Can’t repeal economics — health insurance

How does health insurance work? Individuals (or an organization on behalf of the individual) pay a premium to a company. If the individual falls sick the insurance company pays for health care. Sounds simple, but what is the insurance company’s business model here?

Healthy people pay premiums. That is the insurance companies revenue stream. When they fall sick the insurance company pays for healthcare — that is (along with administrative expenses) the insurance companies costs. Profits = Revenues – costs. The insurance company has an incentive to keep costs low and revenues high.

Notice that for the insurance business model to work healthy people are necessary as a revenue source. But what sort of person would prefer not to buy insurance? Well healthy people of course because they don’t think they need it. By the same token sick people would want insurance. This dynamic is not good for the insurance companies bottom line. That is why insurance companies would like to charge more for older people or sicker people (for example those with preexisting conditions) though ideally it would be best to not have these high risk categories on their rolls at all.

Older Americans are covered under government run Medicare since they add to insurance companies costs. Before ACA insurance companies could refuse coverage to people with preexisting conditions. Now they cant. Healthy people therefore cross subsidize people with preexisting conditions and as a result high risk people have a lower premium than they would otherwise have while healthy people have a higher premium. This is a risk pool and left alone it is not stable. Healthy people are paying more than they want to so they quit buying insurance. This reduces revenues and profits for insurance companies. So they raise premiums. This makes more healthy people leave. And the insurance company goes out of business. Healthy people are needed to cover expenses for sick people and a little bit more. But for everyone — both sick and healthy — to be covered healthy people have to be “incentivized” to buy insurance. In any case, any policy to add more people to insurance rolls implies that sicker people are more likely to apply while healthy people will not. This unraveling of the risk pool destroys the insurance business model. The only way to get around that is to “incentivize” healthy people to join the insured ranks.

The ACA does that by penalizing people who do not have health insurance. The various replacement plans floating around seem to want to give tax credits for those who join. They are essentially the same thing. Consider someone who has to pay a $1 penalty if she does not buy insurance. That $1 of her money she does not have — a penalty she can avoid by buying health care. Now consider the $1 tax credit. If she does not buy the insurance she loses $1 of her own money as taxes — a penalty she can avoid by buying insurance!

Can’t repeal economics. Sigh!

“Border Adjustments” Tariffs Whatever

I do not understand why Mr. Trump and his GOP want to raise taxes on the American people.

Mr. Trump wants to hike import tariffs. His congressional Republican lackeys call it a “border adjustment.” Either way this tax will make goods and services more expensive for American consumers while their touted “benefits” are murky.

For example, a fall in the trade deficit is touted as one such “benefit”. However, this fall will ALWAYS be balanced by a fall in foreign capital investment in the US. Thats just how national income accounting works. Well that’s also fewer American jobs.

Another effect might be a devaluation of the US dollar because of a fall in demand for US assets. That makes our exports more competitive while making imports more expensive. Since many of the goods we make in the US have foreign inputs the net effect of all of this on American jobs and wages is murky.  Moreover, a fall in demand for US assets like T bills puts upward pressure on interest rates. Higher interest rates translate into less US capital investment and fewer American jobs. These higher interest rates could be neutralized by asset purchases by the Fed. But that could end up being inflationary.

Supporters of the “Border adjustment” claim that any inequity in the border adjustment will be negated by a rise in the value of the dollar. Well thats not so certain given the possibility I raise above. In fact anyone who claims they know exactly what will happen to exchange rates is at best wildly optimistic!

Advocates also keep talking about the border adjustment as “trade neutral”. Thats a lie. The whole argument for the border adjustment is that it helps import substitute and export industries while penalizing American businesses which use imported inputs. In fact even advocates say that prices of all goods will rise (see https://taxfoundation.org/understanding-house-gop-border-adjustment/). Which of course it would! In other words it is a tax on the American people.

Of course, US tariff increases will be matched by other countries. This trade war will impoverish everyone.

