MaxedOutMama

Real Men Don't Puke

2009-11-03T10:21:00.000-08:00

Not from anxiety, that is. Real men are only allowed to puke from running until they throw up, and stuff like that. That's manly, especially if you are running to get in the military.

But you can't puke from looking at stats like these:

Montly Treasury Statement Data: Page 5: Social/Retirement
2008 September: 71,307
2009 September: 68,212 (-4.3%)
Hospital Insurance Fund:
FICA 2008 September: 15,110
FICA 2009 September: 14,377 (-4.85%)
Self 2008 September: 5,099
Self 2009 September: 2,159 (-57.7%)
Total 2008 September: 20,209
Total 2009 September: 16,536 (-18.2%)
Income taxes withheld were down 18.6%

FICA 2008 August: 14,244
FICA 2009 August: 13,569 (-4.7%)
Income taxes withheld were down 11.8%
FICA 2008 July: 14,186
FICA 2009 July: 13,714 (-3.3%)
Income taxes withheld were down 12.8%

BEA Quarterly: Wage and Salary disbursements.

Q3 08: 6,567.7 Q3 09: 6,226.4 (-5.2%)

Daily Treasury Statements October:

2009 October (30th)
WIET: 124,731 (plus 3-4K?)
CIT: 7,521
FUT 249 (has to be entered from tonight's) ** FUT 249 + 298 = 547
2008 October (31st)
WIET: 142,514
CIT: 9,668
FUT: 662
2007 October (31st)
WIET: 144,841
CIT: 11,081
FUT: 714 (509 on last day)
2006 October (31st)
WIET: 131,086
CIT: 12,638
FUT: 707
2005 October (31st)
WIET: 121,918
CIT: 10,321
FUT: 711

Fortunately, I am a woman so I am allowed to puke. I am not sure that our fearless congressional weasels are grasping the fact that raising taxes is going to have some sharply diminishing returns approaching the negative.

Also, shifting more and more of the total tax burden to the wealthy is creating very volatile tax receipts:

Those high income people (Singles >.5 mil) get a disproportionate share of their income from businesses, investment income and sales of assets. We can see why the government would want to create asset bubbles, but it is not clear that asset bubbles in fact do create benefits in the long run. They seem to be creating debt and lower incomes in the long run.

The figures above for hospital insurance, which is a flat 2.9% of every dollar of payroll no matter how low or how high the wage, can be used to impute wage drops. So YoY total wages and salaries were down well over 4.5% in September, and are continuing well down in October. We are not entering the zone of YoY comparisons to the cliff-falling stage in 2008, so one is hoping to come up with some stability somewhere soon.

Some taxes are pretty much fixed, which implies that net tax burdens per capita are often rising (including state and local taxes such as property tax).

Nominal wages do not normally drop in recessions; regardless of whatever we may call it, this one has some mechanics that are more like a depression than a recession. NIPA tables can be found here.

In this context, you might want to read this Volokh discussion on the high benefit/high tax state (CA/TX models). There are two important points. First, in many ways Texas is delivering better on standards such as education. Second, a lot of the tax burden in CA has been shifted into incomes and retirement for public employees rather than services - look at this BEA graph, and notice the different curves for public/private wages:

So the diversion is happening in society at large, not just CA.

Quoting from the article:

What is surprising is the growing evidence that the low-benefit, low-tax alternative succeeds not only on its own terms but also according to the criteria used by defenders of high benefits and high taxes. Whatever theoretical claims are made for imposing high taxes to provide generous government benefits, the practical reality is that these public goods are, increasingly, neither public nor good: their beneficiaries are mostly the service providers themselves, and their quality is poor.

But I wonder if the California/Texas comparison isn't addressing a US-wide problem. When I was kid public employees had much better job security, considerably better benefits and lower wages. Now they have MUCH better job security, MUCH better benefits and higher wages. I suspect that the current downturn will produce a paradigm shift due to necessity.

House Medical Plan

2009-10-30T17:42:00.000-07:00

I had a bunch of stuff to post on, but I am not feeling well at all, probably due to taking off the flat, putting on doughnut, getting tire fixed, and putting on tire in the cold wet. Most of the time I do pretty well, but either the flu blew something loose internally or this is my old trouble back again, because this morning my muscles had stiffened so badly that I was nearly immobile.

So I decided that since I was in pain anyway, I'd do some research on that 1,990 page health care bill. I didn't get too far even with the summary before I cracked up laughing and did myself further damage. I think I tore something loose in my rib cartilage. So be warned - you might want to exit to safety before reading on.

Here is the summary and it is only 11 pages. This has many awesome features worthy of Dilbert, but the one that did me an injury is on top of page 2. The bill contains a mandate to provide coverage for businesses, and if they don't, they have to pay 8% of wages to the exchange. For a lot companies currently, that would be a good deal, so I have always seen this as a severe problem that will shift coverage to the subsidized exchanges.. But this - this takes it a step further:

Small business protections. Small businesses with annual payrolls below $500,000 are exempt from requirements to offer or contribute to coverage, including the 8 percent payroll contribution for failure to provide health benefits to their workers. As a result of this exemption, 86 percent of America’s businesses are exempt from any requirement to provide coverage to their employees. The 8 percent requirement is phased in for small businesses with an annual payroll between $500,000 and $750,000.

Well, there are many ways to structure businesses and employment, and I suspect that within three or four years after passage, it will be more than 86 percent. For example, there is employee leasing - the legal structure of which is that your employees work for another business. It would not be difficult for some large employee leasing firm to set up a franchise system in which most employees worked for small units that basically were shell firms below the 500K which would then contract employees to much larger firms for a percentage cut of payroll - say 2%. How much do these DC bozos think the average employee earns? Since one person can own any number of these luscious little profit centers, I think I'll plan to own about 20. It takes paratisization to a new level, but hey, in the land of the crooked only the honest are slaves.

Needless to say, this is going to be like a dagger to the heart of large businesses in the US, because smaller low wage competitors just got handed an 8% of payroll price advantage. The natural result would be to force all businesses to the lowest level of wages, shift employment structures massively, and throw most employees on the exchange.

Roaring with laughter as the light dawned, I shot over to Coyote, who sees the writing on his wall in the form of "Mene, Mene, Tekel, Upharsin".

The implications for my business is staggering. I have already mentioned in the previous post that it imposes an 8% tax on wages on my business — a business where 50% of revenues go to wages and margins are in the 6-7% range. You do the math.

Worse for us is that nearly all our competitors are ma and pa companies with less than $500,000 in wages a year, meaning that our competitors will be exempt from these taxes, giving them an automatic 4% cost advantage over our company. Great.

Twelve seconds after this thing passes, I will be on my phone to my attorney to figure out if it is possible to break my company into multiple corporations that all fall under the 500,000 wage limit. The paperwork and administration for this would be a huge hassle, but it can’t be as high as 4% of sales.

Well, the other option is employee leasing, Coyote. I may have just found my next million-dollar idea. Because damn straight, it's going to be easier and cheaper for you to lease them from multiple businesses that provide a unified type of service than split up your whole company. Call me. We'll go into business together. We'll make millions the first year. That is, we will if I can keep my rib cartilage whole.

It just goes on and on like this; the incentives in this bill are for all large companies to fire most of their employees and shfit their workforce to part-timers and leased employees. Thus, and I was already in pain from convulsive laughing when I reached the top of page three where what to my wondering eyes appeared but:

Government responsibility. It is the responsibility of the federal government to ensure that essential health coverage is affordable and available to all Americans by establishing consumer protections and insurance reforms, affordability credits and overseeing a fair marketplace for people to choose among options.

Which immediately translated in my mind to:

Government responsibility: It is the responsibility of the federal government to ensure that essential health coverage is affordable and available only to all Americans as wards of the federal government by ensuring that their employment is part-time or temporary, and low-paid, and by destroying all unions. Say goodbye to your way of life! Get used to kissing the ass of your Congress Critter!

I think anyone who knows anything about business will find these 11 pages to be a true eye-opener. Small businesses will be eligible to buy coverage through the exchange after 2013, so that's when you can look to get hired again. You ain't gonna be making much, though, because there is a huge incentive for corporations to lower their costs by ensuring that the government pays a good portion of your benefits:

Affordability credits. Provides financial assistance for premiums and cost sharing for individuals and families with incomes up to 400 percent of the federal poverty level (FPL). Affordability credits are offered on a sliding scale such that premiums range from 1.5 percent of income at the lowest tier to 12 percent at 400 percent FPL. Provides additional assistance for households with incomes up to 400 percent FPL by limiting cost-sharing to 3 percent of plan costs at the lowest tier rising to 30 percent of plan costs at 350-400 percent of FPL. Specific out-of-pocket maximums are added to protect individuals at each income tier.

You can access the FPLs for 2009 here; they are adjusted each year and published in the Federal Register. It is a beautiful thing.

Remember that exercise a few posts ago in which we determined that the US median household income for 2008 was $50,303? Take a married couple with one child earning $50,303. That's three persons. The FPL in the 48 states is $18,310, so their income is 2.74 of the FPL. The federal government is going to be subsidizing these folks. Their premium cap is going to be around 5K, and their out of pocket is going to be about 7-8K. If the family had high costs, it would pay them to get less salary; no doubt their employers would be happy to comply. Because if they get their wages down to 250% of FPL - 45,775, their out of pocket cap drops by 4K, which after taxes is going to be net gain in income for them, especially considering their premiums are going to drop more than $1,000 and their copay is going to drop 7%. Since only families and individuals with high medical costs are going to be buying insurance (see the end of this post), that's a massive incentive to fix it up with your employer.

Needless to say, you can count on federal wage tax receipts dropping as this thing goes into effect, which is why CBOs scoring is ludicrous.

Medicaid eligibility goes to 150% of FPL. That's another wage suppressor.

The revenue provisions are impressive:

Revenue. The bill would impose a surcharge on taxpayers with adjusted gross income in excess of $1 million (married filing a joint return) and $500,000 (single) at a rate of 5.4 percent. The bill also: delays implementation of worldwide interest allocation until 2020; limits eligibility for reduced treaty withholding rates; codifies economic substance doctrine; information reporting for payments made to corporations; eliminates nontaxable reimbursements of over the counter medications from HSAs, HRAs, and health FSAs; limits contributions to health FSAs to $2,500; increases the penalty for non-health related distributions from HSAs (from 10 percent to 20 percent); eliminates the tax deduction for employers who receive a government subsidy for providing retiree prescription drug coverage; impose an excise tax of 2.5 percent on medical devices used in the United States; and ensures tax parity for employer-provided coverage for domestic partners and other non-dependents. The bill also clarifies that an employee’s share of premiums for employer-provided coverage offered through the Exchange may be paid on a pre-tax basis through a cafeteria plan, but Exchange coverage that is not employer-offered is not eligible to be offered through a cafeteria plan.

