk that the debt bubble in China, particularly in real estate, could escape the careful management by the Chinese government. Add in the several fault lines in household finances that the Federal Reserve survey reveals and there is good cause to season our optimism with caution.

Individual investors surveyed by AAII are cautiously optimistic, a healthy sign, but the sentiment of actual trading by both individuals and professionals shows extreme optimism, a negative sign.  The VIX – a measure of volatility – just hit a 24-year low this past week, lower than the low readings of early 2007.  Sure, there was some froth in the housing market, investors reasoned at that time, but nothing that was really a problem.

Then, oopsy-boopsy, and stocks began a two year slide. So, don’t run with joy, Roy. Don’t go for bust, Gus. Pocket your glee, Lee. Stick with your plan, Stan. There are at least “50 Ways To Leave Your Money,”  and one of them is investing as though the future is predictable.


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.

An Interest-ing Debt

February 12, 2017

Republicans used to talk about the country’s debt load but such talk is so inconvenient now that they control the House, Senate and Presidency. Perhaps it was never more than a political ploy, a rhetorical fencing. Now there is talk of tax cuts and more defense spending, and a $1 trillion dollar infrastructure spending bill. 48 states have submitted a list of over 900 “shovel-ready” projects.

House Speaker Paul Ryan used to be concerned about the country’s debt. Perhaps he has been reading that deficits don’t matter in Paul Krugman’s N.Y. Times op-ed column. For those of us burdened with common sense, debts of all kinds – even those of a strong sovereign government like the U.S. – do matter. The publicly held debt of the U.S. is now more than the country’s GDP.


In 2016, the Federal interest expense on the $20 trillion publicly held debt was $432 billion, an imputed interest rate of 2.1%. Central banks in the developed world have kept interest rates low, but even that artificially low amount represents 11% of total federal spending. (Treasury)  It represents almost all the money spent on Medicaid, and more than 6 times the cost of the food stamp program. (SNAP)

The latest projection from the CBO estimates that the interest expense will double in eight years, an annual increase of about 9%. The “cut spending” crowd in Washington will face off against the “raise taxes” faction at a time when a growing number of seniors are retiring and wanting the Social Security checks they have paid toward during their working years.

In the past twenty years the big shifts in federal spending as a percent of GDP are Social Security and the health care programs Medicare and Medicaid. These are not projections but historical data; a shift that the CBO anticipates will accelerate as the Boomer generation enters their senior years. Ten years ago, 6700 (see end of section)  people were reaching 65 each day. This year, over 9800 (originally 11,000, which is a projection for the year 2026) per day will cross that age threshold.

CBO Source

A graph of annual deficits and federal revenue shows the parallel paths that each take. The trend of the past two years is down, promising to accelerate the accumulation of debt.


More borrowing and higher interest expense each year will crowd out discretionary spending programs or force the scaling back of benefits under mandatory programs like Social Security, Medicare and Medicaid. President Trump can promise but it is up to Congress to do the hard shoveling.  They will have to bury the bodies of some special interests in order to get some reform done.

[And now for a bit of cheer.  Insert kitten video here.]

We already collect the 4th highest revenue in income taxes as a percent of GDP. Canada and Italy head the list at 14.5%.
South Africa 13.9%,
U.S. 12.0%,
Germany 11.3,
and France 10.9 all collect more than 10%. (WSJ) Those who already pay a high percentage in income taxes will lobby for a VAT tax to increase revenues. Income taxes are progressive and impact higher income households to a greater degree. Poorer households are more affected by a VAT tax.  Cue up more debate on what is a  “fair share.” Many European countries have a VAT tax and the list of exclusions to the tax are bitterly debated.

Adding even more social and financial pressure is the lower than projected returns earned by major pension funds like CALPERS. For decades, the funds assumed an 8% annual return to pay retirees benefits in the future. In the past ten years many have made 6% or less. Several years ago, CALPERS lowered the expected return to 7.5% and has recently announced that they will be gradually lowering that figure to 7%.

Each percentage point lower return equals more money that must be taken from state and local taxes and put into the pension fund to make up the difference. Afraid to call for higher taxes and lose their jobs, local politicians employ some creative accounting to avoid the expense of properly funding the pension obligations. In a 2010 report, Pew Charitable Trust analyzed the underfunding of many public pension funds like CALPERS and found a $1 trillion gap as of 2008. (Pew Report) The slow but steady recovery since then may have helped annual returns but the inevitable crisis is coming.

