the truth is big business loves obama

"I'm generally supportive [of the financial reform bill]. To be sure, there are details of it that I think I'm less sure of, but I think, on the whole, financial reform is, absolutely is essential and I will say that last week, in New York, I listened to a speech by Barack Obama at Wall Street, and one of the points he made resonated with me because I’d said it myself. He said that the biggest beneficiaries of reform will be Wall Street itself.” 

- Lloyd Blankfein, CEO Goldman Sachs (Homeland Security & Government Affairs, Permanent Subcommittee On Investigations, U.S. Senate, Hearing, 4/27/10)

"We continue to believe that comprehensive health care reform will benefit patients and the future of America. That’s why we have been involved in this important public policy debate for more than a year and why we support action by the House to approve the Senate-passed bill along with the amendments found in the reconciliation legislation."

- Official Statement of the Pharmaceutical Researchers and Manufacturers of America (PhRMA), is the largest single-industry lobbying group in America on 3/21/10 regarding Obamacare.

"Climate legislation is one of the critical issues that will be considered this year on Capitol Hill.  The House passed the Waxman-Markey legislation, a comprehensive, economy-wide bill [that] represents a moderate approach that was supported by a wide range of major American companies who make up the US Climate Action Partnership – including companies with a strong Indiana presence such as AES, Duke Energy, Alcoa, Dow, DuPont, GM, Ford, and Chrysler . . . Exelon has been preparing for a low-carbon future for the last decade. [We have] [s]old or closed most of our inefficient fossil fuel plants, [i]nvested billions in our fleet of 17 zero-emission nuclear reactors. In summer 2008 [we] released Exelon 2020, our plan to reduce, offset, or displace 15 million metric tons of greenhouse gas emissions per year, equal to our 2001 carbon footprint, by 2020. We are one-third of the way to our goal, and have a plan to accomplish the rest."

- John Rowe, CEO Exelon Energy (Indiana Council on World AffairsMarten House Hotel, Indianapolis 1/20/2010)

So if you listen to any cable news network or read most any paper all you here is how Obama is "anti-business" and that it is for this reason that the economy is slowly recovering.  Well that is only a half truth in my opinion.  I don't think Mr. Obama is anti-business per se, although I do believe that he is anti-market, which is actually profoundly worse than being anti-business.  The three quotes listed above are all attributable to big business heavyweights: Blankfein is for financial reform, the PhARMA lobby was all for Obamacare and Exelon, one of the largest power producers in the midwest and mid-atlantic (the coal region), wants nothing more than a full cap and trade system.  Does any of this make sense?  Why would a financial giant like Goldman Sachs want more financial regulation?  Why would a power company that produces a majority of its power on fossil fuels want to have the price of those fuels increased dramatically?  The answer is easy of course: they see a future with less competition.

Take financial reform for instance.  Now I understand and agree that any sound financial system must have rules of the road.  However, I firmly believe that the rules should be clear and must be debated before they are enacted.  This is the opposite of what occurred in the Dodd-Frank Bill. There are no new clear cut leverage requirements, there are no new clear prohibitions on proprietary trading.  There are just directives.  These directives either require or authorize incompetent agencies like the SEC to issue rules it thinks are appropriate.  In total the U.S. Chamber of Commerce estimates that Dodd-Frank authorizes a total of 533 rules to be written over the next few years.  Are some of these rules probably necessary?  Of course, but instead of being written by the Congress in the full purview of the electorate they are going to be written in closed door meetings were you need to pay to play.  I bet Mr. Blankfein knows this and is happy about it.  Few firms have the regulatory, compliance and lobbying staff to compete with Goldman Sachs when the task becomes influencing the inept government agents writing these rules.  They will invariably benefit the biggest and most connected of the banks at the expense of their smaller competitors, hence their support for financial reform.  

The same can be said about Exelon's desire for cap and trade.  As Mr. Rowe mentions in his speech, Exelon has been moving away from carbon based energy for years now.  Exelon is a Illinois based power producer and was a major contributor to Barack Obama.  Now they want their reward.  Instead of having to compete on a level playing field where consumer demand requires energy companies to be as efficient and cost-effective as possible, Exelon wants the Obama administration to price its competition out of the market.  It's whole business model over the past few years is that it is trying to get into a position of strength by lowering its carbon footprint ahead of the U.S. legislation so that it could put its boot on its competitors once their costs were artificially higher because of diktats from Washington.  Now that cap and trade seems dead that are literally shitting their pants and demanding even more intervention from Washington on their behalf.  Notice how the other companies named in Mr. Rowe's comment are all major corporations with huge lobbying arms.  Their support is predicated on the belief that they will be able to influence who gets "free credits" and what parts of industry will be "exempt."  That sure is one way to compete effectively.