Of course stuff like taxing retiree prescription plan benefits pretty much ensures that employers will cut them, and since many people in their 50s and early 60s rely on this coverage, that's going to be a real privation for them. The HSA and FSA cuts eliminate one way of providing highly economically efficient insurance; I guess Congress doesn't like economic efficiency. Taxing medical devices will directly raise costs paid by insurers and thus insurance, but heck, most people will be receiving their coverage through the government exchange anyway with 8 years. No corporation can survive when it raises its costs above those of its competitors.

It also appears to take an axe to Medicare reimbursements through a bunch of nice-sounding garbage that really gives a bunch of excuses to cut payments and increase harassment of doctors and institutional providers.

You might wonder why, since this thing is supposed to be so wonderful, we would need an extensive program of grants for school-based clinics. I wonder why too, but I assume this is supposed to cover reproductive services.

If this were not in fact serious, it would be wonderfully funny parody. As it is, it qualifies as a Greek-style tragedy.

The taxes suggested are not going to be nearly enough to pay for this. There just aren't that many tax returns at that level; even if this tax were applied to all AGI for tax returns over $250,000 it wouldn't come near to paying for it.

Because premiums are going to go through the roof! The penalty for not buying coverage is 2.5% (That's $250 per $10,000 of AGI) of AGI above the filing threshold. The filing threshold for singles is above 9K for 2009. Nobody can be denied coverage for pre-existing conditions, so many moderate-income individuals will pay the penalty and just buy coverage through the exchange when they really need it.

Suppose you are a young person making $30,000. Your fee for not buying coverage is going to be under $550 annually - thousands less than buying coverage. If you are in good health, you'd be a fool to buy the coverage; it will be there when you need it and you are only disadvantaging yourself.

Altogether the most idiotic piece of legislation in a long time. It will add trillions to the deficit in short order and jack health insurance rates sky-high within a few years of going into full operation. Needless to say it is not sustainable - it is, in fact, designed not to be sustainable for the reason of not offending anyone by forcing them to pay for it, so of course it will be repealed later in sections. At that point it will actually be cheaper for many high-income persons to accept a 17-20% wage tax for universal health. So that's how we'll get there; employers will be forced to drop coverage and exchange premiums for those not subsidized on the exchange will be so massve (20-30K annually?) that the Ann Althouses of the world will sign on to universal as a way of keeping more of their money.

I have never laughed so hard over a piece of legislation, but in the end it will be an expensive bit of comedy. The Medicare provisions are lethal to health care for the elderly, I think.

Economically speaking, it would appear that the individuals who drafted this bill have not a clue about business in America. This does not surprise me, but is forcing destructuring on American business truly a good idea at an economic time of such diifficulty? One would suspect not.

But then, those who have brought us fake jobs for $160,000 a job probably think this is cost-effective. I don't know. Businesses have to be alert to this type of thing; I don't think the feedback will be good, and one wonders what type of cynical promises have been made in back rooms.

If you are interested in simulating what this will cost over time, most of the data you need can be found on page 7, Table 1 of the 2007 IRS tax return summary and in the ensuing pages. You won't get much more than 80 billion from the surcharge, if that.

GDP, Titanic, Desk Chairs

2009-10-29T10:30:00.000-07:00

See, nothing changed on the carrying wave. Nothing. See this prior post, and look at the updated graph for Q3. Just click on it, and meet your doom.

Gross private domestic investment is still sitting at 11% of GDP. The import/export contribution worsened a bit.

The combination of declining real disposable incomes, declining tax receipts, and trying to squeeze growth out of government spending and personal spending is an exercise in futility. It can only work short term, and the more the government borrows the more you are stealing from future growth. We will borrow that money now cheaply and be paying ever-escalating interest on it.

Figures here. GPDI at 11% of GDP. Government spending at 20.7%. Both of these did not change from Q2. PCE rose from 70.7% to 71.0%. Net exports worsened a bit, moving from -2.4% to -2.7%, equivalent to Q1.

That's a whole fat lot of nothing. This is what Who Struck John meant when he was talking about sideways until next year, then down again. This is the sideways.

It would be time to rationally panic and start consider doing something, or learning Japanese so we can find out how they do it. We are already being carry-traded; the next step is for world growth to resume and for all our industries to start exporting investment. If we want to stop that, we need to cut corporate tax rates!!!

Everything's Dandy, Sugar and Candy, Lala LA

2009-10-29T07:09:00.000-07:00

I wasn't thinking that this GDP release would be all that joyous, and it is great to see some positive numbers.

But the underlying details aren't very encouraging. It looks like we have about four more months left on the inventory adjustments before those fade out.

Because of the overhanging debt problem, this is one of the few times in my life I've paid more attention to current-dollar measures than real measures. And that's what just kicked me in the face about this GDP release.

Table 1 gives you the change from prior periods in "real" terms. That plus 3.5 looks awfully nice, and I weakly wanted to stop there. Sadly moving down the table, we see that personal consumption expenditures (PCE) increased 3.4%, whereas disposable personal income dropped 3.4%. This might puzzle a person until one realizes that this far into a down period, people really, really start needing things. Everything from cars to lamps to clothing. So they are not as conservative as they would like to be. However one cannot assume that falling disposable personal income will correlate indefinitely to rising PCE; this is not how the world works in real terms.

I was steeled to the falling incomes bit, so I proceeded bravely onward to Table 2, which gives us the percentage contribution to the change from prior period. PCE accounted for +2.38%. Gross private domestic investment accounted for +1.22, but the vast bulk of that was inventory adjustment at +0.94%. The rest is basically gubmint spending at +0.48%, but state and local is declining, so the federal gubmint had to increase spending by 0.62% to create that positive.

So at this point we heave a sigh and acknowledge quietly to ourselves that people are spending money from savings (some of which is coming from written-off debt!) and government is spending mythical tax dollars (borrowing) in order to push this through. It is the personal spending which concerns us really. Disposable personal income is defined as personal income less taxes. This is why increasing taxes to spend more government money does not get you out of a recession but gets you further in. You can only increase taxes on the population in small wedge segments, or disposable personal income falls more than GDP increases from the government spending. Of course, one of our current problems is that state and local taxes are going up and have gone up for years disproportionately to personal incomes of many people living on stable incomes, which is tending to erode their spending power.

Brooding about PCE and declining disposable personal incomes I proceeded onward to Table 3, which gives us GDP level and change from preceding period in current and real dollars. Here is where one wants to stop and sing the Marine Hymn before proceeding; one suspects that this could be painful. The reason we are so interested in current dollar measures is that debt is paid out of current dollars.

So, metaphorically guarded by Marines, this one proceeded to look at current dollar measures in Table 3. Noting that GDP increased by about 150 billion, and noting that PCE increased by about 150 billion, the Marines and I scrutinized PCE with some care. Spending on motor vehicles and parts increased by about 39 billion. In the work-up for this release, I had figured that 5-7 billion was the real increase ex-stimulus, so we are going to subtract 32 billion as being evanescent and not a carrying force.

Gasoline costs were a concern. Gas prices increased, but real consumption only increased a couple of percentage points. Current dollar gasoline spending increased 48 billion, of which about 46 billion is definitely due to price changes. This goes into the category of "forced", which is really net retraction from other spending capacity; forced spending for consumers tends to shift their discretionary spending patterns down by more than the forced spending increase until the pattern stops changing. In other words, most consumers are likely to be extremely cautious about overall spending for some time to come.

In the services forced categories, health increased by about 19 billion; financial services and insurance increased by about 11.5. That takes us to 30 billion. So now we have PCE of 150 billion going to 128 billion without CARS. 128 billion - 46 billion - 30 billion = 52 billion. That's a kick in the teeth, that is. We did not emerge from Q3 with much of a carrying force at all.

If you think this is an irrelevant exercise, think again. Private inventories are still falling; the net contribution to gross private domestic investment in Q3 derived mostly from the fact that non-farm private inventories fell only about 147 billion in Q3 vs Q2's 177 billion drop. Non-forced spending has a lot to do with both jobs and moving goods out of inventory.

Even the Marines cannot save us from the sad reflection that PCE is going to be curbed later in this cycle by the fact that several millions of households are now living effectively rent-free through the simple recourse of not paying their mortgages. Eventually, this economic stimulus is doomed to end and it is hefty. Figuring that the average household manages to clear an extra 7K after compensating for moving expense, higher credit, etc, and figuring 2 million households a year, that gives us 2,000,000 * 7,000 = 14,000,000,000 or a 14 billion dollar stimulus, no small factor when you consider that that is 9.3% of the annualized increase in PCE seen in this GDP release. With initial claims hanging in there above the 500,000 weekly level, the picture is a bit intimidating.

There has also been a substantial net boost to spendable incomes and thus PCE from the lower mortgage rates. Those rates will hang in there in the future (who the heck is going to refi a 4.9% mortgage?) but the additive effect is about gone and it is real stimulus to the consumption side of the economy. Seven million housholds paying $2,400 less a year on their mortgage than otherwise is a net 7,000,000 * $2,400 = $16,800,000,000 (16.8 billion) added to spendable income. And we've hit the trough on mortgage rates.

So we are locked into increasing government stimulus to try to compensate for the net drags we believe to be coming in the first half of 2010. Oooh, that smarts. Boy, does that smart.

The combination of forced PCE increases with decliniing real disposable income suggests that the only real cure for this economy is consumer debt write-offs, which makes the wacky idea of giving households with 225K annual incomes 8K to buy a house look even stupider, doesn't it? It's kind of as if a person with declining income were running up debt on his credit card to buy gold toilet fixtures on his house just because he has a six-month very low APR on his credit card.

Update: No, it's not me with a bad case of the blues. I have a flat tire, but not the blues. Forbes article:

You Know, I Believe I'm Beginning To Get Riled

2009-10-27T21:08:00.000-07:00

Update: Calculated Risk is following this, the latest word is that perhaps Reid's attempt to attach it to the unemployment extension bill is causing upset. That's very good. This is one worth contacting Congress over. It might also be worth contacting the media; their amazingly uncritical reporting of this might change if they are embarrassed into a little research.

Also, Tim from HSH asked what the cost of the credit would be. There are several tiers of cost. The first is the direct funds expended, and that will be in the tens of billions of dollars. The second is involved in the fact that the purchase credit is inducing some people to buy homes when they shouldn't, which factor is aggravated by FHA accepting the credit as a downpayment. As soon as the credit ends and Fed MBS purchases stop, mortgage rates will rise. Then we'll have the following situation: We'll have brought forward poor quality demand. Those buyers who were marginally qualified and needed the tax credit to purchase will have bought houses on which they will be underwater. Needless to say, that will cause further defaults and sales at further losses. Almost all of those sales will be handled by the GSEs, which means that the taxpayers will end up with the losses. And that's where most the costs lie. I will post with more detail on the credit card issues and the expected real cost of the home purchase tax credit. End update.