In December 2009, I first noted a Financial Times Future of Finance article which quoted Raymond Baer, chairman of Swiss private bank Julius Baer. He warned: “The world is creating the final big bubble. In five years’ time, we will pay the true price of this crisis.”
That warning is two years overdue. Sure hope he’s wrong but … here’s the global government debt clock. The total is approaching $70 trillion, $20 trillion of which belongs to the U.S.  We have less than 5% of the world’s population and almost 30% of the world’s government debt.  As Homer Simpson would exclaim, “Doh!”

Correction:  Posted figure for 10 years ago was originally 9000.  Current figure was originally posted at 11,000.  Projected for the year 2026 is 11,000.)


Market Valuation

Comments by President Trump indicating a “sooner than later” schedule for tax cuts helped lift the stock market by 1% for the week. The Shiller CAPE ratio currently stands at 28.7, just shy of the 30 reading on Black Tuesday 1929. (Graph) Since the average of this ratio is about 16, earnings have some catching up to do. Today’s reading is still a bargain compared to the 44 ratio at the height of the dot com boom. Still, the current ratio is the third highest valuation in the past century.

The Shiller Cyclically Adjusted Price Earnings (CAPE) ratio
1) averages the past ten years of inflation adjusted earnings, then
2) divides that figure into the current price of the SP500 to
3) get a P/E ratio that is a broader time sample than the conventional P/E ratio based on the last 12 months of earnings.

The prices of long-dated Treasury bonds usually move opposite to the SP500.  In the month after the election, stocks rose and bond prices went lower.  Since mid-December an ETF composite of long-dated Treasury bonds (TLT) has risen slightly.  A number of investors are wary of the expectations that underlie current stock valuations.

The casual investor might be tempted to chase those expectations.  The more prudent course is to stick with an allocation of various investments that manages the risk appropriate for one’s circumstances and goals.


Inauguration 2017

January 22, 2017

Mr. Trump’s inauguration marks the first time in almost a hundred years that a business person assumes the highest political position in the country.  His cabinet choices share that same characteristic. There will be an inevitable clash of cultures.  Many civil servants are lifers, drawn to the generous benefits of government service, and the stability of employment.  Some may be drawn to the work because it gives them a sense of self-worth.

Many have little experience in private industry and distrust the motives of business owners.  Former President Obama was one of these.  An inspirational figure to some, his antipathy to business interests of all sizes antagonized political foes who challenged him for most of his two terms.

Mr. Trump has a similar weakness – his antipathy to and unfamiliarity with the insular culture of civil servants who work in a massive bureaucracy characterized by a thicket of rules and a lack of transparency.

Work in the private sector is characterized by competition, a striving for efficiency, the changing winds of people’s preferences, and the quality of the services and products we provide.  Employment in the public sector requires patience with burdensome procedure, a tolerance of a heirarchy of both the competent and the undeserving, and a willingness to work in a system that relies less on merit and more on seniority.

What will happen when these two diametrically opposed cultures mix?  Stay tuned.


Obamacare Kaput?

Since FDR began the custom, Presidents have signed executive orders on their first day in office to signify that they are on the job for that portion of the American electorate that put them in office.  One of the highlights of Mr. Trump’s campaign was the repeal of Obamacare.  Shortly after his inauguration President Trump signed an order stating his intention to repeal the ACA.  The order freezes any further promulgation of rules and regulations pertaining to the act.   I thought it would be appropriate to republish a blog I wrote in April 2011, a year before the Supreme Court ruled that most of the ACA was constitutional.  Like Social Security, ACA premiums and penalties were a tax.

The problems of providing health care and the insuring of that care have not gone away: rising costs, more sophisticated and expensive therapies, more demand for care from an aging population.  The problem is a knotty one:  how to distribute health care costs.  We all benefit from the availability of medical resources, yet these resources are very expensive.  The 24 hour care and equipment that stays idle in an urban hospital must be paid for with funds from other parts of the health care system.

