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Wednesday, January 20, 2010

But Maybe We'd Better Pay For It

The natural tendency for some Republicans is going to be to overreach now. They'd better not.

It is not that the US public doesn't support health care reform, but the health care reform must be genuine - it must lower costs and increase access (on average). The problem with the current health care bills is that they will increase costs and lower access for far too many people. It's fake reform.

Any true health care reform has to start with raising the Medicare payroll tax about a percent, and then increasing reimbursements to halt the cost-shifting that is dramatically driving up costs for those privately insured. Then you want to promote laws that allow small businesses to combine in trade associations or whatever to negotiate health insurance for large groups rather than small groups.

However there are other big issues pending. I wrote about this last year, and with every month that passes such a step becomes more likely. See Coyote Blog for the ongoing drive to get US private retirement funds converted into T-bills. The problem with doing this is that a Congress which has shown so little fiscal responsibility will take the money, spend it all, and then your retirement funds will be GONE. Seriously gone.

But this will keep coming back and back. I guess this sort of thing will support gold prices for some time. If it's not in financial assets it is not as easy to take it, although Congress could pass a law outlawing the possession of specie and requiring that it be turned over to the government in exchange for "full faith and credit" assets.

Otherwise, the US dollar is looking good, which is one factor causing oil prices to trend down. The other factor is that heating oil prices did not keep up with crude prices, which surely has caused refineries to back off some of their purchases. I noticed that dated Brent spot (Euro) had fallen below $76 yesterday. But Nymex heating oil and gasoline futures are below 205, which is not very congruent with crude future prices.

There was a 6.1 mag quake in Haiti. I guess it is officially an aftershock, but it can't have improved things any.

Caroline Baum has a pretty good column up about interest rate risk and the Fed's operations. As soon as interest rates rise the Fed takes an implicit loss on its MBS holdings. Right now they can do what they are doing because their Net Interest Margin (NIM) is high due to their cost of funds being so low. If the demand for money rises (recovery), then T-bill costs will rise, and their net returns from the MBS holdings go down.

But I do not think the Fed will be able to get out of it this year. Technically the Fed does not really control interest rates - the market does. However the Fed can always flood the market with money, thus forcing down relative demand. If it does, it causes inflation to the degree that money is circulating. Needless to say, that money always circulates to some extent. In such a case one would see commodity prices rise quite rapidly, which would crush recovery.

In general, this is not a spot one likes to see one's central bank in. It is not clear that the interests of the real economy and the Fed's interests will be aligned later in 2010.

Hah! If Congress attempts to confiscate 401K accounts and replace them with IOU's, they will find that people turn them in for cash, paying the 10 percent penalty. Certainly all of the folks I know and have discussed this with have agreed that would be the rational thing to do.

Further, if Congress proposes such legislation and it begins to make headway, you will see the trade in of 401Ks begin immediately. Now this will not be good for Wall Street, as they will lose those nice fat 401K fees and that much stock being put up for sale in such a short time frame will lead to a large downturn in the values of equities. Considering how much power the financial lobby seems to have in Congress, I doubt this will occur.

Much more likely is some sort of scheme that will attempt to take control of future donations into the 401K plans, requiring them to be put into some form of US debt of one sort or another (perhaps even a new form). That too will fail as the companies will not have little reason to match funds, if it is not stock based (as I think most companies understand they do benefit from the net effect of all the individuals 401K accounts buying stock each month). Take away the matching funds and very few folks have any reason to lock up their funds in a 401K.

I think you are right about raising the Medicare tax. Unfortunately that will affect the bottom line of a lot of folks, further retarding any sort of economic recovery.
"India's top three outsourcing companies are ramping up hiring and increasing pay as global corporations, mainly from the U.S., send more work offshore to cut costs as they emerge from the downturn."

Looks like a very bleak employment picture going forward as large corporations continue to cut personnel in order to create profit and make bonus while small business sector contracts.
I hate Caroline Baum.
"The natural tendency for some Republicans is going to be to overreach now..."