What these examples show is that government intervention in the economy always produces winners and losers.  For the most part the interventions most favored by Mr. Obama undoubtedly favor the largest and most connected businesses in the industries affected.  Be it the hundreds of new rules in Dodd-Frank that have yet to be written or the onerous requirement that all business entities must now file a 1099 for every supplier with whom they purchase over $600 per year in goods (courtesy one of the many unread provisions in Obamacare), red tape and government regulation most favors the largest firms with large legal departments and the funds to spend on lobbying.  Small businesses, the real economic and job growth engines in our society, have neither of those advantages.  They are forced to play by the rules negotiated by their larger competitors.  Usually this is to their disadvantage.  These same small businesses are not hiring for this exact reason.  

There are three costs that almost all small businesses face regardless of their type of business: the must pay for energy, they must pay for credit, and they pay for health care for many of their workers.  Under Mr. Obama's polices the price for all three is going up.  Throw in the fact that tens, if not hundreds, of thousands of these small business owners, who are often organized into partnerships, limited liability companies or Subchapter S Corporations, are about to see their taxes increased at the end of the year, it is completely logical that they are not hiring or expanding.  The best thing Mr. Obama could do to help the businesses is to be "anti-business" and instead be "pro-market."  Let them compete effectively with their larger competitors and stop disadvantaging them by enacting "reforms" that put these competitors in a position to write the rules of the game.  These businesses don't want handouts and special privileges, just the opportunity to compete fairly and let the market decide who has the best product.

doublethink is alive and well

Prior to his election in 2008, the most common compliment bestowed on Barack Obama by the mainstream media was that he was an extremely skilled orator capable or persuading almost anyone of his point of view.  Swept up in the media storm that was Obama, he was constantly praised as the best speaker, even better than Reagan, of the last half century.  Obviously Chris Mathews is a full fledged Obama supporter, but just look at what he said a year and a half ago.



A simple youtube search will show numerous other examples of similar comments.  However, since becoming President Obama has not made nearly as many public speeches, and now that he is in a policy making position he has been a little more hesitant to expouse specific views on a variety issues.  Even the left has criticized him for failing to take the lead on issues ranging from healthcare to energy. However, I have notice an interesting trend when Obama does speak, and it is eerily familiar to a type of propaganda described by George Orwell over half a century ago.  Doublethink, the term penned by Orwell in his masterpiece Nineteen Eighty-four, was described by him as follows:

To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy, to forget, whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed, and then promptly to forget it again, and above all, to apply the same process to the process itself -- that was the ultimate subtlety; consciously to induce unconsciousness, and then, once again, to become unconscious of the act of hypnosis you had just performed. Even to understand the word 'doublethink' involved the use of doublethink..

 Now obviously Obama's rhetoric has not quite reached that of "the Party," but he is slowly inching his way in that direction.  The more common terms, doubletalk and doublespeak, both derived their meaning based on Orwell's concept of doublethink, and they may be more apt terms for Obama's current rhetoric.  Defined as any language that deliberately disguises, distorts, or reverses the meaning of a statement, resulting in a communication bypass, doublespeak has been employed by governments throughout history in order to enact unpopular policies or to hide those policies true costs.  Let's take a look at a couple of things Obama has said of the past year.

On healthcare: "We agree on reforms that will finally reduce the costs of health care," Obama said. "Families will save on their premiums; businesses that will see their costs rise if we do nothing will save money now and in the future. This plan will strengthen Medicare and extend the life of that program. And because it gets rid of the waste and inefficiencies in our health care system, this will be the largest deficit reduction plan in over a decade."  This was one of the main ways Obama was able to sell reform: he claimed premiums would go down for current insurance holders, that he would strengthen Medicare and total government spending would decrease.  All this while giving over 33 million more Americans coverage.  This is the essence of doublethink. Claiming that we can dramatically increase the total number of services while paying less for it!  However, in May the CBO released a new estimate saying that the cost of the bill would be $130 billion more than originally estimated over the first decade, effectively eliminating any "savings."  And this estimate uses ten years of revenue to pay for only 6 years of benefits.  Just look at Medicare as an example.  The program now costs almost ten times what the original estimate said it would be when it was passed.  First year economics tell you when you drastically increase demand for a service (by adding 30 million new people seeking care) while instituting a number of new mandates (accept everyone with preexisting conditions, covering dependents until age 26, etc.) that the price will rise - in this case premiums.  A great example of what happens when government tries to take over the healthcare system is in Massachusetts, and the current debacle up there has been documented thoroughly in today's Wall Street Journal.