I've been watching this video over and over again this evening. It is about the only thing that accurately conveys my feelings:

So they want to extend the housing credit, do they? And create a new bracket which will give money to people who are "move up" buyers earning up to $250,000 annually? Because, hell, everyone knows that Granny must go, but buying houses for people with incomes solidly in the top five percent of all US households is a crucial and progressive element of the US economy. I mean, hells bells, there's nothing so American as giving money to the top five percent to buy property from the top one percent.

This is the stuff of which revolutions are made. I cannot hope to find the words to accurately describe this insanity (Bloomberg article):

The deal would reduce the size of the tax credit to 10 percent of the sale’s price, capped at $7,290, the people said. The credit would be available on home purchases that are under contract by April 30, and borrowers would have 60 days more to close the sale.
...
The demand for new homes and condominiums may increase by “more than two times because you’re allowing step-up buyers into the equation,” said Andrew Parmentier, a managing partner at Height Analytics, a research firm in Washington. “ You just opened up a whole new pool of people who can buy into those empty homes and empty condos that were built out.”

The income eligibility for first-time homebuyers would remain the same at $75,000 for individuals and $150,000 for couples. The income criteria for step-up buyers would be $125,000 for individuals and $250,000 for couples.

Listen, if we have to pay people 1% of the purchase price to buy an $800,000 home when they've got say, a $200,000 household income, we have a serious problem with insane high earners. If anyone thinks this is really going to make a difference to most people who want to "step-up", that person has rocks in his or her head.

I would like to daintily point out certain facts itemized (in a very ladylike fashion) in my last post. In 2008 the lower limit for the top 5% of households was $180,000. It is nice to see our Congress Weasels trying to take care of the welfare of the top 5% of households by income, with money we don't have. It is even nicer to contemplate what this "step-up" credit will really be used for - buying a new, cheaper home and walking away from the old one. This is the "pay them to default" tax credit. I also find it wonderful to contemplate that Congress is just so darned set and determined to balance the budget that they are proposing to raise taxes on health insurance next year. But knowing that the union guy earning 40K is tossing some revenue in the bucket so the 200K guy can buy his seventh house is gonna make that feel little ouchie feel sooooo much better.

All of this money is just being thrown away. Note that this is of course a bipartisan deal, shepherded carefully along by prominent Congress Weasels Dodd and Isakson. It is even nicer to understand that this is supposedly being tacked on to the unemployment extension, so that the other Congress Critters can be induced to vote for it, in case their Critter consciences raise difficulties. They are not all weasels, you know.

I can only imagine the scene on the floor when this bipartisan move toward a brighter tomorrow is coming up for a vote. Why, they'll have to detach the Weasels from the pages (creating a giant sucking sound that will reverberate through our nation's capital ), drag Craig out from the men's cloakroom (he spends a lot of time in there practicing his tap-dancing), remove the banker lobbyists from their posteriors (please, please, remember those breath-mints!), rip Barney Frank away from his latest consultation on foreclosure avoidance with the the GSEs, get Rangel to hold those mortgage apps for low-cost refis on his numerous primary residences (he's done very well with those so far), extract Dodd and Conrad from their meeting with the FBI regarding VIP loans, and interrupt Reid's very, very important calls on some very, very important business. But we can all feel great about the fact that Isakson has nothing whatsoever to do with Georgia real estate, and will absolutely, positively not gain anything personally from this sort of thing. It's not like his business is, you know, real estate, or as if he ever had anything personally to do with the sea of defaults around the Atlanta area. As he assures us in his own words, he is a completely disinterested expert:

Isakson has pushed hard for a tax credit for homebuyers since January 2008 because he knows that it will work. In the mid-1970s, America faced a similar housing crisis when a period of easy credit and loose underwriting flooded the market with new construction. Interest rates rose, the economy slowed and America was left with a three-year supply of vacant homes. Congress responded by passing a $2,000 tax credit for anyone purchasing a new home for their principal residence. Isakson, who was in the real estate industry in Atlanta at the time, says the results were clear and swift as home values stabilized, housing inventory dropped and the market recovered.

Isakson spent more than three decades in the real estate business, beginning his business career in 1967 when he opened the first Cobb County, Ga., office of a small, family-owned real estate business, Northside Realty. Isakson later served as president of Northside for 20 years, presiding over the company’s growth into the largest independent residential real estate brokerage company in the Southeast and one of the largest in America.

Sniff. It's great to have these people looking out for us, and to know that there is not one iota of self-dealing in this proposal. I'm also just really touched and awed at the very high standards of professional journalism which prevent newspapers from ever mentioning any possible conflicts of interest involved in such proposals.

Anyway, if you were perchance wondering why economists not paid by NAR pretty much uniformly agree that the housing tax credits are a totally useless economic stimulus on a par with trying to wake up in the mornings by lacing your coffee with Valium, but yet somehow this message never penetrates through to the weasel warrens of Congressional power, you might want to read about one of the very earliest US cases that went to the Supreme Court, Fletcher v. Peck. Dear readers, this is as Georgian as peanuts. Remember when those started showing up in everything? When will you learn?

Night of the Living Undead Realtors and Property Developers is a pretty scary film, now playing in a Congress near you! A free people can not long tolerate such insults, so think it over and call your Congress Weasel. I'm sending mine a link to this video along with a gentle suggestion that I suspect that this legislation is injurious to the public interest, a hint that perhaps a bit more attention to the fate of common folk might be warranted, a respectful reference to the fate of the Fletcher v. Peck legislature, and a Patton quote:

All right now, you sons of bitches, you know how I feel.

Next Installment Of The Hopium Blues

2009-10-27T07:17:00.000-07:00

It's all about incomes, really. And the implication of declining incomes for tax receipts, entitlement programs, the needs of the population, etc. Without starting from the fundamentals, it is hard to design workable social or economic stimulus programs.

First, we need some perspective. See Census data here and here for the following.
Click on this for a larger image. What you see here is total housing units from 2000 on, from Census. These are estimates, but pretty good, and no matter how much one discounts these estimates, the fact is that total housing units rose by over 12.5 million from 2000 to 2008.

And what did incomes do? Yes, we have another clickable table, also from Census:
This table gives you ten years of income history by household income quintile in 2008 dollars. That's 1998-2008. The first column is total households. The next four are upper limits by 5th, and the last is the lower limit of the top 5%. US incomes are much flatter than most people want to believe, which is why cutting taxes on everyone but the top 5% is such a futile proposition.

Note the following over this decade:

The lowest fifth saw household income drop from $21,259 to $20,712.
The next fifth saw household income drop from $40,113 to $39,000.
Note that the median occurs in between these two brackets
The following fifth saw household income fall from $63,764 to $62,725.
The next quintile saw household income rise from $98,936 to $100,240.
The 5% bracket saw household income rise from $174,390 to $180,000.

Note that all income brackets are off their ten year high.

The bottom quintile saw income peaks in 2000, at $22,405.
The second quintile saw income peaks in 2000, at $41,260.
The third quintile saw income peaks in 2000, at $65,233.
The fourth quintile saw income peaks in 1999, at $102,383, then fell through 2004, and reached a second peak in 2007 at $103,842.
The top five percent peaked in 1999 at $183,493, then fell into the mid 2000s, and reached a second peak in 2006 at $185,824.

I have discussed tax receipts in 2009 with some thoroughness, and if you have read those posts I think you'll agree that all of these brackets are still falling.

To some extent we are seeing demographics here. As people enter their later 50s, the incomes of those in private industry tend to level off and then start declining. Only government workers maintain their jobs and their income levels.

Another factor is that the incomes of the top brackets were heavily intertwined with the asset bubble. and the grossly disproportionate government/private compensation premiums. See 2006 summary of federal ratios. Over this decade, wages and benefits paid to government workers grew whereas private incomes fell. This last, is, btw, the reason why the WIET declines are so tightly linked to the government wage and salary job losses. Government job losses over the course of this recession have been hugely concentrated toward recent months.

But government jobs are going to continue to decline. This has major implications for financial assets, because as these jobs decline, retirement benefits are going to grow hugely, but the ability to shift money into the retirement funds is declining. So 401k and pension plan benefit stimulus for stocks and bonds is going to erode.

Somewhat obviously, housing values are going to continue to decline for a few years. All the money dumped into housing credits is basically being wasted. As incomes fall and mortgages shift toward actual repayment plans instead of eternal borrowing plans, housing values must fall to compensate. One can shift the adjustment timing a bit by spending all this money, but the end point will be tied not to interest rates, but to incomes.

So the best real stimulus for housing is to concentrate on generating private sector jobs.

If you will look at the second table again, you'll see that incomes for all these brackets declined following the 2001 recession, which really extended into 2003. The income bottoms are centered on 2004, with only the lowest quintile troughing in 2003. You will see a similar pattern on this recession, even if we do not tip into a second cycle of contraction; incomes are going to bottom several years after NBER's official recession end date.

Somewhat obviously, household formation is constrained by lack of income. With the great increase in housing units since 2000, rents will fall until we reach an equilibrium between incomes and rents that allows new household formation. Housing values are highly related to rent, and thus to household incomes.

There are less obvious implications which have strong economic implications. The distortion between government/private incomes is not tolerable. Here we will go back to Table A-5 from the last employment release. As is normal in recessions, the ratio of public/private employment rose from 18.85% in Sept 08 to 19.6% in Sept 09. However private incomes are falling too far and too fast to support taxation levels that can support our government employment. This will either be corrected by public policy or by a hard turn to the right, which is why conservative Ds and conservative Rs are abruptly beginning to sound so much alike. Recovery largely depends on some highly boring and not very marketable adjustments, plus a hefty dose of realism. The Rs have to drop the tax-cutting mantra, and the Dems have to drop the spending mantra. We are living in an era of sharp constraints.

The other obvious implication is that we simply cannot continue to shift costs from government-paid insurance onto those on private insurance. That is why the protests against the current health care "reform" bills have legs and persistence and are coming from both the right and the left. Whether you are a progressive or a hidebound conservative, reforms which promise government subsidies but do not attack the genesis of the problem are not reforms, but cosmetics that will induce sharper future cuts. Since everyone wants to be able to access medical care, this is a rising concern. Since medical costs in the private sector are rising while incomes are falling, it is an acute concern.

Because we are essentially faced with problems of social "fairness", the electoral map is biased toward Democrats. But if the solutions chosen continue to suppress growth, the electoral map will abruptly shift towards Republicans. It is no accident that taxation and employment policies which grossly favor government workers over private workers were those that formed the basis of last year's national elections, and it is no accident that large industries with heavy government lobbying power are managing to get the government to give them hundreds of billions of dollars. The big companies - insurance companies, auto companies, energy companies, financial companies - have all been very successful at getting federal handouts since the Clinton era, and current proposals amount to a huge shift toward handing out more money to relatively prosperous segments. This cannot continue - it will not continue, because the price of its continuance is dollar deflation and a vastly lower standard of living for most Americans.

