Browsing the blog archives for September, 2009.

Obama cutting the capital gains tax?


I’m not exactly sure what to make of this, but it certainly caught my attention. In a speech at Hudson Valley Community College earlier this week, President Obama actually proposed eliminating the capital gains tax for startup businesses. The Washington Post published the complete text of the speech at:

Before you get too excited, there were some Big Brother solutions mixed in as well, and a silent assumption that private firms need government assistance to grow the economy. Nonetheless, I am fascinated with Obama’s recognition of the obvious–that capital flows where potential returns are greater. In other words, wealthy Americans are more likely to help grow the economy and create jobs when Washington CUTS the tax burden. If this is true, then why did Obama campaign on an INCREASE in the capital gains tax and an INCREASE in the income tax on wealthier Americans–those most likely to invest in startup businesses?

Maybe Obama just got a new speechwriter. Or PERHAPS this signals a slight shift away from the class warfare theme of his incessant campaign and toward economic reality. Demonizing the rich is good left wing fodder, but it doesn’t grow the economy. One speech doesn’t count for much, so we’ll see if this proposal goes anywhere.


Great talk radio


I enjoy high quality talk radio with hosts who not only reinforce my conservative instincts, but sharpen my perspective as well. I’m also a Sirius satellite radio addict, and I listen to Sirius Patriot whenever I get a chance. There are some good hosts out there, but my 2 favorites are exclusive to Sirius-XM, Mike Church at 9 AM and Andrew Wilkow at noon (EST). Opposite personalities aside, these guys do their homework and have a knack for getting to the bottom of things. Church can articulate the Constitution and the founding principles of this country as well as anyone I know. Wilkow has a way with the language; his ZERO LIABILITY VOTER concept reduces human nature, politics, and economics into 3 simple words. Both entertain along the way, and do a great job reducing the complex to the understandable. And by the way, if you don’t have satellite radio, Sirius offers a free trial at its website so you can see what you’re missing.

As a university professor, I’m always in search of the perfect way to make a point. Every now and then these guys just seem to nail down a topic perfectly. I usually just enjoy the moment because their comments are event specific and just wouldn’t have the same effect a day or week later. Andrew Wilkow had one of these moments when a caller engaged him about a healthcare entitlement. The poor guy never had a chance. As the healthcare debate continues, this 3-minute exchange just keeps getting better. It’s a great combination of passion and logic. Check out the link in the blogroll.

Mike Church had one of those moments this past Wednesday. At the bottom of the first hour he swerved into a brilliant 4-minute explanation of capitalism, one that explained the complexities of the “invisible hand” and other concepts in everyday language. I dropped Mike a short email congratulating him on this effort and told him I’d like my students to hear the audio. He graciously linked me to an MP3, which I have posted on both my university class websites and the blogroll. If you’re a die-hard capitalist like I am, you’ll definitely appreciate it. If  not, do yourself a favor and listen. The light bulb might go off.

Thanks to Mike and Andrew for the work they do. The more the left rails about talk radio, the better they get.


What’s wrong with a government option?


I just had an interesting conversation with someone about the proposed government healthcare option. The problem with private insurance companies is that they are mostly concerned with profits, he said. A government provider could be trusted to put people first. Like much of what the left tells us, this sounds reasonable if you don’t give it much thought, but nothing could be further from the truth.

Before I address his concern, it’s worth noting that government entities cannot compete fairly in the private sector anyway because they have bully power that private companies don’t. It’s impossible to create and maintain a level playing field because public organizations can more directly influence taxes, regulations, and various government giveaways. Consider how the government is already propping up a “semi-public” firm, General Motors, with capital for financing cars, “Cash for Clunkers,” tax credits, and talk of environmental regulations that will inevitably favor GM’s new product development efforts. This should be enough to win the argument, but let’s return to the original contention just in case.

Yes, private insurance companies are interested in profits. But the idea that they can generate financial returns without serving their customers is illogical. Can a grocery store maximize profits by raising prices and cutting service? Perhaps it can for a short time, but certainly not for very long, and neither can an insurance company. There are differences between grocery stores and insurance companies, but the same principle holds true for all private enterprises. Successful companies, by definition, are successful because they provide value to their customers.

Government entities are fraught with conflicts of interest. Bureaucrats must consider the interests of those receiving a service, those paying for it, lobbyists representing those providing it, politicians who control the flow of tax dollars, and even the voting public. By their very nature, public organizations require central planners to make market decisions that affect these constituencies. In a free market, this is done more efficiently because all of the players—doctors, hospitals, patients, insurance companies—pursue their own interests instead of relying on government to sort everything out. Healthcare is heavily regulated and might be considered as a less-than-free market, however. Healthcare reform should remove government barriers that restrict natural market activity instead of adding to them. The idea is to shift the healthcare market toward open competition, not government control.