On Energy: "Each of us has a part to play in a new future that will benefit all of us. As we recover from this recession, the transition to clean energy has the potential to grow our economy and create millions of jobs – but only if we accelerate that transition. Only if we seize the moment. And only if we rally together and act as one nation – workers and entrepreneurs; scientists and citizens; the public and private sectors." - Barack Obama, June 15, 2010, from whitehouse.gov
Obviously this quote refers to the notorious cap and trade bill.  In his oval office speech on the oil spill, President Obama tried to make the case the economics alone justify getting away from fossil fuels. In the speech he did not mention the phrase "climate change" even once, instead claiming that job growth and prevention of oil spills were the main impetus behind a cap and trade bill.  Once again the contradictions in such a statement are apparent.  Raising the cost of carbon will make energy more expensive.  This will put businesses in a precarious position: either devote more of their limited resources to paying for energy, or buy less of it and produce less as a result.  This will leave all types of industries with less money to spend on new investments or hire workers.  Will there be more workers in subsidized industries like wind and solar?  Yes, probably.  But these will be far outweighed by the losses in traditional industries.  You simply cannot pay more for energy as a whole, decreasing the capital available for investment, and expect the total amount of prosperity to increase.  Regardless of how pressing an issue climate change may or may not be, trying to sell cap and trade as a jobs bill is contradictory.

government run healthcare at any cost

The Democrats are in a tough spot. Their healthcare bill is unpopular. They don't have any idea how to create private sector jobs. The House and Senate are so far apart when it comes to financial reform that it makes their differences on healthcare look like the differences between Kristina and Karissa Shannon (see Exhibit A). Basically, the Dems are now coming upon the realization that they have no path to anything other than complete and utter decimation in November. At this point it does not matter if they scuttle Obamacare or not.

Exhibit A

With this backdrop, Pelosi, Reid and Obama have decided to simply go all-in. They have accepted these losses and now want to force through the most liberal, far-reaching and redistributive healthcare bill possible. They have decided that since they are not going to have the power to do anything after November, they might as well do as much dirty work as possible now, making it almost impossible to roll back these unpopular and tremendously expensive initiatives until at least 2012 (when Obama leaves office), which is effectively too late to stop it. Just look at all the talk about bringing back the public option.

I watched several hours worth of coverage of last week's healthcare summit at the Blair House. Basically, I came away with the fundamental understanding that the two parties fundamentally see two different healthcare problems. In the democratic paradigm the world works like this:

Health insurance is so important that every single american should get it regardless of their ability to pay for it.  It should be an affirmative, government provided right.  The 60 million Americans who don't have health insurance need and want it, they simply can't afford it.  This is the biggest problem with regards to health care in America.  Health insurance companies face no competition and can gouge consumers, pricing people out of the market.  The federal government should mandate both the minimum protections private insurers can offer, the minimum coverage that a citizen must buy, and will provide subsidies for people up to four times the federal poverty level to purchase this insurance.  This manipulation of the health insurance market will not have many unforseen consequences, and people will be able to keep their current coverage if they like it.  The subsidies can be paid for by taxing just the rich.  

On the other hand, the GOP sees the problem this way:

Healthcare costs are rising too fast.  Perversions in the market destroy the price incentives that normally provide information regarding the relative supply and demand for a given product or service by allowing the customer (you and I) to receive full services without having to realize the full costs of those services (through use of  co-pays, premiums and low deductibles).  By disturbing these incentives, the price system is not allowed to function correctly, allowing for an efficient allocation of resources.  This situation inevitably will lead to excess demand, driving up costs.  Excess demand is also created when doctors practice defensive medicine in fear of malpractice lawsuits down the road.  Capping non-economic pain and suffering damages can reduce this defensive medicine.  The solution is to add market discipline to the health insurance market, by opening competition (like allowing people to buy insurance across state lines) and re-instituting price discipline (like by promoting health savings accounts and eliminating the differential tax status between employer and individual purchased health insurance).  High risk pools can be created to help insure those with preexisting conditions. 