We'll find a new balance somewhere. None of this is impossible, but the transition to a economy that is capable of growth is going to require a new kind of electoral calculus. Just as CA has been forced to start cutting benefit programs and government spending, the federal government is now faced with the same choice. Every time we pay T. Boone Pickens to build another windmill, we are in effect handing a good portion of that bill to Americans with very moderate incomes, who are already overburdened by their own debts.

Median household income in 2008 (see 2008 Census release) was $50,303. Mean (average) household income was $68,424. Median income for owner-occupation households was $62,082.

While household incomes did not increase for a decade for most households, here is what happened to household debts:

Obviously that correction is not over either. A lot of that is mortgage debt. Let's look at consumer credit outstanding, which is composed largely of CC debt and things like auto loans, student loans, etc. The historical tables for SA consumer debt are here:

In 1998, outstanding consumer credit SA ended at 1.42 trillion. In 2008 consumers ended the year with 2.56 trillion, which we have since paid down to 2.46 trillion. Stated in current dollars, in 1998 the upper income limits for the middle fifths (2/5ths and 3/5ths) of households by income were 30,408 and 48,337. Which makes things look better, but the truth is that consumer debt is paid always in constant dollars from disposable income, which has only declined over that period. It's pretty clear that US consumers compensated for lower incomes with more debt - for a while, until marginal debt repayments increased more than marginal increases in incomes, which then pushed us over into contraction.

This is the signal I picked up in stores this spring, which is only increasing in strength. Inflation cannot rescue us from our debt crisis, because inflation is dependent on rising incomes. Nor can lending more rescue us; this thing toppled on bad lending when people increasingly became unable to repay their loans.

This post is now way too long. I was going to go on to discuss credit cards and the current rumors, but that will have to come later.

Well, You Live And Learn

2009-10-26T11:31:00.001-07:00

I'm deep in tables, finances and NIPA tables. We get the first GDP estimate for Q3 this week, and I've been running through my stuff so I can plug it in quickly. I probably won't believe it though.

NIPA Tables (find 'em here!) Through Q2:
Click on this to get a larger image that's actually worth something.

This is from NIPA Table 1.1.6 showing GDP and several components in chained dollars. The top line is GDP. The line under it is PCE. GDP had rolled back to early 2006; PCE has only rolled back to late 2006.

The last three lines are government, Gross Private Domestic Investment and Exports.

Now click on this one and open it in another tab.
Same data, really, but this shows the components by share of GDP since 1970.

Here you can see the nasty fall in GPDI and exports in this recession. But what is of particular interest is that PCE (Personal Consumption Expenditures) has grown rather than dropped as a share of total GDP over the course of this recession.

Needless to say this has some rough public policy implications; raise taxes and you pull GDP down unless you are heavily stimulating GPDI in such a matter as to raise incomes and expenditures enough to compensate.

The only way to really pull off that hat trick quickly is to shove the money in infrastructure, and believe me, I do not mean light rail. If we were to cancel the more wacky portions of the stimulus we could throw another 100 billion or so into infrastructure. The timing is wrong, and it needs to get out there quickly, so you'd have to do something else to hit the northern half of the country. But that is just the short term - we need something in place by the end of the year, within three months at the latest.

Gross private domestic investment is at a series low at 11% of total GDP. It will pop up a little (or should) due to inventory clearing this summer, but I am not sure at all that the carrying trend isn't still slowing. Go back and look at the 74-84 sequence. Note that GPDI never dropped nearly this low as a share. It never even got close to 15% of GDP, whereas it is now 11%. That's not viable. You see it took three dips - one associated with the 75 debacle, which was really bad on the industry side. Then it took two associated with the 80-83 woe. You see the early 90s dip. But the low in 75 (only one quarter) was 13.5% of GDP. It was only in the 13s for two quarters, hit the low in Q2 75 and was back in the 16s in Q2 76. The low in the 80s sequence was Q4 82 and Q1 83, and by Q2 83 it was back to 15.6. Q4 83 it was in the 17s again.

There's no comparison to these previous recessions in this one. This one is more than twice as bad in its growth implications. The last three quarters of 2008 GPDI share was in the 14% range. In the first two quarters of 2009 it was 11.9% and 11% of GDP. The components of GPDI are nonresidential structures, residential structures, equipment, software and inventories. Here is a graph of these components in chained dollars so you can get a feel for their absolute levels: (Click on this for a larger version)

We should be through most of the inventory correction and we will get a bit of a boost from that, but it is not going to account for growth for long. Residential investment may or may not have bottomed, but in the near term it is shelfing nicely. Nonresidential (commercial and public) probably will fall through at least next year; commercial is way overbuilt, vacancies for most categories are very high. That leaves equipment and software, and the business readings are such that any growth in that category is probably going to be quite slow. Smaller businesses have not finished their decline yet (nor have many larger businesses), and they account for a big portion of employment, equipment and software. All of this implies that we won't get back over a 14% share for over a year, which is not strong enough to take us back to sustained growth with our debt drag as soon as the inventory correction is through. We might get back to the 12s for a bit, but that isn't going to get us anywhere.

For all intents and purposes, GPDI is the economy. If that doesn't pick up, the economy doesn't pick up. According to these metric, the correction was nowhere near over in June.

PCE and GPDI are linked. If you stimulate PCE, you should indirectly stimulate GPDI. However, we have that nasty little import problem, so of recent years feeding the PCE beast hasn't had as much effect on GPDI.

If you stimulate GPDI, you create jobs and that boosts wages, taxes and PCE quite quickly. GPDI is the major growth driver of the economy.

The other thing I would do is panic in a coldly rational fashion and cut corporate tax rates 5% across the board with the top rate being dropped to 25%. Permanently. Because it is now clear that we cannot afford to maintain PCE without GPDI, and you can only stimulate GPDI so much without raising taxes, which we cannot afford to do on most people, much less on corporations.

A VAT (value added tax) would probably result in a decade-long depression. I think not.

We cannot afford to raise health care taxes in January per the Baucus plan. No way. When the retirement bulge really hits, we will have to raise taxes on the higher earners. But we will only be able to do that once, so it is futile to do it now.

I feel truly sorry for this administration. Like the Bush administration, it finds itself caught in imponderable external inexorables that can only dictate backing away from many of Obama's campaign promises. The good news is that he is still very popular (given this economy, those poll numbers are great!). The bad news is that this administration may not be ready to suck it up and face reality yet.

The truth is that the only way they can get enough growth going to accomplish any of their domestic goals is to pull a Reagan-Palin. Cut corporate taxes sharply, drill, baby, drill (we can't afford green energy that's not cost effective, and only hydropower is en-masse), snuggle and cuddle up to the US Chamber of Commerce, and then proceed to slowly adopt some reform proposals along the lines they want.

But we don't have the room to go to single-payer now. We do have the room to adopt market reforms and raise Medicare reimbursements. We know we have to raise Medicare taxes anyway to about 3.90. Do it now, raise the reimbursements, go HSA for private, and he'll get a lot of support from businesses because health insurance costs will correct.

The Pelosi wing of the Democratic party is zombified by the economy. Obama's going to have to pull the plug on it.

Foul Beasts, Enemies Of The People's Republic, BEWARE

2009-10-23T10:29:00.000-07:00

Ah, by the time the US Chamber of Commerce is on your enemies list, you need to back away from the Koolaid. Some Democrats have felt driven to take a stand:

“It’s a mistake,” said Rep. Jason Altmire, a moderate Democrat from western Pennsylvania. “I think it’s beneath the White House to get into a tit for tat with news organizations.”

Altmire was talking about the Obama administration’s efforts to undercut Fox News. But he said his remarks applied just the same to White House efforts to marginalize the U.S. Chamber of Commerce, a powerful business lobby targeted for its opposition to climate change legislation.

Hey, who hired the Episcopalian unification strategist for White House communications? Is anybody really thinking up there? At a time when Americans want jobs, and then some more jobs, and then maybe some better-paid jobs, wouldn't it be wise not to be throwing political garlic at the US Chamber of Commerce?

Is this Chavez-like? When do the grocery stores get confiscated?

The Shrink seems a bit concerned:

On the other hand, if their behavior reflects the character of the President and those around him (and the evidence unfortunately points in that direction at the moment) here is considerable cause for worry. In such a case, Obama's poorly contained anger can lead him to make errors of judgement which are consequential. Further, those who cannot tolerate criticism cannot learn from their mistakes. They believe that all criticism is based on a personal repudiation and animus and as a result, never hear the content of the criticism. As a result those who criticize them become enemies who must be crushed in order to remove the stain on their escutcheon.

This is just kid stuff, but it is worrisome. IMO, this is related to the ridiculous claims of racism that were earlier leveled at critics. It's a sign of weakness and childishness, but at least almost all of that was coming from outside the White House.

And to think I worried about Hillary Clinton's Nixonian characteristics. If there are any adults in the White House, they need to throw the Che-T-Shirt crowd out and get some people with maturity in. Quickly.

But maybe this is a case of Obama not wanting to hear the "no" word. I laughed at Paglia for her mental dissonance in condemning the President's advisors while professing unmitigated support of the President, so I don't feel justified in just attributing this nonsense to the advisors. He chose them. He can dismiss them, if he doesn't agree with them. He probably does.

The real problem is that nobody is happy at the prospect of a health reform bill that doesn't really do anything to help for four years but does raise costs, and probably will make things even worse after four years. The more clued-in Dems are very worried about this proposal and about costs involved in cap and trade. For good reason. When push comes to shove, the White House won't be able to declare the Dems Public Enemy Number One, so they need to stop this ASAP and sit down and talk with those with whom they disagree.

Oh, and I think this policy comes from the very highest levels of this administration, because Obama seems to be pushing it:

Speaking privately at the White House on Monday with a group of mostly liberal columnists and commentators, including Rachel Maddow and Keith Olbermann of MSNBC and Maureen Dowd, Frank Rich and Bob Herbert of The New York Times, Mr. Obama himself gave vent to sentiments about the network, according to people briefed on the conversation.

Then, in an interview with NBC News on Wednesday, the president went public. “What our advisers have simply said is that we are going to take media as it comes,” he said. “And if media is operating, basically, as a talk radio format, then that’s one thing. And if it’s operating as a news outlet, then that’s another.”

Quite naturally, other news organizations are becoming concerned. None of them probably believe they can get through the next three years without publishing something critical of this administration's policies, and no individual reporter wants to have his or her beat threatened for writing what the White House considers unfair criticism.

Krauthammer. Politico.

And the ironical aspects are stunning; this is a president bound and determined to talk to dictators around the world, but bent on not talking to critics?

