Browsing the blog archives for January, 2014.

Enter the MyRA

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There’s a lot in Obama’s SOTU address worth comment, but one proposal really caught my attention. Lamenting the low savings rate of low and moderate income families–and inferring an unfairness associated with recent stock market gains–the President offered a solution, the myRA. This interesting contraption is supposed to be a “simple, safe, and affordable starter account” that “guarantees a decent return with no risk” of loss. The myRa sounds nice, but it masks financial reality and doesn’t offer a real solution to a problem.

The President is conflating issues here. Those who earn low or moderate incomes tend to save less for retirement by choice. Saving more would be a good idea, but it’s really not difficult to open an IRA or purchase savings bonds. So why do we need a myRA? We don’t, except that existing alternatives require that we accept risk in order to achieve a competitive return.

Risk and return go hand-in-hand when investing. The only way you can earn a competitive return is to accept some risk. The only conceivable purpose of a myRA is to guarantee savers a higher rate of return than they could get in other risk-free alternatives like savings bonds or CDs. Taxpayer subsidies would be necessary to pull this off, making the myRa just another wealth redistribution scheme.

But there’s a deeper problem here that is being ignored. Why do savings bonds and banks offer such low rates of return, below inflation? In a free economy, interest on savings accounts should exceed projected inflation because savers would always demand a return above and beyond what they expect to lose in a currency’s depreciation. But we don’t live in a free economy. Savings rates at banks are driven down by a Federal Reserve that makes money available for next to nothing. All of this is supposed to prime the economy by encouraging artificially high levels of business investment and consumer spending. Is it any wonder that savings rates are so low?

The most effective way to increase returns on guaranteed consumer investments is to get the Fed out of the interest rate business and let markets determine the rates. Of course, the President would have none of this. He favors the near-zero rates that the Fed creates and then proposes a program to raise returns for some Americans at the expense of others. This vicious cycle explains the failure of central planning. Once the process starts–and it’s in full swing now–government must continue to propose inefficient solutions for the unintended consequences of its previous intervention. Each one is designed to curry the favor of voters who fail to see the big picture and are attracted to the idea that they’ll get something for nothing, or from someone else. It doesn’t take long to realize that, as Reagan put it, government is not the solution to our problem; it is the problem. Unfortunately, the President hasn’t figured this out yet.

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Lifestyle & Individual Choice

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With the President’s State of the Union address next week, the talk of income inequality and the so-called income gap persists. For those of you still convinced that the gap between high and low incomes is problematic, I’d like to encourage you to think about two concepts, lifestyle and individual choice.

Whenever you make such comparisons, it’s important to set aside extreme cases; they’ll always exist and they don’t prove anything. Even so, you’ll certainly find significant differences when you compare a typical family in the bottom 20% with one in the top 20%. What you won’t find at the bottom, however, is starvation and a lack of access to basic housing, education and health care. A plethora of government programs and EMTALA are there to ensure this, at least in theory. You might point out that poor Americans are more likely to go to poor schools. You’re right, but that’s a problem with government schools, a topic for another day.

When comparisons are made between the “rich” and the “poor,” government benefits such as these are rarely included. In fact, studies demonstrate that most poor American families have air conditioners, satellite or cable TV, a cell phone, and a car. I’m not suggesting that being poor in desirable, but the lifestyle of typical poor Americans family is a far cry from typical families in many of the world’s most populous countries. Those who claim that we have a collective responsibility to close the income gap rarely suggest sending dollars to Latin American, Africa, and Asia. Their sense of morality only includes those born in US territory.

This brings me to my second point. President Obama often refers to Americans who are poor “due to no fault of their own.” There might be a small group of such Americans, but statistics tell us that many in poverty choose single parenthood, abuse drugs or alcohol, and/or drop out of high school. These are choices, not mandates. Society is not to blame for such outcomes and not does it have any responsibility to redistribute wealth to soften the impact of poor individual decisions.

This is not to say that such people are not important. They are. However, opportunities to break out of poverty can be found in private charities and in the private sector. Studies estimate the amount spent on the so-called war on poverty exceeds $15 trillion, yet those on the left still clamor for more.

It’s not enough to complain about an income gap as if its existence is immoral. An honest discussion on incomes in America must consider the lifestyle of poor Americans relative to those in other countries, the failure of government anti-poverty programs, our approach to government schools, and the link between individual choices and income. I don’t expect the President to address these issues next Tuesday.

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Obamacare’s fatal flaw

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With the Obamacare rollout in full swing, several things are clear:

  1. Washington will decide what kind of healthcare plan you need.
  2. The cost of your plan is likely higher than it used to be.
  3. Few Americans are actually purchasing health insurance through Obamacare.
  4. Most Obamacare buyers are in moderate to high-risk categories.

Obamacare has been discussed at length on this blog, so none of these realities should come as a surprise. Nonetheless, Obamacare defenders just don’t seem to understand why most insured young Americans are not flocking to the exchanges. The answer is simple: It’s a losing proposition.