Both sides are open to criticism.  Democrats say the republicans plan does little to help the uninsured get insurance.  That is mostly true, although there plans would drive down healthcare costs in the private market, making insurance more affordable for everyone.  This would allow some people currently priced out of the market to purchase insurance.  Republicans counter with the argument that the Democratic plan would be vastly expensive, would drive up the costs of insurance in the private market (through the coverage mandates) and amounts to little more than a vast wealth redistribution system.  In addition, by adding millions to the insurance market on the public dime, Obamacare will eventually lead to healthcare rationing when the program becomes underfunded (like all other public entitlements).  The true costs of providing healthcare to these individuals will be shifted to private payers whose premium costs are not mandated by the federal government, which could either lead to increases in private insurance premiums/decreases in quality of care or to the destruction of the private market all together when people begin dropping costly private insurance that is subsidizing the entitlement.

In my opinion, both sides are missing the larger point.  What was the original point of health insurance?  To hedge against the risk large healthcare costs if you are in a accident or are diagnosed with an unforeseeable disease.  The reason health insurance today provides the much different service today of covering not only unforeseen injuries and illnesses but everyday check-up and dental visits is because of the tax structure that was in place over the past 25 years that allowed employers to purchase health insurance for their employees using tax free money.  This made it cheaper for employers to offer an increase in health insurance value to their employees (which they paid for before being taxed) to a corresponding increase in pay (which would be paid for post taxes).  This scenario inevitably lead to hugely expensive insurance plans that covered all types things instead of simply increasing an employees pay.  Until the U.S. moves away from the tax system that heavily favors employer purchased plans, it will be difficult to have any price discipline in this market.

The most effective way to reform the health insurance market would be to simply give move away from the employer provided system and towards and individual market system.  In this scenario, consumers would be better able to gauge their true health care costs, and make rational decisions using a cost-benefit analysis.  Despite all the talking points about "waste" in the health care system, the only way to truly keep costs at an appropriate level is to allow effective market signals (using the price mechanism) establish the equilibrium level for these services.  History has shown that when a market is able to provide such incentives, resources will be distributed in the most efficient way possible.  This is perhaps the most important reform that could be considered in any health care overhaul, unfortunately neither side seems to grasp this important point.

healthcare, copenhagen and the epa

Well now that I am done with finals, I am hoping to update this thing a little more often. A lot has happened since my last post, and obviously my prediction that Penn State would play in the Fiesta Bowl did not pan out, but more about that later. Additionally, the Eagles are playing great right now, and I am going to devote an entire post to playoff scenarios later this week. For now, I want to focus on the two big political issues right now: healthcare "reform" and climate change.

At 1 AM ET last night, the Senate voted 60-40 to end debate on a healthcare bill, setting up a vote to pass the bill on Christmas Eve. The bill itself has become extremely unpopular with the public (a recent CNN poll released today showed 56% of people say they oppose it while only 42% support it), but that won't stop the Democrats from forcing it through in the middle of night. The whole process has been laughable and completely at odds with President Obama's promise of a "new era of transparency" that he promised during his campaign. The 2000+ page bill was written by 10 hand picked democrats behind closed doors, and the bill wasn't released to the public, or in that case the other Senators who had to vote on it, until just a few hours before the vote for cloture was invoked.

In short, this bill sucks, and I think that even the Democrats realize it. The major goal of the legislation was to provide every American with health insurance and do it without breaking the bank. Guess what? Neither goal will be accomplished under the Senate bill. First, although the legislation includes a new mandate that requires individuals to buy health insurance or face a stiff fine, even the Congressional Budget Office estimates that over 25 million Americans will fail to be covered even after the bill. Although Democrats were able to include several provisions that limited the insurance companies from denying coverage based on preexisting conditions and the such, they obviously have to be disappointed they had to abandon the public option, which many saw as a stepping stone to a single payer system.