Obama To Enter Diplomatic Talks With Raging Wildfire

If It Were Not For The Honor Of The Thing

2009-10-22T06:17:00.000-07:00

Initial claims were revised up for the previous week to 520,000, and rose last week to 531,000. I know that this is a recovery because of the broad-based improvements in shipping, production etc, but this little bug of a recovery doesn't seem to have much carrying power. This is the list of states with increases of over 1,000 in initial claims for the previous week:

State	Change	State Supplied Comment
MI	+1,096	No comment.
SC	+1,247	Layoffs in the manufacturing industry.
OR	+1,253	No comment.
PA	+1,253	Layoffs in the service and transportation equipment industries.
MO	+1,373	Layoffs in the service, transportation, and warehousing industries.
GA	+1,500	Layoffs in the service and manufacturing industries.
TX	+1,631	Layoffs in the transportation, service, and manufacturing industries.
WA	+1,740	Layoffs in the transportation, warehousing, and manufacturing industries.
KY	+1,834	No comment.
IA	+2,181	Layoffs in the manufacturing industry.
KS	+2,544	Layoffs in the manufacturing industry.
MD	+2,783	Layoffs in the trade and service industries.
IL	+3,172	Layoffs in the trade and service industries.
AR	+4,704	Layoffs in the construction industry.
IN	+4,977	Layoffs in the automobile and manufacturing industries.
WI	+4,999	Layoffs in the trade, service, and manufacturing industries.
NY	+5,411	Layoffs in the construction, service, and manufacturing industries.
FL	+9,976	Layoffs in the construction, trade, service, and manufacturing industries, and agriculture.

One hardly knows what to say or write. Here's a website with a list of presidential opinions on the thrill of the office. Very funny, and I found it because I thought of Lincoln's famous remark and googled it to make sure I remembered it correctly:

Lincoln: “I feel like the man who was tarred and feathered and ridden out of town on a rail. To the man who asked him how he liked it, he said: ‘If it wasn’t for the honor of the thing, I’d rather walk.’”

Anyway, I guess my attitude toward this recovery is a cross between Lincoln's view of the presidency and the situation of the Chinese workers who now have a new washing machine gleaming in their house, but no electricity or running water. It's pretty and a trophy of sorts, but what use is it really?

To fully understand my glumness, look at this progression of WIET (Withheld Income and Employment Taxes) from the Treasury Statements:

July 2008/2009: 142,964 / 131,417 (-8.1%)
Aug 2008/2009: 136,464 / 126,389 (-7.4%)
Sep 2008/2009: 142,759 / 125,216 (-12.3%)
Oct (through 20th) 2008/2009: 97,151 / 84,811 (-12.7%)

The August comparison was very favorable to 2009, because several more days of revenue were shifted into September. When one accounts for that and the shift in the auto company schedules in July, a very nasty progression develops on the order of -8%, -9%, -11%, -12.5%. Some of it is undoubtedly due to people falling off unemployment due not to jobs but to expiration of benefits. Some of it is probably due to retirements.

Nonetheless, this is not the tonic a person recovering from viral pneumonia needs. When this data is read conjointly with the household survey's report of 1.2 million wage and salary jobs lost from July through September (see Table A-5), the very poor NFIB small business report for September, the previously noted disturbing business expectations from the Chicago PMI report last month, and the continued high initial claims reports, a rather cohesively dark expectation on US incomes and business spending emerges. It's worth noting that according to the household survey, over 350,000 of the wage and salary positions lost were in government.

Then I read the FOMC report and I conclude that those poor dudes and dudettes probably all have the flu, or have OD'd on the Prozac. Whatever drugs they are on, those drugs most certainly have taken the FOMC members to a happy place. Would that the general public could share the same experience. It is true that at the time of the September meeting, some of the later reports were not in, but the chirpy talk about stabilization of business spending, housing values, and a reduction of the economic drag from incomes in 2010 was a little off the wall. It reminded me of the deeply reassuring projections in early 2008 about the expected reduction in economic drag from the bottoming of the residential sector - that on the eve of the worst collapse in the residential sector post WWII.

The reason why weakness in wages, government jobs and small business incomes is so determinative is that these are the stable structural pieces of the economy that generally carry it through recessions. In short, we are now seeing cuts to the bone, and chipping of the bone, and insults to the bone marrow - a structural economic anemia of sorts. The extremely poor tax figures suggest that sales tax receipts will rise briefly and then sag further, implying that the state and local government restructuring has much, much further to go.

Nor can one possibly talk of a stabilization in bank profits or in the housing market with employment figures like these. We need to factor in a wave of new defaults on consumer debt, including mortgages, CC balances, and other consumer loans.

And then one must take seriously energy costs; rises of these magnitudes from earlier in the year would indicate a negative 50 basis points on GDP expectations on energy movements over the summer, which is not something we can afford to swallow right now. There is at least a negative 25 basis points coming in Q1 2010 from the end of some of the stimulus provisions (tax credit, 1st quarter decline in refunds from overcounting of the tax credit, end of COBRA copays?). There is some sort of negative coming from unemployment expirations, but we don't know what that will be. A minimum of a negative 15 to 25 basis points from swine flu. We would expect about 20% of the population to get severe enough cases to impair their work/mobility for a couple of weeks, and that does affect sales. The small business and Chicago PMI look-sees indicate that business spending will continue to decline; that's another negative and not a weak one. Government revenue is going to force government spending on non-social programs and probably social programs to decline. State and local governments are in many cases in death spiral in which declining revenues plus the need to put ever higher contributions in pension and medical retirements funds have created a rapidly shrinking pool of spendable funds. Something's going to break there, but until it does, that is a long term and extremely widespread economic drag which will affect previously somewhat immune economic segments. It's a diffusor of economic stress.

If, which I do not think likely, something similar to the Baucus bill passes additional taxation will exert a perceptible drag on the 2010 economy. Time to go back and look at CERF's last forecast. Look at their US projections. I still come out somewhat more positively, but 2010 isn't looking very green at all.

There are some relative bright spots. Because household formation looks to be suppressed for some considerable time to come - years - one would expect that consumer electronics of the novel/prestige type would have room to penetrate the younger population. When younger people don't form households, they tend to buy visibility goods.

At some point, enough consumer debt will be written off, defaulted and eliminated through bankruptcy to provide an underlying economic floor for recovery.

Over the last few months, it has become clear that business profits are close to stabilizing in the current environment. If we go significantly negative in Q1 2010, that will reverse.

Crude At 80

2009-10-21T09:26:00.000-07:00

Crude inventories and finished good inventories running very high, YoY YTD imports are down 9.1%, total product supplied is down 4.3% YoY YTD. Crude at $80.

Current gasoline stocks are up 7.5% YoY, crude stocks ex-SPR is up YoY 10%, distillate stocks are up 33% YoY. There's a lot of this stuff around:

At 339.1 million barrels, U.S. crude oil inventories are above the upper boundary of the average range for this time of year. Total motor gasoline inventories decreased by 2.3 million barrels last week, and are near the upper limit of the average range. Finished gasoline inventories decreased while blending components increased last week. Distillate fuel inventories decreased by 0.8 million barrels, and are above the upper boundary of the average range for this time of year. Propane/propylene inventories decreased by 1.4 million barrels last week and are at the upper limit of the average range. Total commercial petroleum inventories decreased by 4.2 million barrels last week, and are above the upper limit of the average range for this time of year.

There's real value and then there's relative value, but we have left either range to go to desperation value (anything but currency).

Natural gas stocks are high too:

Bovespa is nearing its previous high.

Seems like summer 2008 all over again.

They Say God Only Gives You What You Can Handle

2009-10-21T06:21:00.000-07:00

Yesterday morning early my fever broke. I woke up sweating a bit. Every 3 or 4 hours since I have felt a lot better. By mid-afternoon I was drenched, so I think I have finally broken the back of this virus.

Twelve hours after my fever broke, no water! The pump is seized. I have them here now working to replace it. I really need to wash. I stink. I reek of fever sweat.

It sure would have been awful if this sequence of events had been reversed.

A Decade With Negative Growth

2009-10-19T07:25:00.000-07:00

Well, I'm done with my preliminary calculations. I am still running a fever, sometimes quite high, so I won't be posting very much for a while yet.

Not that posting would be very appealing even if I felt better, because everything I've got shows that under current government policies (excluding health care reform and cap and trade), we have created the overwhelming probability of a decade that will show negative GDP growth. I'd call that a depression. Depending on when the Fed changes rates (with the earlier hikes giving the most growth), it's a net over a decade of -2% to -9%. Oh, joy.

Mind you, that won't mean that you don't have some positive periods, but our current policies are building massive risks and government losses which must be funded by the taxpayers, on top of higher structural deficits, which must be funded by the taxpayers, and the inevitable result will be no jobs growth, lower net incomes for most households, and much higher taxation for higher income households. All of that would not prevent growth if it were not that both the Fed and the overall government is now wedded to zombie banks which it cannot allow to fail, and in fact is now following a policy of increasing their hidden losses instead of working them off.

It would appear we are screwed.

What's going to determine the next five years is one simple dynamic; mortgage rates have been pushed so low in a high loss environment that no sane lender would underwrite mortgages at these rates without the ability to lay off risks to the government. Now the GSEs do not underwrite all types of loans, so we have a two-tier rate schedule and an utterly dead private MBS market.

So everything is being sanitized through the government, but that is happening at the cost of very high future losses. Right now money is being slowly but surely siphoned out of the general economy through bank deposit deployment shifting steadily into Treasuries and government-guaranteed low return options, which of course has the effect of creating very low bank interest rates - rates that are below inflation rates, thus a negative real interest rate on money.

The current situation is not disputable. A cursory inspection of H.8 (Assets and Liabilities of US Commercial Banks) shows what is happening. From May to Oct 7th, on a seasonally adjusted basis:

Bank deposits grew approximately 130 billion.
Bank credit dropped about 325 billion.
Bank loans and leases dropped a little under 420 billion.
And bank credit invested in agency MBS and Treasuries grew almost 100 billion.

Borrowings from other banks have dropped more than 400 billion.

Of course the very high bank chargeoffs show where the missing money went - it is simply a loss. A Q2 chargeoff rate of 2.65%? That is about 100 basis points above the previous high, and it is still growing.

The money supply in circulation is being choked off. Naturally this creates an incentive to invest money in anything that would generate a cash return, no matter how small, so we have funded stock and commodity speculation.

Among the commercial analysts, there is a desperate attempt to justify current increases in stock and commodity prices, most of it completely unfounded.

Is the situation in retail improving in a structural manner? No. The wider indices show continued degeneration in pricing power.

Is the dollar declining, and are the costs of imported necessities to the US consumer rising? Yup.

Is the expected real return on sales of most consumer consumption items in the US declining? Yup.

Will that fund business investment and growth? Nope.

The net result is Japan. See Mauldin's last newsletter for a brief summary of what really happened to Japan. For two decades, there was little to no real growth in their domestic economy. Most companies invested externally, which is exactly what is going to happen to the US. This creates a situation in which you have low to no growth in wages and and consumer incomes.

The theory being presented is that external buying from manufacturers benefiting from a cheap dollar will be our way out. There are two problems with this theory. The first is that there are growth problems elsewhere in the world, especially in China. The second is that a cheap US dollar accompanied by high corporate taxation and an expensive operating environment does not create internal corporate investment. It creates external corporate investment. If we wanted to use a cheap dollar to expand the manufacturing share of the US economy, we'd need to cut corporate tax rates to about 25% max (and phase out some of the tax specials), plus assure a steady energy supply.