Not so long ago Republicans understood that government intervention in business decisions was a bad idea because the economy is complicated. As a result, policies have complex and often unintended effects. This was one argument for small government that did not promote grandiose policies with ever cascading unintended consequences. Republicans need to remember that idea. Executive orders or even legislation cannot repeal economics.

How about a flat destination based corporate income tax without any border adjustment? That would encourage American businesses to relocate to the US. It would increase demand for American goods and American workers. And all without the inevitable price hikes from so called “border adjustments.”

The impact of Republican intransigence on passing the budget and raising the debt ceiling

It should come as no surprise that our country finds itself in yet another internecine squabble regarding questions about how much to, or maybe even if we should, fund governmental operations.  It is a source of national embarrassment that the United States hasn’t passed a full slate of Appropriation Bills since Fiscal Year (FY) 2008.  Looking back to FY 1977, there have been 17 funding gaps of at least one day or more (Congressional Research Service). The funding gap in Fiscal Year 1997 was, until now, the most highly publicized funding gap.  In FY 1997, the U.S. Government shut down from 15 December 1996 until 6 January 1997.  While our current shutdown commands the attention of the vast majority of the press, the effects of a shutdown are mostly temporary; they do not extend much past the lost productivity of government workers. There may be very real impacts in specific sectors of the economy. Closed national parks may affects tourism related businesses, closed Headstart facilities would affect the working poor, and closed licensing authorities may affect whether businesses get certain permits or not. However, this could be balanced against the economic activity created by people who substitute their vacation dollars away from national parks or by depending on friends and family for daycare. Moreover, the impact of the shutdown will begin to be felt – even in these sorts of affected sectors – only if the shutdown drags on. Thus, it is hard for us to get overly excited about another crisis of artificial proportions.

The bigger issue associated with yet another game of brinksmanship played by two kids who can’t play nicely on the playground, is the issue of a possible link between this fight and the yet-to-be-had fight over raising the debt ceiling.  Even without the current intervention by the Federal Reserve, the United States dollar enjoys reserve currency status, which allows the U.S. to borrow at very low interest rates.  Certainly artificially low interest rates hurts U.S. savers, but it is a boon for the U.S. in terms of lessening the burden of servicing the fast-growing U.S. debt.  Now, though, we are quickly approaching the date when all extraordinary financial measures will be exhausted and the U.S. will default on its legal obligations.  This date is widely believed to be 17 Oct (side note – just approaching the debt-ceiling deadline in 2011 caused the U.S. to suffer a downgrade to its heretofore sterling credit rating; an actual default will potentially have long-lasting implications, as it will most likely raise borrowing costs substantially and it will make asset valuation harder because treasury bonds will not be risk free anymore), but the first large, default-inducing payment comes on the 1^st of November when benefit checks are due.  Currently there are no indications that countries are actually worried about a default; in fact, the yield on the 10-year U.S. Treasury bond closed unchanged on the first day of the shutdown, which suggests there isn’t any panic selling as of yet.  But let’s do some back-of-the-envelope calculations to get an idea of what may transpire.  As of 31 August 2013 (latest data available from Treasurydirect.gov), there is $16.7 trillion of total U.S. Treasury securities outstanding.  The average interest rate now is 2.4 percent; this equals about $400 billion a year in interest payments.  Assuming that a simultaneous credit rating downgrade and a limited default causes a one percentage point increase in the average interest rate from 2.4 percent to 3.4 percent (a rate last seen in August 2009), interest payments will increase by $170 billion a year.  To put this in perspective, last year’s Fiscal Cliff deal is projected to raise $617 billion in new revenue over 10 years; all of this new revenue will be subsumed by increased interest payments in less than four years.

A less obvious but more pernicious consequence is the uncertainty that results from nearly five continuous years of partisan gridlock.  Businesses and individuals cannot plan if they do not know whether a law will exist or not. This puts a damper on economic activity and job creation. Moreover, to the extent larger businesses have more resources to deal with uncertainty, partisan bickering serves as a tax on small job creating businesses.

— Commentary provided by me and Jeff Smith.