Differences between public and private organizations are best illustrated when you consider what happens when revenues fall short of expenses. In the private sector, failing companies must find ways to cut costs and/or improve their products and services. If they don’t, they will dissolve while more efficient (and more deserving) competitors survive. Private sector revenues come directly from customers, who vote with the wallets. When government entities are faced with “budget shortfalls,” their constituencies coalesce to demand more money, and they often get it. Funding for poverty, education, and other social concerns continue to rise every year, but we are constantly told that the existing programs need more resources to “finish the job.” Ultimately, failure is weeded out in the private sector, but often rewarded in the public sector.

You might not be in love with your health insurance company, but at least it has a clear obligation to you, and it’s solvent. Government agencies like those that administer Medicare and Social Security are facing eminent collapse if reforms are not instituted in the coming years. Rest assured that these and most other government programs will survive, as politicians and bureaucrats decide who pays more and who get’s cut. If we get a government healthcare option, it will survive too, regardless of how it functions or how much it costs. This part of the Obama proposal is likely to be the most damaging to healthcare quality and the most difficult to undo…if it passes.


End of the Healthcare Road


Economics and rational thinking eventually run into political reality. If we weren’t there before the President’s speech on Wednesday, we are now.

Obama’s attempt to revive his quest for government control of the healthcare system was nothing more than a massive sleight of hand. I posted some initial observations on this blog shortly after the speech. By now the inaccuracies and mischaracterizations have been well chronicled, so I won’t go over them again.

I have suggested a number of reforms, from market-oriented options like health savings accounts to a reorientation of the role played by government. The left, however, appears unwilling to accept anything that does not significantly expand Washington’s role. Obama demonized pharmaceutical companies and insurance companies throughout his speech. Once again, capitalism is the evil and government must reign it in.

Does our President really think healthcare can be expanded to non-contributors by squeezing waste and evil profit out of the system? I try my best to keep politics out of my analysis, but he’s either ignorant of basic economics or he’s deliberately trying to deceive us–or perhaps some combination of the two. I’ve tried to give him the benefit of the doubt and simply count him more as a Marxist than as a deceiver. A redistribution of wealth is clearly at the core of his proposal, but I think there’s more to the story. I’m becoming more convinced every day that Joe Wilson is right. I was saying the same thing to my TV throughout the speech.

Keep in mind that just about everything Washington does costs and intrudes more than originally touted. Consider Social Security. The Social Security Act of 1935 set the original tax rate at 2% with a wage threshold of $3000. The maximum anyone paid was $60 a year. Today, 12.4% is paid on a maximum income of $106,800, for a total of over $13,000. What seemed acceptable to some as a limited government role in retirement blossomed into an albatross headed toward insolvency.

This is where economics and the spirit of compromise run into political reality. If Washington has a tendency toward leviathan–and it does–then how do you negotiate a critical issue like health care reform with a majority party that leans left and whose leader cannot be trusted? In an earlier blog I warned of phony compromises that move the country another big step toward socialized medicine instead of the two big steps Obama seeks. The President reiterated the battle lines on Wednesday, however. More government control is the only option on the table.

This doesn’t mean that we should stop discussing real reform based in market principles. Real reform–and perhaps some compromise–might make sense at some point, but not now, not with this regime. A Congress whose majority would consider a 1000+ page reorientation of the best healthcare system in the world without reading it is not capable of negotiation in good faith. We are left with no rational alternatives. We must seek to defeat this agenda in its entirety and hold its perpetrators accountable in 2010 and 2012.


The Falling Dollar


The U.S. dollar has fallen to its low for the year. Anticipating a recovery, many investors are moving from relatively safe dollar-based securities back to stocks. With the Fed keeping interest rates artificially low and the possibility of further declines in the dollar, investing in the U.S. currency is not very attractive. How will this affect our economy? It can get complicated, but a couple of key points are worth highlighting.

First, a weaker dollar means it takes more of our (U.S.) currency to purchase a given quantity of imported goods. Specifically, oil prices will rise, which will increase the price of much of what we buy.

Second, our burgeoning national debt must be financed with a weaker dollar. Although the Chinese have played a big role in the past and currently hold about $1.3 trillion in U.S. dollars, they are becoming less interested in financing more of it. With Fed-induced low returns, they might be better off holding Euros, British pounds, or a market basket of currencies instead. One possible short term solution is that the world will view the dollar as the preferred currency and will continue to hold them even with a low rate of return. Recent skepticism from world leaders suggests that this will not be sufficient. What is more likely is that either Washington will have to print more dollars or the rate of return on dollars will rise. Both of these alternatives are inflationary.