It might surprise readers that more than 50% of the $3.5 trillion in Federal outlays is for Social Security benefits ($930B), Medicare ($600B) and Medicaid and Community health programs ($500B).  Eighty years ago, FDR initiated a new role for the Federal Government: an economic support system. To do that, FDR had to threaten and cajole a Supreme Court reluctant to stretch the meanings of several clauses in the Constitution.

Even FDR would be appalled to learn that the Federal Government has become an insurance company whose chief function is the collection of insurance premiums through taxes in order to pay insurance claims in the form of Social Security, Medicare and Medicaid Benefits.

Readers who would like to read more on a pie chart breakdown of government spending can visit the Kaiser Family Foundation’s fact sheet. Dollar amounts are from the latest White House budget.


MM Bash

I’m about to bash criticize some of the reporting in mainstream media (MM) publications, whose budgets rely on viewership.  When that audience was more predictable, flagship publications like the NY Times, Washington Post and Wall St. Journal could wait to verify facts before running a story.  In the current 24 hours news cycle and the rush to print, fact checking sometimes comes after the story is published online – if at all.

MM channels rested on their decades old reputations for thorough journalism and were willing to cut off at the knees any reporter compromising that reputation.  More than a decade ago, Dan Rather lost his anchor job with CBS for running with a story about George Bush that had not been properly vetted. News (fact-checked) and opinion (not checked) were clearly defined when they were in separate sections of the newspaper. In this new age when most information is delivered digitally, we are quoting blogs or other opinions that are not fact checked as reputable news sources without verifying the information.

A lie travels around the world by the time the truth gets its boots on. Something like  that.  In today’s lightning fast world of information flow, an apocalyptic news item that can move markets can be tweeted, webbed, facebooked, and retweeted.  “China fires on U.S. destroyer in South China sea!”  “N. Korean missle hits Alaska!” Sell, sell, sell, buy, buy, buy signals can flash instantly to world markets.

Later, it’s no, China didn’t fire on a U.S. destroyer.  China said it would fire if fired on by a U.S. vessel in the S. China Sea.  No, the North Koreans didn’t actually fire a missle.  Instead they said that they had a missle that could fire a nuclear payload on Alaska.  They’ve been saying that for several years.  Most defense analysts remain skeptical.  Oops, nevermind stock and bond markets.

We can not prevent this, nor can we hide our savings under a mattress.  We can prepare by making sure that we have some emergency funds in place.  Most financial advisors recommend six months replacement income.  Only after those funds are in place should we consider that boat we want on Craigslist or the down payment on that house we want to flip.  Don’t just plan to have a plan.  Have a plan.


Household Net Worth Ratio

The zero interest rates for the past eight years are not natural and have created distortions in business and residential investment as well as stock market valuations. Let’s look at the residential side of the picture.  Below is a sixty year chart of the percentage of household net worth to disposable income.

The majority of the net worth of households is in their home.  The value of stocks and bonds comes second.  One or both of the two factors in that ratio is mispriced.  Perhaps disposable income has not grown to match the growth in asset valuations.  When reality doesn’t match predictions for a time, assets reprice.

What affects the pricing of these assets? The stock market rises on the prospect of sales and profit growth.   Salaries and wages rise as businesses compete for workers in a faster growing marketplace.  Disposable income rises.  Home prices rise on the prospect that more workers can afford to buy a home.

Now, what happens when disposable incomes, the divisor or bottom number in this ratio, don’t rise as much as predicted?  Yep, the ratio goes up, just as it did in 1999-2000 and 2006-2008, the peaks in the graph.


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 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 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  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 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 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 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 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 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.

March of Generations

2010 marked the demographic closing of the “Greatest” generation of the Great Depression and WW2 and the start of the Boomer generation, when the Boomers born in 1946 reach 65.  During the past twenty years, the Greaters, I will call them, and their children, the Boomers, have contributed the most to shaping public policy.  Those over 45 vote the most frequently and in greater concentrations than younger generations.  The overwhelming majority of politicians at the national level are over 45.  Earning power tends to peak in the 45 – 64 age range so it is that generation that contributes the most in taxes as a percentage of the total.  As a demographic, those in the 65+ age consume more federal tax dollars.  Politically and economically these two generations have a dominant influence on the nation.  So how has it been going?