But regardless of all that, there is one reason I find this bill reprehensible: Obama and the Democrats are STRAIGHT UP LYING about how much this bill will cost both in the short and long term. They are claiming that this bill is fiscally responsible based on the estimates made by the Congressional Budget Office. According to the CBO, the bill will only "cost" $781 billion over the next decade and will actually reduce the deficit by $132 billion over that time period. Really? Really? Does anyone actually believe that this bill is going to save money? Can you say that with a straight face? It simply does not make sense. They are claiming the quality will increase and costs will be lower. That's right! Democrats have finally figured out what most people couldn't: how to defy the laws of economics and make a system even better while making it cheaper in the process! Do you know why the CBO thinks this bill is going to save money? Because the tax increases to pay for the bill are going to start immediately, but over 98% of the costs do not start to accrue until 2014. So basically the CBO estimate uses 10 years of tax increases and only 5 years of entitlement benefits and then claims that it is a true estimate of the cost of the bill. This is the same type of accounting that has given us a Social Security/Medicare system that is set to bankrupt the country. Currently those programs have a total unfunded liability of over $50 trillion. That's trillion with a t. So what's the best way to address this coming financial crisis? Expand the program to include millions more. The whole entitlement state is nothing more than a Berni Madoff ponzi scheme on steroids, and if the accounting used by the CBO were used by a private company, the officers and accounts would be in jail for fraud (literally they would be).

Unfortunately, this health care bill isn't even the most destructive bill being considered by the Congress. The end of the world that is global warming must be stopped, and if we do not act... well, most people really aren't talking about what actually will happen if global warming continues. We are told horror stories about melting glaciers and rising sea levels, but I am not sold that any of these things will cause costs that are higher than those that would be imposed by cap and trade legislation. First, none of these supposed problems are going to occur in the near future or quickly. It will be a slow process and no one can predict exactly what is going to happen. By the time we start seeing any of these problems, we will be much more advanced as a society. Even under the most grave of predictions, it is impossible for anyone to say with accuracy what its effects on the human population will be. That is because humans are an unbelievably adaptable creature. We are the only mammal that can be found everywhere from North of the Arctic circle to the tropics around the equator. We will be ok.

Let's say the doomsdayers like Al Gore are correct. If we do nothing the Earth will warm two degrees over the next century. So what would be the actual effect on the human population? First, we will have advanced tremendously as a society by the time 2100 roles along. Technology has increased at an exponential rate since the advent of capitalism in the mid-sixteenth century. One hundred years ago, Howard Taft assumed the presidency, Einar Dessau made the first short-wave radio broadcast, and the first flight across the English Channel was completed. Today, instead of relying on radio we have the internet, so every individual has access to unlimited information, and we have planes that can fly without human pilots. Just imagine what life will be like one hundred years from now. I have full confidence that humans will adapt to a warmer climate, especially one that occurs slowly over decades. And do you know what the catalyst for change will be? Not a command and control economic push as desired by Obama and the other socialists, but the price mechanism. As global warming begins to impose actual costs in our society, the prices of the goods and services that are adversely affected by the climate will rise, encouraging innovation and alternative investments. Things like rising sea levels will be addressed by technological innovation. Consider this fact: 27% of the area and over 60% of the population of the Netherlands is below sea level. Using crude dikes and polders, the dutch have been able to keep the sea from destroying their homeland for hundreds of years. Imagine the innovation that would ensue if billions people faced a threat from a rising sea level, creating a large market in protecting against flooding.

And what about the positive effects of global warming? If the Earth does warm that will mean that more Northern regions will experience a longer growing season, allowing for the areas to grow crops that could traditionally only be grown in warmer climates. Critics say that the rise in global temperatures will lead to an increase in petulance and disease. Well why don't we address these problems directly rather than some indirect and causally suspect basis like global warming. If malaria will increase in tropical regions, we should invest in more mosquito nets, safe indoor DDT sprays and more education. No one can argue that stopping global warming would help protect poor populations from increased occurrence of disease more than this direct aid would. Additionally, the global warming alarmists insist that natural disasters will increase in both frequency and intensity. Even if this is true, which no once can actually prove, they are simply speculating, I think we will soon have the technology to address such concerns. Both researchers in the U.S. and especially in China are currently pursuing technology to control the weather. It sounds like science fiction, but so did a device that allowed you to not only to speak to anyone else on the globe from practically anywhere but also allows you look up any fact with the push of a button, to an observer 100 years or even 25 years ago (For those unsure, that last poorly worded sentence was my attempt to describe the iphone). For a few ideas about weather manipulation and where the technology is headed, check out this wikipedia article on weather control. Again, if the problem from increased storms is nearly as large a problem as the alarmists expect, one would expect research in this area to skyrocket.