By the way, some Keynesians claim that a weak dollar is good for imports because U.S. products will cost less abroad. The problem with this idea is that increasing production costs caused by the weak dollar (higher oil prices) can easily counter this effect, so don’t count on this over the long term.

The bottom line is that Obama’s massive spending has sown far too many seeds of inflation, and an economic upturn is the water that will make them grow. Unfortunately, this means any recovery we get in 2010 will probably be modest.


A Healthcare Compromise


Obama’s health care initiative is in trouble. Leftists are unwilling to support any proposal that does not include a government option, and moderate Democrats are backing away from any proposal that does. In his search for some sort of middle ground, the President will likely repackage the public (government) option as a co-op or partnership. Others will be calling for compromise legislation, as if a united Democrat party needs any Republican help. To those on the left, however, compromise means one big step toward socialized medicine instead of two. Olympia Snowe’s so-called public option trigger is an example of the type of compromise we should reject.

But there are some practical ways conservatives seeking market-oriented improvements can work with those on the left. Changing the IRS code to replace deductions for employer-provided health insurance with a personal deduction would enable Americans to enjoy the same tax benefits when they obtain their own coverage. Allowing individuals to purchase coverage across state lines would make markets more competitive. Tort reform would put a lid on some of the frivolous lawsuits that surround medical practice. Clarifying the fourteenth amendment so that children of non-Americans born in U.S. hospitals do not automatically receive citizenship (and government benefits) would play a role as well, as would deporting illegals who can’t pay their medical bills.

What should we be willing to give up in a compromise deal? Government already plays a big role in our health care system, and this is unlikely to change. One possibility is to remake part of the government function without expanding its reach. I proposed my own compromise alternative in March to address the need for basic care for those who can’t get coverage or don’t want to pay for it. Current low-income programs (Medicaid, SCHIP, etc.) would be scrapped and those without coverage would pay a fixed percentage of their income for a basic, no-frills plan funded by government but administered by private insurance companies. Participant contributions would be matched dollar for dollar from the general fund. Deductibles would be high and coverage limited because the pool of funds could not increase unless those paying into the system paid a higher percentage of their income, which would create an incentive for those making the most money to get private coverage. The idea was to create a barebones plan that makes basic coverage available to the limited number of Americans who fall through the cracks AND requires those filling up the emergency rooms to pay into the system. It was also designed with an internal mechanism that would keep the plan small so private insurance could flourish.

Another possibility is to provide universal (very) high deductible coverage to every American, perhaps kicking in after anyone spends more than $15,000 on basic healthcare expenses in a given year. Such a proposal would not be too costly and would not require massive overhead to manage because only a small percentage of Americans (not including those in Medicare) would need to make a claim in any given year. The benefits could be substantial:

1. Americans with preexisting conditions would have a ceiling on their annual expenses. Granted, $15,000 is still a lot to pay, but it provides a safety net at some level.

2. Insurance companies would be more likely to insure those without preexisting conditions because they would not be responsible for reimbursing basic care beyond the $15,000 level.

3. Premiums would fall because insurance companies could be reimbursed for catastrophic care, all Americans would be paying into the system, and the amount of unpaid medical bills providers written off by providers would fall.

4. Americans who save their own funds (perhaps through medical savings accounts) could forego insurance altogether if they wish, knowing that a major illness wouldn’t wipe them out if they had adequate reserves to cover the $15,000 deductible.

If you’re skeptical, remember that we’re talking about a compromise here, a move in the right direction. Both proposals would provide some sort of coverage to ALL AMERICANS (something the Democrats’ proposal won’t do) while providing an incentive for Americans to get insurance in the private sector. Couple this with some of the earlier reforms I mentioned and you might have a package worth considering.

Perhaps the biggest advantage of this type of compromise is that it meets the left’s stated concern-ACCESS for all Americans–without meeting its real concern, ENTITLEMENT. Democrats who refuse to support such a deal will be forced to acknowledge their real position, that some Americans should accept financial responsibility for the healthcare of others, and that a government-run plan is the solution. These are not winning arguments with most voters.

The truth is that this type of compromise won’t be good enough for the majority of Democrats who are fixated on complete government control of the system. In the mean time, we must watch out for so-called compromises that increase the role of government. We’re starting to win the battle. Now’s not the time to quit fighting.