That's my fear, that the GOP power-broker idiots are going to say to themselves "The pendulum's swinging the other way - we're INVINCIBLE!" and offer us more Dem-Lite candidates who LOOOVE the "Big Govt/ Schmoozes With Lobbyists/ We elites deserve to run your lives" brand of politics that has infested Wash DC for years now.

Newt? Michael Steele? John McCain? Are you listening? The people say "Work for THE COUNTRY, work for YOUR CONSTITUENCY." We in flyover country DON'T want your main concern to be "Party first". Consolidating the GOP into an invincible political juggernaut is NOT why we elected you. We citizens prefer switching off parties every so often to keep you power-hungry pols from assuming a permanent entitlement to all the goodies you vote yourselves (at the expense of us taxpayers).
Then you want to promote laws that allow small businesses to combine in trade associations or whatever to negotiate health insurance for large groups rather than small groups.

If you take this policy, allow individuals the same right, and extend the same tax advantages to individuals, you solve 90% of what people don't like about our health care system.

Letting people choose health care plans from any state would probably fix the rest of it; large groups of individuals buying catastrophic-care plans with lots of preventative-care benefits plus some sort of HSA would almost certainly be 80% of the market, because that's the best bang for the buck. There would probably be two or three states with an optimum regulatory structure, and that's where all these plans would be domiciled.

My understanding is that with people in control of (and responsible for) their own health care costs, everything else including Medicare and Medicaid would gradually fall into line as costs come down. FICA taxes and Medicare reimbursement could be adjusted later, if necessary.

Bonus points for cramming down the trial attorneys with tort reform.

This policy is politically feasible, popular with the voters, and there's no reason it shouldn't be bi-partisan across the left and right moderate spectrum.
Neil - perhaps I should put up a post about what I think could be done to start meaningful health care reform, and we could all discuss it?

We can stop an unreasonable rise in costs, but realistically, the population is getting older as an average, and even if fundamental health care costs per procedure and treatment don't rise at all, that means we will be spending more for medical treatment.
Mr. Sensitive - we can afford a percent. If a person earns 100K annually, the percent is 1K. That will not hugely affect the economy.

But there is payback. Over the next ten years, approximately 15 million more people will go on Medicare, which will vastly increase the total burden on PRIVATE insurers. So if the percent is used to raise reimbursements 20%, then you can expect private insurance costs to even decline, which would pay back some of the extra money to the companies and workers.
A-Nonny-Mouse. Uh-huh.

Right now it is clear that neither party truly represents the interests of the general population. We need to correct that. ASAP.

The sudden recognition by the media that Democrats too are concerned about fiscal responsibility and a sustainable future is a step in the right direction. Over the last year, the constant cry in DC and the press has been to describe all people who are raising concerns about our direction as nutcases.

And yes, I do want two viable parties competing for my vote. I do not want to have to pick between the insane and the insane.
A "what-if" thread on health care policy might be fun, M_O_M.

The reason I said the Medicare tax could be adjusted later, is because if we loosen the regulations to start gaining productivity in the health-care industry, it probably won't be absolutely necessary to raise rates until later, after the economy has recovered and can handle it. Although I am willing to admit that the impact of a 1% rate hike might not be too bad for the nation's psychology, if it were accompanied by the other changes I mentioned.

Of course, if you really want to up the Medicare tax revenue, we'd also change the rules about retirement age and IRA withdrawals to incentivize the over-65 crowd to go back to work to some extent or other. That'd probably cure a lot of ills right there....
Problem is - with unemployment at current levels, anybody over 60 who gets laid off can see the handwriting on the wall - if they can't get another job (with healthcare), they will go onto Soc.Sec. at 62, making things much worse than predicted sooner.

Higher co-pays would help keep costs lower, along with tort reform, competition across state lines and maybe a voucher system for the truly badly off.
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