These two generations have been especially kind to the less fortunate.  Below is a chart of federal spending on entitlements that includes Medicaid, food stamps (SNAP), family support assistance (AFDC), temporary assistance to needy families (TANF), welfare contingency fund, child care entitlement to States, child nutrition programs, foster care and adoption assistance, Children’s health insurance, supplemental security income (SSI) and other programs.  These are inflation-adjusted dollars. (Click to enlarge in separate tab)

Chiefly responsible for the rise of assistance spending has been Medicaid.  Below is just the federal component of Medicaid spending, in real inflation adjusted dollars, over the past 20 years. 

For most of the past twenty years, states and local communities contributed about 70 cents for each dollar that the Federal government spent. (Source – (CMS) Centers for Medicare and Medicaid Services)  As part of the stimulus program, the states only kicked in 50 cents for each Fed dollar. As these stimulus funds run out this year, many states will be hard pressed to meet accelerating Medicaid costs.

Joblessness has led to increased enrollment in the program. Colorado had a 13% increase in enrollment last year. But an ever increasing cost is long term care for seniors who spend down what resources they have, then enter the Medicaid program to meet either long term home care expenses or nursing home costs. A 2005 Kaiser Family Foundation analysis of long term care spending in 2003 revealed that Medicaid paid $34 billion or 40% of total long term care expenses.  $34 billion was an eighth of total Medicaid spending of $270 billion that year but as the population ages, the long term care component of Medicaid costs will inevitably rise.

The growing sophistication of medical technology has enabled the Greaters to live longer and better than their parents did.  Body parts wear out but can be replaced or repaired.  A dying moment can be postponed for several days or weeks or months with the use of critical care and life support systems.  Much of that care gets charged to Medicare.  Below is a chart of Medicare spending in inflation-adjusted dollars.

Medicare covers some disabled and others but it is primarily a program for seniors aged 65+.  Let’s look at the total Medicare cost divided by the number of seniors so that we get a per senior cost.  This is not the actual per person cost but the process enables us to make some projections. Over the past 20 years, the per senior cost of Medicare has grown, in inflation adjusted dollars, by 67%, a rise of 2.6% per year over inflation.  Using that growth rate, I estimate a per senior Medicare cost of over $11,000 in 2015.

How are these rising costs being paid?  A Kaiser Family Foundation analysis of 2009 Medicare revenues found that the premiums that seniors pay each month for Medicare B (doctor’s bills) accounted for only 13% of Medicare costs (Page 12).  Payroll taxes made up 38%.  Income taxes pay 44% of the cost.  If Medicare is truly an insurance program and we want to subsidize health care for our seniors, why do we take almost half the cost of this “insurance” program from our income taxes? 

During the past twenty years, the Census Bureau reports that the population of those aged 65+ has increased from 22 million in 1990 to 40 million in 2010, an average growth rate of 3%. In 2015, the US Census Bureau estimates that the senior population will total almost 47 million.  Now that the Boomers are hitting 65, that population growth rate is accelerating to 3.3%. 

Math time:  47 million seniors x $11,583 (my projected average cost per senior in 2005 constant dollars) = $544 billion, over half a trillion dollars.  My methodology gives a 2015 estimated total cost of $70 billion more than the Obama 2012 budget estimate of $473 billion in 2005 constant dollars and hey, I could be wrong.  Perhaps the ratio of disabled and other recipients of Medicare won’t increase as fast as the senior population growth.  Perhaps there will be savings under the new health plan.  Perhaps the government will crack down on the fraud and abuse in the Medicare system. 

So what to do?  
1) Cut down on fraud and abuse.  Make changes to the timeliness of the Medicare payment system so that more claims can be reviewed before being paid.  Spend more money on field agents who can inspect newer medical facilities to ensure that they are legitimate.  Use database technologies to scan for doctors who are billing Medicare for far above what the average physician in their specialty in that geographic area bills Medicare. 
2)  Reward efficiency.  There is much talk of payments based on outcomes, not procedures.  Such a program will be difficult to implement and follow but it promises savings.  
3) Pay up for our values.  If we are going to support the health of our senior and disabled population, then we need to pay for it directly.  Lower the Medicare tax rate and tax all income regardless of its source.  We reach into the general tax revenue kitty to subsidize seniors so that they can have affordable monthly Medicare premiums.  If that reflects our values,  let’s take that cost and add it to the payroll tax rate. 

We can do this.