Ask yourself if you would expand or invest in US plant under the current environment? If you have answered yes, you do not understand business very well. The decision has apparently already been made by US manufacturers NOT to expand internally at this time. We blew through some of our magic ratio levels this summer, and restocking should be well underway (these graphs are from August):

A look at H.8 shows that C&I loans at banks have continued to drop, and we are seeing no pop at all in commercial credit for nonfinancials. Flat. "He's dead, Jim!" (to quote the good doctor). There are only the faintest indications in NACM that business credit is expanding, so the net is still down. Mind you, we are not worrying about YoYs, because prices have dropped so much. We are just worrying about the June to current trends, and those are consistently poor to declining. Now you cannot have a business expansion without using money. It does not happen. Saying that it can happen is equivalent to believing that video in Colorado was really of a space alien evincing a fascinated interest in the domestic customs of UFO enthusiasts. Only Wall Street economists are capable of such nonsense when they go In Search Of Optimism. These are the same folks who were highly reassuring about financial risks in 2007.

So right now, we don't seem to have a carrying wave of growth of any sort. Normally, a neutral is a positive for growth because people try to find a way. But in the current situation, this is not so. For one thing, stimulus this year did provide some boost, some of which is due to expire. Another unpleasant truth is that state and local governments are running into deep funding problems, and are being forced to raise taxes and fees plus cut spending, which is a very broadspread negative vector. Finally, small businesses are cutting employment and shutting down at a very high rate. Because these businesses account for such a big part of the jobs base, this is an unfortunate development which will have widespread effects. The businesses shutting down are not just restaurants and independent retail, but service businesses such as welders, mechanics, HVAC etc.

CR has written about his worries for 2010, and that is worth a read as well.

No ten year forecast is worth anything, because public policy changes in response to experience. There are public policy responses which could restore real growth, but there are also public policy responses which could make the situation worse.

It's worth noting that over the last six weeks many economists have shifted toward a more negative outlook.

A Bow To Land Court Judge Keith Long

2009-10-17T06:15:00.000-07:00

In general, I approach matters such as foreclosures from a banking point of view, albeit a community banking point of view (which, as long-time readers may have gathered, tends to differ from the reckless-too-big-to-fail-bank point of view). And in truth, I do not see that the praiseworthy judge's decision in this case is injurious to the interests of decent banks. But regardless, he is doing the right thing, and it is such a rare action in today's world that he deserves great honor for it.

Also I would like to point out that it is only the action of individual judges in individual states that have imposed any checks and balances on this whole mess; if we left it to the federal government, a few wacky Congress Critters would believe whatever Citibank and BofA lobbyists told them. Therefore if anyone suggests that somehow the federal government should "take over" or "overrule" the state requirements for foreclosures, you should fight it with fury.

Here is a link to the text of the decision, which was released yesterday. I will be updating this post with an explanation and summary, because the weird rumors are already flying over this.

Update1: This is laugh-out-loud funny. Even if you have never read such a document before, I believe you would be able to absorb the humor. My eyes are streaming from laughing so much.

Praise Works

2009-10-15T15:11:00.000-07:00

I think I'm going loony. Maybe it's the flu, but I don't think so.

I read The Anchoress' tribute on her husband, which was elicited (reposted) by this article in which a woman seems to be explaining proudly that she uses bribery, threats, punishment, sex and withholding of sex to get her husband to do some share of the housework. She goes on and on about oppression and parity and that her husband has to be treated like a child to get him to do what he ought to be doing, which he doesn't do enough of. What can one make of this?

So how have I accomplished this? By holding my husband’s feet to the fire every single day of our lives, of course.

Not one day of vacation in seventeen years? No "Honey, you've been working hard, why don't you just hang out this weekend?"

It all sounds most unpleasant, doesn't it? My feeling is that praise and appreciation works much better, and that if you are bribing or punishing your husband that can't be any fun, and if I didn't respect the Chief, I don't think I'd be exactly enjoying sex and that sex surely should be more than a way to control your husband. The whole way the writer goes on makes it sound like the relationship is just work, work, work and more grim work. I'm wanting to say that the article must be a misrepresentation of their marriage, but of course I don't know that.

You know, it sometimes works the other way around. A man will be a neat freak and drive his wife nuts. One person's natural way isn't always the only way, and one of the things marriage does do for people is to rub some of their own idiosyncrasies off and make them better people.

I think Dr. Helen has a good point regarding what this women may be teaching her children. All I can say is that this grim specter of a life of duty which involves herding a man around day after endless day is the sort of thing that would make me never want to marry!! Speaking as a woman. Seriously, if a girl or a woman accepted this proposition, why should she ever marry? It all sounds too damned exhausting!

Rachel Lucas writes about bitch-martyrdom, and that's worth a read also.

The Chief and I are both rather imperfect people, but at least we have FUN together. At least we are mostly each other's rest and refuge from the world's difficulties. I get a warm surge of pleasure just from seeing him sit down in the morning to read the news on the internet with his coffee, and I sometimes bake him something just because I know he'll pick up a piece and lug it over with that body language of implicit satisfaction.

I had the weirdest sensation when reading the original article. I immediately thought of the Rapture. You know, the Christian rapture that some Christian sects believe in, in which one day everybody good gets sucked up to heaven and the rest are all left to deal with the Time of Tribulation. It has never appealed to me, and one reason is that I doubt I'd be raptured, but if I were, it would be hell. Who is supposed to be taking care of those left behind? The dogs, the kids, the lonely people living alone - this seems more like a last torture than some sort of reprieve. It seems like a total disaster to me.

I mean, to some extent, one takes care of people and one takes pleasure in it just because the people are there, and they are yours to take care of, and it makes you feel good to do so. That is obviously even more so when they are your spouse whom you chose and are taking care of. I just keep staring at what this woman wrote thinking "This can't really be true. This is how she thinks she ought to feel, but not all of how she really feels." Isn't there anything in her that would make her happy to see her husband hanging with the coffee over breakfast on the weekends? Everyone has those ritual moments of relaxation that a person looks forward to, and doesn't it give her a bit of a kick to see her husband having that and to think "I can give him this?" And he does work outside the home, and she does work at home, so of course she can make her own moments of relaxation.

I feel like my skull exploded from sheer astonishment. Either what this woman wrote is a lie, or I have completely misunderstood what a lot of people find in their relationships. It seems to me that people sort of naturally learn to pull together, and that there's a pleasure in that. I know both the Chief and I do that and feel good about it, and I know my parents did. The small considerations add up to a pattern of love and warmth that's literally woven into daily life, and it is a rich, deep, romantic type of thing.

I get The Anchoress' post without any trouble. Yes, indeed. But the original article appears almost impossibly divorced from basic animal instincts and normal human interactions. But if the article isn't a lie, than this woman has created a sort of prison for herself, regardless of what her husband thinks of everything, and she's made everything a duty, and nothing a gift, which just seems impossibly barren and stark.

Do As We Say

2009-10-14T17:45:00.000-07:00

...But not as we did.

Both the Chief and I have been sick for weeks with this thing, which probably is H1N1. Both of us have kept getting up as soon as we felt a bit better, and both of us keep relapsing. We have now made a compact to actually try resting, which is what I am doing. I note that doing so for a few days has produced a pretty strong immune reaction. I don't know what it is with this stupid virus - you just don't feel that sick, but you really don't kick it out.

Anyway, I have heard from a few people who have done much the same thing and have managed to make themselves pretty darned sick, so I'd advise you to overrule your instinct to declare a premature victory and instead make like a couch potato until you stop feeling so tired. I can testify from personal experience that just drinking more coffee and exercising more does not work.

Sorry For Not Posting

2009-10-10T17:03:00.000-07:00

The Chief hasn't been feeling too good after getting what he thought was a very light cold last week, then chest inflammation this week. I figured it was the flu, so this morning was tied up getting Zithromax. But now he is having chest pain, so it is off to the hospital.

Update: The Chief is in the hospital resting comfortably, trying to convince everyone to let him out. I think it's the flu.

Further Update: The Chief has escaped durance vile!!! They thought he was having a heart attack, but no, all his tests are clear. He is a much more chipper Chief, although he still has the flu, but even that is considerably better, and his lungs are clearer. I am vastly relieved. His pet goose is very happy. The dogs have taken a victory run, and now we will all topple into bed as the tension leaves our bodies.... It turned out that he started having the chest pains Friday morning early, so he stuck it out two days without feeling the need to consult a medical authority, or any deranged naggy person who might advocate consulting a medical authority. It was only when he started sweating and feeling disoriented that he figured he had better do something about it. Oh, well, he is alive, and the enforced inactivity did him good. Last week he told me very indignantly that if he rested any more, he'd die.

More Of A Burden Than An Honor

2009-10-09T07:05:00.000-07:00

That's the headline over at Spiegel today regarding Obama's peace prize. I hope the poor guy has the guts to refuse it. Even the commentary over at DU has strains of vast incredulity.

There are two bad things about this. First, Obama is in the early stages of what he is trying to do, and this is making every country in the world sit down and review results rather than rhetoric at a time when international cooperation is truly needed. And the truth is that there are no achievements, which is no criticism of our president, because peace is not that easy and not that quick. Second, it is going to irk some of the world leaders very deeply, and in doing so, it is going to hamper Obama's and the US' efforts rather than facilitate them.

Obama could go over and give a really wonderful speech renouncing this prize that would greatly help him, but if he accepts it, he's going to regret it.

For myself, I was first incredulous and then just worried. I suppose it was kindly meant, but I think Spiegel's take is unfortunately the truth:

Denn ausgezeichnet wurde heute nicht der amerikanische Präsident, der harte und möglicherweise unpopuläre Entscheidungen zu treffen hat, sondern eine globale Symbolfigur, in die schon während des Wahlkampfes 2008 aus aller Welt Hoffnungen und Wünsche investiert wurden. Obama hat diese zum Teil übermenschlichen Erwartungen, die in ihn gesetzt wurden, lange Zeit fast eingefordert. Doch neun Monate nach seiner Vereidigung besteht seine politische Aufgabe nun darin, neben dem global geschätzten Hoffnungsträger endlich auch den Realpolitiker sichtbar werden zu lassen. Die Entscheidung aus Oslo wird ihm dabei nicht helfen. Sie ist eher eine Bürde als eine Ehre.

Roughly: Distinguished today was not an American president who has perhaps to make difficult and potentially unpopular decisions, but a world wide symbol in whom since the 2008 election the hopes and wishes of the entire world have been invested. Obama has been almost demanding these somewhat superhuman expectations. Nine months after his oath of office his political task is now to manifest the functional politician in conjunction with the estimable bearer of global hope. The decision from Oslo will not help him. It is more a burden than an honor.
The article then goes on to review the lack of success so far in the American diplomatic initiatives, implies that he should not accept the prize, and then concludes with:

Falls er ihn dennoch annehmen sollte, ist ihm der Applaus aus Übersee bestimmt gewiss. Was sein eigenes Land betrifft, sollte er sich da nicht so sicher sein. Die Amerikaner wollen einen Präsidenten im Weißen Haus, keine Wunschfigur aus Oslo.