Lastly, I just want to comment quickly on the EPA's recent "endangerment finding" that carbon dioxide is a "dangerous pollutant" and can be regulated accordingly under the clean air act. In order to make such a finding, they had to show that carbon dioxide threatens the public health and welfare. They based this finding on the "scientific consensus" that global warming will hurt "air quality," increase air born, climate-sensitive diseases, and increase the frequency and severity of natural disasters. Regardless of the fact that the clean air act was designed in 1970 to regulate pollutants like Sulfur dioxide that cause direct harms to human health through inhalation and the like, the fact that they found that emissions of greenhouse gases caused not only global warming but also the harms associated with it is disturbing. Traditionally, causation is a legal concept that has two parts: cause-in-fact and proximate causation. In order for a prior event to be considered a cause, both of these tests must be satisfied. For something to be a cause-in-fact, the second event would not have occurred but for the occurrence of the first. For something to be a proximate cause, an act from which an injury results as a natural, direct, uninterrupted consequence and without which the injury would not have occurred. Regardless, I see no way that someone can say that emitting carbon dioxide will cause the adverse effects of global warming. There are so many other contributing factors that contribute to these events other than U.S. emissions (the only emissions the EPA is allowed to consider in their endangerment finding) that it is impossible to say that they will not occur anyway even if the U.S. stopped emitting carbon dioxide immediately. Complex weather patterns, international emissions, and shirts in solar weather patterns are all potential intermediary actors that affect the potential harm. In order to be considered a cause in the legal sense, the event must have a direct and foreseeable impact on a harm that will not occur independently if the event is removed. Although they are strong arguments that warming is being caused by increased carbon levels, that link is too tenuous to be a legal cause under the clean air act, and any government intervention must derive its authority from new legislation, not some bullshit and speculative argument that misapplies a law that was designed to regulate pollutants that actually do directly hurt individuals because of things like toxicity.

the gm deal and paying for universal healthcare

The bailout to save a second troubled automaker, this time its GM, is all but finished. Although it is still likely that GM will file for bankruptcy protection on Monday, the details of the deal that were advanced by Geithner and the Treasury Department, are pretty much set, pending final approval by the UAW workers. The UAW and their retirees are the big winners in the deal. The union and the trust tasked with safeguarding the UAW retiree's pension benefits holds approximately $20 billion in claims against GM. In exchange for settling the claims, the UAW will receive $10 billion in cash money, a 17.5% stake in the restructured GM, an option to purchase another 2.5% down the line (but to be fair, it is not likely they will exercise that option because of unfavorable terms in the warrant, so let's just assume it will stay at 17.5%), $6.5 billion in dividend preferred stock paying an astronomical 9% dividend, AND about $2.5 billion in promissory notes. Wow, that is a mouthful. Contrast that deal with the one received by GM's secured creditors, which are owed approximately $27 billion. They will receive a 10% stake in the restructured company and warrants to purchase another 15% in about a decade. So the secured creditors are receiving less equity and no cash for more total claims than a group that is on-par with other unsecured creditors.

Now I understand that this is not a bankruptcy proceeding, but a voluntary agreement, but let's get this straight: it is voluntary in the same sense as the situation where one of the parties threatens to physically harm the other party in negotiations, inducing the party that is threatened to agree to terms. In this sense almost any action can be considered voluntary because the party is voluntarily acquiescing, albeit due to threats of violence. In the case of GM, the large majority of the secured creditors are the major banks, including Citi, Bank of America and the old Wells Fargo (not sure what they are now, Wacovia maybe?). The arbiter is the Treasury Department; the same treasury department that controls many of the decisions that the banks are allowed to make as a condition of their receiving TARP money last year. In other words, since the banks have not yet repayed the TARP money, the Treasury can make their lives very difficult if they do not like what the bank is doing. Therefore, the banks, fearful of retribution by Geithner by way of terms associated with TARP funds, are almost forced to accept less than they could achieve through bankruptcy. If this isn't strong arming I don't know what is. And the Obama administration is playing politics by playing softball with the UAW, giving them a larger ownership share AND CASH FOR HALF THEIR CLAIMS. This supposed to make up for further concessions by the union in their collective bargaining agreement, but a UAW press released claimed, "[f]or our active members these tentative changes mean no loss in your base hourly pay, no reduction in your healthcare and no reduction in pensions." (Link here to read the actual memo released just a few days ago.) So much for concessions that make GM profitable.