Insurance is a gamble. Individuals consider it it when they believe a serious negative event—a fire, a major illness, or even a loss of life—could be devastating without outside help. They are willing to purchase it when the amount of the premium seems to justify the risk of the event and the payout that would follow if that event occurred. In everyday language, people buy a policy when they weigh the odds and premiums, and think it’s a good deal. For the young and healthy it’s not. This is true for a number of reasons, but one of them is the game-changer.

Obamacare is designed to subsidize the coverage of high-risk and low-income Americans through the premiums of the young and healthy. Many Americans seemed okay with this idea when Obamacare was originally proposed, but most figured that someone else would be the subsidizers. Collectivism is often appealing to the masses when they are told that “the rich” and “big corporations” will foot the bill. When it comes time to make an individual decision, however, most opt in only when they are on the winning side of the wealth redistribution. This is why social security is required, not optional.

Put another way, the financial losers in the healthcare game will only play if they are forced to. The fine that must be paid for noncompliance is trivial compared to the cost of insurance, especially when EMTALA guarantees emergency treatment, hospitals are always willing to negotiate with non-payers, and bankruptcy is always an option. While none of these three situations is desirable, they underscore the fact that Americans without health insurance will be treated, thereby reducing the incentive to buy a policy.

There’s only one way around this. Some call it single payer, but I prefer the term collective payer. The young and healthy must be forced to contribute to a losing proposition in hopes that they will shift to the winning side as they get older. However, collectivists view seniors as financial liabilities because they are no longer working and “contributing to society.” With government in control of healthcare finance, there’s no guarantee that you’ll get the care you need down the road.

The simple truth is that young and healthy Americans will not purchase health insurance at Obamacare prices unless they are required to do so. But don’t expect Obamacare to “implode” on its own. There’s too much emotion tied up in the concept of universal healthcare, and the left will propose as many costly band-aids as needed to keep this entitlement afloat.

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Be Thankful for Income Inequality

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Income inequality is the Democrat’s official political villain of 2014, but this is not really new. President Obama often likes to distinguish between the fat cats and easy money of “Wall Street,” and the daily struggles of “Main Street.” The inference is that there’s only so much success to go around, and whatever goes to the rich on Wall Street is being withheld from its rightful recipients, the average guys on Main Street. John Edwards almost rode his version of this argument–”two Americas”–to the Democrat nomination for President in 2008. More recently it was the centerpiece of Bill de Blasio’s successful campaign for mayor of New York City. The inequality of outcomes argument is at the core of Marxism and has been repackaged by many redistributionists over the years.

At the national level, President Obama has played the class warfare card incessantly since running for the office. A majority of Americans still reject socialism when clearly presented as such, so leftists are constantly looking for softer and more creative ways of repackaging the argument. Taxes have become contributions, government spending has become investment, and there’s a constant reference to everyone paying “their fair share.” Business leaders are greedy wealth-seekers while government leaders are “public servants.” The minimum wage must be a “living wage.” The fact that some people’s skills are worth more in the marketplace than others is now called income inequality.

Who can oppose fairness, equality, living wages, public service, and investing in our people? These sound reasonable if not attractive to the uninformed voters among us, but they are really part of a concentrated attack on capitalism, one that threatens our survival as a free, productive society.

Capitalism is based on freedom and views fairness through the lens of opportunity. Outcomes will, by definition, differ in a capitalistic society because individuals have different talents, goals, and motivations. Moreover, free markets are always fair in the truest economic sense. Some might get more than others, but one’s returns are based on the value one deliver to others through voluntary exchange. This diversity in financial outcomes is both necessary and beneficial to society for many reasons. I’ll give you three:

  1. The highest wage earners in a society make the greatest economic contribution. They receive high wages because they offer the highest value. Brain surgeons save lives, CEOs run companies that produce products and services that enrich our lives, and even athletes and celebrities provide entertainment. Most of these jobs require advanced and/or specialized training, high tolerance for stress, and the like. The higher wages attract individuals to these professions. Cut the wages through regulations and taxes, and you cut the incentives, and ultimately the quality of products and services they produce. Remember, transactions in a free economy are voluntary, so individuals can only earn high wages when others obtain the benefits of the products and services they provide.
  2. The highest wage earners pay the most taxes. The top 10% consistently pay more than 70% of the taxes in the US, enabling those who earn less to pay less. This is a reality that leftists who constantly promote more government spending to cure society’s ills should champion, but they don’t. Envy is the root of the problem and it’s a powerful motivator of the masses in elections.
  3. High wage earners create opportunities for the rest of us. The earnings they retain after taxes are either spent in the economy to create jobs or invested in firms that need capital to grow. They also finance many of the benefits we often take for granted. Consider that you can watch the Super Bowl in high definition free of charge even if you cannot afford to support any of the advertisers. Others—including a high proportion of high-income earners—are paying most of the freight.

Yes, income inequality is our friend, not our enemy. It’s a healthy byproduct of a free society, not a demon that must be exorcised. Contrary to the President’s rhetoric, our ability to reduce the gap does not define our greatness as a society. The fight against income inequality is a more subtle argument for redistributing income and expanding power of the state. Don’t buy it.

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