Should he accept the prize, the foreign applause is certain. How his own country views it is not so certain. The Americans want a president in the White House, not a fantasy figure from Oslo.
Unpleasant but probably true.

I'm just reading around all the newspapers, absorbing the commentary. I had meant to post an economic summary, but I guess that will be tomorrow. Also I wanted to get back to incomes and the reality of how much the average household can pay for insurance, per Joy's "rough beast" comment, which had me laughing and wincing at the same time.

Update: Sigh. So he accepts. Famous last hopes.

Further Update: So I've watched his acceptance speech, and it turns out he accepted it with the intention to share with everybody else, and the prize means that the world wants the US to lead, and in any case, these goals are responsibility of all nations:

That's why my administration wants to establish a new era of engagement in which all nations must take responsibility for the world we seek.

"An affirmation of American leadership on behalf of aspirations held by people in all nations."

Towards the end of the speech he says:

Some of the work confronting us will not be completed during my presidency. Some, like the elimination of nuclear weapons, may not be completed in my lifetime, but I know that these challenges can be met, so long as it's recognized that they will not be met by one person or one nation alone.

So American leadership is just basically talking about it, and it's not America's responsibility. Methinks our pres just said he has no intention of becoming a functional politician to achieve these goals. He intends just to earnestly talk about them to motivate all nations, and nobody should complain that he doesn't become that functional politician, because really it is the world's responsibility, not HIS and not America's. He said he was "humbled" but I think he meant "pressured", and is trying to eliminate the soft bigotry of high expectations.

I guess we'll find out if this is really the leadership the world is seeking.

A Pretty Problem With A Disturbing Answer

2009-10-06T06:53:00.000-07:00

One of the things that has truly worried me about the current health care proposals is that theories that we can raise taxes to cover the proposal ignore other portions of the overall fiscal problem. All the current proposals seem to me to be the public financing form of Option ARM mortgages, because they look at proposals separately rather than looking at them as a percent of total financing.

I explained before that the method I use is for economic projections is based on figuring out what is not possible and extrapolating within the range of possibilities. And you can't raise revenue 2% devoted to one program without adjusting other taxation expectations, particularly not in an environment of declining wages and salaries.

Here, an explanation and a caveat, because the facts contained in this post are rather painful and everything is politicized these days. My political position is currently that I can not vote either Republican or Democrat with a clear conscience. The Democratic leadership is and has been using bullshit numbers for years now, and the numbers are getting crazier instead of more realistic.
Further, segments of the more leftish portion of the Democratic party is veering into an old insanity in the attempt to dodge these numbers. See Ann Althouse' s reaction to the latest Michael Moore production. The Republican Congressional leadership has been ignoring the basic reality of what is happening to most people in the economy for years, and in doing so, has committed a grievous dereliction of public responsibility; they do not deserve to be in power. Bush tried hard to get them to deal with reality, and they refused with nearly one voice. In response, the public turned control of Congress over to the Democrats in 2006, and then the Democratic leadership committed the same grievous dereliction of public responsibility. I would like currently to be a Democratic voter, but until they get more realistic I cannot be. I believe that for historic reasons, only the Democrats can make the public accept unpleasant realities. However, if the Republicans were to turn and get real, I'd vote for them. If neither party wants to deal with reality, then I think we need a third party, and I also believe we are likely very near to creating one. I know I am not the only one thinking this way. These numbers are not political. They are just an attempt to figure out where we are and where we can realistically expect to go.

I am currently working on recasting the wage picture by using treasury receipt data. I do this over a range of two years, and normally I do it in the spring, but the recent changes have been so huge that to make any meaningful economic projections for the next year I have to refigure all of this. It's a lot of work.

I don't think most people realize how misleading the unemployment stats are in comparison to other recessions. There is a pronounced distortion arising from early retirements which presents a picture that is favorably biased. If it were not for the availability of early retirements and disability, U3 unemployment would be at least 1.9 million higher, which would give us an unemployment rate of around 11%. The availability of Social Security and Disability benefits does help to support total US incomes, but it comes at a high price in terms of tax receipt expectations.

Nor do most people understand just how immediate the Social Security and Medicare crisis is.

To give you an idea, here is some recent data using the August Monthly Treasury Receipts report.

First, understand that the WIET component of federal revenues is extremely high.
In September, WIET accounted for 125,216/172,133 = 72.7% of monthly receipts.
For the fiscal year ending in September, WIET accounted for 83.9% of total receipts.
In August, WIET accounted for 92.1% of monthly receipts, and fiscal year-to-date WIET accounted for 84.9% of total FYTD receipts. This is a recession year, and in recessions, the share of corporate taxes drops.
So for comparison purposes, let's also include the split for the fiscal year ending in September 2007 of 78.1%. That will give us an upper and lower bound. For a lower bound I am going to use 80%, because as the population ages you just have fewer workers and WIET cannot become much larger without huge individual percentage tax increases on workers, which would hurt the economy, driving down wages recursively and lowering total WIET.

Second, understand the split of WIET between income taxes, Social Security taxes, and Medicare taxes.
For this, you have to use the Monthly Treasury Statement to split revenues among the gross receipts. These statements are available at this website. Daily Treasury Statements here. (People keep accusing me of lying when I produce these numbers, and I am getting very irked about it. Before you say I am lying, verify the numbers yourself. If you don't, then you are a delusional idiot and that is what my response will be. You don't have to like reality; you do have to deal with it.)
For August, gross WIET as reported in the DTS for Aug 31 was 126,389 million. Turning to the MTS for August (the last available), we see on page 5 that individual income taxes were 62,489 million and SS/Medicare was 63,569 million. Part of the difference is the extra 238 million in personal income tax that wasn't withheld, so subtract that from the 62,489 - 238 = 62,251. MTS total = 124,740. Thus, August WIET was approximately composed of 49.9% income tax and 50.1% FICA. For our purposes, we can just call it 50/50. There are other adjustments we can make, but this is close enough to understand why WIET is dropping so rapidly.

For comparison purposes for before the recession and the wave of early retirements, let us go back and do the same thing for August of 2007: (Links, MTS, DTS)
Gross WIET August 2007: 140,381
MTS PIT August 2007: 77,618 - 177
MTS M/SS Tax Aug 07: 63,908
MTS total adjusted: 141,349
Income tax ratio: 54.8%
FICA tax ratio: 45.2%

Implications for future receipts:
When people retire, they generally only pay income tax on about 15% of their Social Security. But they pay no Social Security or Medicare tax on their Social Security benefits, although they do pay a Medicare premium. Thus, if we are currently at a 50/50 split, for every retiree who swaps a 30K salary for a 20K SS check, we can expect income tax receipts to drop around 70-85%, and FICA taxes to drop 100%. This is why federal receipts from WIET can be expected to plummet as the wave of retirees occurs. It's been given a jump start by the wave of unemployment:

More than 2.6 million retired workers entered the Social Security system, up from 2.2 million in fiscal 2008. That's a much bigger increase than during past recessions.
...
The number of disabled workers receiving first-time benefits also soared to nearly 1 million, an increase of 100,000 over the previous year, according to Social Security Administration records.

Well, here the demographic composition of the population comes into play. We are, on net, much older than we were in previous recessions. Far more people are eligible.

Alert readers ask a sensible question:
Q: Why, beastly blogger with unpleasant numbers, is the proportion of income tax to FICA falling when you just wrote that retirements cause FICA receipts to fall faster than personal income tax? See, YOU MUST BE LYING!

A: The answer lies in the regressive nature of FICA taxation and the progressive nature of income taxation. What you are seeing is not just the impact of retirements, but a remarkable change in the distribution of incomes. Those with higher incomes are losing a lot of income.
Current income tax brackets:

The Medicare tax is a flat 2.9% on all wages.
The Social Security tax is 12.4%, but is capped each year. See historical rate table. In 2009 the maximum wage on which Social Security is charged is $106,800. In 2007 it was $97,500.

We can use this difference and another level of detail in MTS on page 6 to figure out something about wage distributions:
August 09:
HI (the 2.9% Medicare non-capped portion of FICA) for August was 13809. The August wages on which that was collected were 13,809 = 0.029(X). Using the algebra that Cohen believes has no application to daily life, we get 13809/0.029 = X or wages equal to 476,192 million or 476.2 billion.
OASDI (the 12.4% capped portion of FICA) for August 07 was 49,372. You need to know the wage cap for that year, which was 106,800. Wage caps from SSA. 49,372/0.124 = wages of 398,161. The difference between the two numbers is the amount of wages that had exceeded the cap, which is 78,031 million. Using the changing distribution month by month will give you a good feel for the distribution of these incomes and how they are changing over time. 78,031/476,192 = 16.4% of all incomes that exceeded 13K monthly (106,800/8).

Now for the reality check. Let's do August 2007:
HI (the 2.9% Medicare non-capped portion of FICA) for August was 14,121. The August wages on which that was collected were 14,121/0.029 = 486,931 million.
OASDI (capped) salaries. 49,379/0.124 = 398,217. For August 88,714 million of wages were earned by those who had already exceeded the 97,500 annual cap, and thus must have monthly wages exceeding 12K That is about 18.2% of all wages.

Note that over two years, salaries don't seem to be going anywhere. Except, ah, down. Believe it or not, in most recessions total wages continue to rise, albeit more slowly. Even last year, wages were rising. That is why PCE usually leads us out of recessions. Total incomes haven't fallen, and when things start to improve, consumer confidence rises, consumers start spending, and cue the "Happy Days Are Here Again" tape. This is one of the duration effects I have been mentioning that makes this recession a different animal than most post WWII recessions.

Since we are crying in our beer, the Beastly Blogger former known as M_O_M (screen abbreviation BB?M_O_M) might as well get this over with quickly:
Let's look now at August 2008. MTS file. Page 6. You've done this before.
HI receipts = 14,484.
OASDI receipts = 50,567
Wage cap = 102,000
14,484/0.029 = 499,448
50,567/0.124 = 407,798.
18.4% of wages had exceeded the cap and must have therefore have been earned by those with monthly salaries over (102,000/8) 12.75K.
It looks like nominal wages have dropped about 4.7% to 4.9% over the year (shadow wages don't show up, but have probably declined faster). They have also dropped from 2 years ago.

So, let's look at nominal August wages, FICA, income tax receipts.
Nominal wages August:
09: 476,192 million
08: 499,448 million
07: 486,931 million.
Income Tax receipts August:
09: 62,489 million
08: 70,263 million
07: 77,618 millon
FICA tax receipts August (from page 5, nonadjusted)
09: 63,569
08: 65,440
07: 63,908

Income taxes, being progressive, drop a lot more from smaller changes in income than does FICA. Also this year's receipts are affected by the $400 tax credit.