So if the UAW is getting 17.5% of the equity, bondholders another 10%, who is going to get the rest of the company? The answer is... you guessed it! The federal government! Does anyone really believe that GM is going to be profitable anytime in the immediate future? Just because they have received a ton of taxpayer money (all told the total amount is projected to be $100 billion) doesn't mean that they are magically going to start making cars people are going to want to buy. A partnership between the federal government and the UAW doesn't seem like the type of ownership that will focus on the cost cutting and efficiencies necessary to get GM out of the red and into the black, once again making it a profitable company. The UAW is going to continue business as usual, sacrificing profitability for more benefits for workers. But don't worry, the unlimited cash cow, the federal government, is their partner so I'm sure there will be plenty of money to go around, regardless of how much the company is losing. Nobody will complain when the tax payer foots the bill, will they? Mark my words, unfortunately the U.S. government is now a majority owner of the largest automanufacturer in the world and they are not going to relinquish that hold anytime soon. For the next few years, GM will bleed money and the federal government will finance the losses. The only bright side is that this may be an issue Republicans will be able to use against Obama and the democrats in 2010 and beyond.

Lastly, although there is more I want to say regarding Obama's recent proposals to finance universal healthcare, I just want to comment one of the ideas. For a breakdown of a few of Obama's proposals check out this Wall Street Journal article. Even Obama admits that the costs of such a program will be huge, and that the feds will have to increase revenue to pay for it. One of the proposals is to make it so that contributions to health savings accounts would no longer be tax deductible. Currently there is very little incentive for insured individuals to curtail their healthcare expenditures. Typically low deductibles and the co-pay amounts do not reflect the actual cost of the services rendered. Therefore the price payed by the consumer does not serve its critical function of relaying the information regarding the costs of the services to downstream users. Since the price is distorted, there is no incentive to only use the service when it is marginally beneficial. Therefore, the services are overused, imposing larger costs on the system as whole. Health savings accounts go a long way in fixing this problem. Typically, they will be employed in combination with traditional catastrophic insurance coverage with a high deductible. Instead of comprehensive coverage, the patient will contribute part of his paycheck into the health savings account for use for future medical services that are below the price of the high deductible. Typically the contributions are partially matched by the employer and are tax deductible, just like other contributions to health insurance.

Under such a system, the patient would have to pay the full amount of any treatments received up to the deductible amount. They will make these payments from their health savings account. Since the patient is allowed to keep contributions to the savings account that are not used, he has a strong incentive to save as much of it as possible. Therefore, in cases where he may or may not have to go to the doctor (like when he has a head cold), he will probably choose not to go if the price of the visit is more valuable to him than the benefits of the visit. There is no such incentive in a system where a doctor visit only costs a $15 co-pay. By allowing the price system to function effectively, costs on the system as a whole are reduced because only transactions that both sides consider necessary and beneficial will occur. However, by eliminating the tax deduction associated with health savings accounts, the Obama administration is attempting to provide fewer incentives for more people to adopt such a system. He would like to replace this capitalist solution with his socialist system where everyone buys insurance from the federal government.

my usual tuesday rant

First, I want to apologize that this is my first post in a week.  I had to finish writing my paper and have started studying for finals because I have two friends coming into town on Wednesday, and they are going to be ruining my life until they leave on Sunday.  So don't expect many posts until then.

So I've been reading a lot about universal health care lately.  According to some recent polls, over 60% of Americans support a universal health care system, and they think the Federal government are the best ones to provide it.  And I mean why not.  As the argument goes, the government can provide cheaper health care than the private industry because they won't be working for a profit.  Not to mention that by giving everyone health insurance, the overall system costs associated with providing medical services to currently uninsured patients will be eliminated.  Sounds like a win-win to me!

Obama has recently said that implementing universal health care is a bigger priority than even his climate change initiatives.  So obviously we are going to see some big political battles over the next couple of months over this issue.  What gets me the most angry is the terms that supporters of universal health care cast the issue in.  Their whole argument is that the rich should payer higher taxes, use that money to pay for health care for the indigent and working poor, and VOILA!  Problem solved.  It is the most fundamentally flawed type of argument.  List a couple of facts and ideas and then simply assert that it will fix the issue because it sounds like it would work.  Never in this analysis (if you can even call it that) are any effects or the proposed changes even considered.  In order to develop an effective health care system in this country the analysis must start with three fundamental questions:  What is the effective goal of our ideal health care system?  How does our current system fall short of that goal?  How do the we change the current system to best meet our goal and prevent unintended bad consequences resulting from that change?

You would think the answer to the first question is easy, but if you ask a diverse group of people I bet you would get several different answers.  Liberals may say that they want everyone to have affordable coverage and equal access to treatments.  Conservatives may say the want the government to stay out, regardless of how that affects the system.  If you ask me, both these are not going to happen, either because its physically impossible (liberal) or politically impossible (conservative).  Personally, I think a diversified health care system would be most ideal, allowing individuals to pick and choose the amount of coverage they want based on a variety of circumstances: amount of risk willing to accept, family medical history, ability to pay, etc.  This would be unacceptable to the democrats running things however.  They think they can provide everything for everybody.  In determining whether this is possible, it is helpful to look to the state of Massachusetts, who a few years ago implemented a system similar to the one proposed for the rest of the country.  Let me tell you how great the results have been.

The first problem with the Massachusetts system is the extraordinary costs associated with it.  The program provides no- or low-cost insurance to approximately 165,000 residents, roughly 60% of the people who had been previously uninsured before the program took effect.  The Massachusetts budget for 2010 sets aside approximately $880 million for this part of the program alone.  And that cost represents a 42% increase in cost since the program began in 2006!  It has increased in price almost 50% in just 4 years!  

How could that be, you ask?  Easy, by providing extensive coverage for people who don't have any stake in paying for it, these newly insured people have no incentive to save.  Why not go to the doctor for that cough if you don't have to pay for it?  Until a system is put into place where the users are forced to pay for the costs of services received in some type of proportional way there is no incentive to keep costs down, and they will continue to rise.

"Easy fix!" yells the supporter of universal health care.  Simply cap the amount of treatments a person can receive.  Yay, problem solved.  Not quite.  Whether the limit is based on the relative necessity of the procedure, the value of the service based on clinical effectiveness and/or cost, or a limit on total expenditures, each option will lead to undesirable results.  The first problem is that its going to be government bureaucrats, not doctors and patients who will be deciding these limits.  In health care each patient is different and localized doctors, not federal bureaucrats should make these decisions.  

And if you think that just because care will be rationed for those who choose the federal health insurance option will be limited, while those who remain with private insurers will see no change, then you are very mistaken.  When the government provides health insurance to the indigent, they will no doubt do what they do for medicare and medicaid: force service providers to accept the patients and only receive what the bureaucrats running the system thinks your services are worth.  Undoubtedly, this price will be well below the true cost of the service.  This will lead to higher costs for private providers who can't mandate their own prices, which will be passed on to the consumer.  

Since mandating lower costs for people that don't even pay for the service is probably not even politically feasible, the U.S. system will probably go the route of Massachusetts and its European and Canadian counterparts and simply impose price controls on all medical services.  Price controls are one of the most economically undesirable political actions that a government can make.  When a price control is set at a value higher than the market equilibrium, it will lead to a surplus in the good or service as the supply increases faster than demand.  Contrarily, a price ceiling will drive down supply, while increasing demand by creating an artificially low price for the service leading to shortages.  This is exactly what happened in Europe and Canada.  The shortages have led to rationing of medical services, often leading to long waits to see a doctor and critical care industries, death before you ever receive treatment.

At the end of the day, increased health care coverage and lowering costs are competing goals; it is not possible to achieve a high degree of both.  As output increases, the cost associated with that output increases as well.  Universal health care will not increase coverage while lowering the overall cost of the system.  Instead it will lead to huge amounts of debt and the rationing of medical services.  And the rationing will not be done by doctors and patients, but by bureaucrats in Washington.  Until personal responsibility and choice are hallmarks of our health care in this country, we will not see any change from the status quo except maybe things could get worse as the government tries to fudge things.  I hope in the next few weeks to develop a proposal on how a system based on the market would be more advantageous than the current system  Although such a system would not cover everyone and may not be ideal, at least I won't try to mask its flaws in rhetoric and hide its true effects (cough, cough, Obama and Pelosi).