Now we'll look at the trend in structural outlays. This information is Fiscal Year to Date through August each year:
Just benefit payments for SSI, Social Security and Disability:
09: 646,415
08: 599,187
07: 593,845
Total Centers for Medicare and Medicaid Services:
09: 886,002
08: 801,545
07: 783,236

We could cheerfully suggest that the trend in incomes will reverse itself as the economy improves, but we cannot suggest that the trend in Medicare/Medicaid/Social Security outlays will improve. It must rise as retirements rise.

We also cannot be too optimistic about nominal wages due to the first effect of retirements I mentioned. Looked at one way, the effect of Social Security is to support incomes. But from a taxation POV, it greatly reduces the tax base.

Given that we now expect unemployment to be very high going through 2010, we can't expect wage pressures to have that much of a contribution to increase the tax base.

The nastiest aspect of this is that we have little room to raise taxes, and any attempt to raise taxes on the higher income groups will have much less net effect than projections from a few years ago would indicate.

Real Wages for Higher Earners:
Another unpleasant reality is that real wages are dropping faster than nominal wages, and therefore real marginal tax rates are probably rising for most wage earners even as their real disposable incomes fall.

Take medical benefits. Over the last few years, most companies are reporting that they are passing on a share of medical insurance cost increases to their employees, as well as cutting benefit packages. Companies that did do 401K matches have mostly cut them, and many companies have terminated retirement/pension plans or suspended contributions.

Consider a worker who earned 120K in 2007 and paid $50 a month for a family medical insurance package through his job. The 120K was split in the following ways:
$107,000 wages. 25% tax bracket on the last portion of that. Income over $97,500 was not subject to the 6.2% employee share of SS tax.
$4,000 401K match by company.
$6,000 stock options.
$3,000 pension contribution.
Okay, we can kiss the stock options goodbye. They may be there but are worthless. The pension contribution is gone. The 401K match has been suspended. Family medical insurance package (with higher deductibles and copays) now costs $100 monthly.

Let's say that nominal wages of this worker have been increased to $112,000 in 2009, which is better than many have experienced. The employee's share of FICA tax has increased from 97,500 * 0.062 ($6,045) to 106,800 X 0.062 ($6,621.6). Because the employee's nominal wages have risen, federal income tax at 25% has risen $1,250. State income tax will have risen as well. The extra cost of the insurance (which is taxed) has risen $600 and comes straight out of take-home pay. So this worker may have nominal wages rising according to the Medicare tax formula ($3,103 to $3,248), but this worker's true nominal take home pay has hardly increased in two years, and when you include the benefit cuts, the worker's compensation has dropped more than ten percent. It is not surprising that people are spending a lot less. They have a lot less to spend.

When you include inflation over the two year period, things get even worse (here's a handy historical chart of CPI along with a page with a lot of inflation calculators). When you include the likely effect of diminished investment returns, this employee's true income contracts even more. The 401K match may be gone, so if that employee ever wants to retire, that employee is going to have to ratchet up his or her tax-advantaged retirement contributions! Let us hope that employee does not have high credit card balances. If so, the only real way for that employee to retrieve his or her position is to pay those suckers off - that is by far the highest rate of real return.

So don't expect retail spending to suddenly turn around and get all bubbly and exuberant. It can't. It isn't there.

Sept 09 Employment & Tax Data

2009-10-02T06:51:00.000-07:00

Several interesting things about this report. First, the 9.8% official unemployment rate tells us little. The male unemployment rate rose to 10.3% and the female unemployment rate rose to 7.8% - both increased by 0.2%.

Second, the benchmark adjustment (scroll down to nearly the end of the link above) from March is in. This is the table:

Table B.  National Current Employment Statistics March 2009 preliminary
benchmark revisions by major industry sector
-----------------------------------------------------------------------
                               |                  |Percent benchmark
          Industry             |Benchmark revision|     revision 
----------------------------------|------------------|-----------------
                               |                  |              
Total nonfarm ...................|      -824,000    |        -0.6  
Total private ..................|      -855,000    |         -.8  
 Mining and logging............|       -23,000    |        -3.2  
 Construction .................|      -152,000    |        -2.5  
 Manufacturing ................|       -67,000    |         -.6  
 Trade, transportation, and    |                  |              
   utilities...................|      -282,000    |        -1.1  
 Information ..................|       -36,000    |        -1.3  
 Financial activities .........|        -9,000    |         -.1  
 Professional and business     |                  |              
   services ...................|      -111,000    |         -.7  
 Education and health services.|       -57,000    |         -.3  
 Leisure and hospitality.......|       -76,000    |         -.6  
 Other services ...............|       -42,000    |         -.8  
Government .....................|        31,000    |          .1  
-----------------------------------------------------------------------

Pretty hefty downward adjustments there. This does not really affect the household survey numbers.

In the household survey, total employment fell by 785,000 on the month. The two-month drop is 1,177,000. Unemployment only increased by 214,000, because the civilian labor force fell by 571,000. I think we are starting to see retirements pick up, and one of the reasons for that would be COBRA. The subsidy is due to run out, jobs aren't around, and many older people who are eligible for early Social Security may be forced to take it to pay for their insurance premiums.

In the establishment survey, jobs in government are listed as declining 53,000 on the month. One would suspect that the government portion would be among the most reliable of these numbers. There was a note on the subject in the discussion:

Government employment was down by 53,000 in September, with the largest decline occurring in the non-education component of local government (-24,000).

This seems quite plausible. I would expect government workers to be retiring more quickly than otherwise due to concerns about imperiled pensions, and my belief is that many of these places will not be able to replace the workers even with increasing local taxation.

The U-6 unemployment rate increased to 17% seasonally adjusted.

Regarding the big fall in household employment, I kind of think it is accurate because of the big drop in WIET.

WIET (Withheld Income and Employment Tax):

September:
09: 125,216; 08: 142,759 (-12.3%)
August:
09: 126,389; 08: 136,464 (-7.4%)
July
09: 131,417; 08: 142,964 (-8.1%)

Note that the last remission day for 09 was the 29th, whereas for 08 it was the 31st. So some of the monthly change is due to some extra revenue in 08 being shifted to Sept from August. However the trajectory of the decline is clearly escalating.

WIET has two main components. The first is composed of Medicare plus SS taxes, and the second is withheld income tax. The rate of the first component is 2.9% Medicare, which is a flat rate on all wages, no matter how high, plus 12.4% Social Security tax, which is a one-step regressive (for about the last 9% of earners) . Income tax rates vary greatly, from negative (EIC) from 10-35%. Thus imputing wages from these taxes is a very interesting problem if you like numbers and relies heavily on the relative share of incomes, which of course is changing quite drastically in this economy. The IRS shares released for 2007 are going to be substantially different than the shares in 2009. It's complex enough that I should take it up in a separate post.

You can also try to extrapolate from US Census wage data, but you have to be aware that there is an upward bias in that data. People lie on the high side. We do have 2008 earnings data by male and female..

Regardless, it is difficult to look at WIET and not perceive that nominal wages are falling sharply. BEA wants me to believe that wage and salary disbursements increased 8.5 billion in August. I don't. BEA and I often disagree in the short term, but I usually win the argument a year or two later. I must be feeling better, because instead of getting steamed when I read yesterday's release, I burst out laughing. I wonder what September's numbers are going to look like!!!!

Anyone who thinks we know GDP levels within one percent really needs to develop some healthy cynicism. It's not that the government statisticians are engaged in a conspiracy. Instead they follow a very careful methodology designed to produce quite accurate data. But that methodology relies heavily on imputation, and when you impute, you use numbers from prior periods. And BEA appears to impute wages from BLS data, and BLS imputes from actual shares of employment from about 3/4 of a year ago, Things were very different then. Eventually, they'll all catch up and the data will be very good. In the meantime for those who need this data NOW, I would suggest spending some time with the Treasury statements and, er, adjusting your expectations accordingly. Monthly here, Daily here.

So in partial answer to Neil's question about raising the total tax burden, I'd have to say no - you can't on most of the population. The share of local and state taxes is destined to increase, and in many cases has increased already. Much of it is pretty regressive. If you increase federal taxation broadly, you shrink state shares of taxation quite substantially. The only way to raise taxes without wreaking too much havoc is to add marginal taxation on currently tax-sheltered income, and at a pretty low level.

Further, for reasons I will explain later, I think the real incomes of most of the top portion of the population are falling quite quickly, and that the trend will be sustained, which raises some unfortunate contemplations about the utility of raising income taxes on any but the highest income earners, who are (gasp) by far the most mobile. Adding a VAT now would be like playing Russian roulette with a six chambered revolver loaded with six bullets.. Raising marginal tax rates on the top 30% of income will net much less than most suppose.

PS: I also strongly recommend CR's "ugly, ugly, ugly" post on employment. Not only are these numbers ugly, but they are really being helped by the wave of retirements and the safety valve that extends. But I have to tell you that default risks are pretty high for older workers forced to take unplanned early retirements as banks will be finding out.

Ah, NACM

2009-10-01T12:06:00.000-07:00

I can't say that most of the reports are favorable. ISM manufacturing this morning tracked Chicago PMI pretty well, showing declines overall, in new orders, in production, etc.

HOWEVER, take a look at NACM's September report. Services finally rolled over positive (50.1) and both sales and dollar collections picked up. Manufacturing improved also, but there the sales component was not so impressive. There is an element of build here if you trust this report, and I do. When the money starts flowing, things start happening. It's weak, but there.

Charles asked why this was a recovery and not stimulus. I assume he is wondering if this isn't a temporary effect. A recovery is characterized by positive feedback effects, whereas a stimulus might help, but when it goes, only the positive feedback effects remain. And the answer to Charles' question is seen in NACM, in the Monster report showing that blue collar employment seems to be shoring up, in retail services for groceries, etc. This is the NACM report for September activity.

I expect the housing tax credit dingus to fade out without having any long term benefit to the economy whatsoever. In the annals of stimulus, this has to be one of the nuttiest programs in history. But CARS did get some money moving within the economy. Alone it wouldn't have done anything, but low-end retail was moving up already, and I think CARS did genuinely help things along.

Is it a "real" recovery? Not yet, IMO. The positive feedback effects are too isolated and too small a portion of the whole economy to battle the tide of falling incomes. It's not that rare in long recessions to get a bit of growth in the middle as a couple of segments hit bottom and recoup. I had the first indications in May, in traffic. Then in June, domestic freight picked up quite broadly although very minimally. And it has been slowly building over the summer. Most of the growth appears to be in low-end retail for necessities, and that is where many of the jobs are being gained. If you look at manufacturing NACM, you see that although there was improvement in September relative to August, the July peak for amount of credit extended and new credit apps hasn't been exceeded. However, dollar collections are coming up, and new credit apps crept up. This has been a very anemic improvement.

Treasury releases the final day of tax receipts for September this evening, and after that we can look at tax data and what it says about economic potential.

ISM Manufacturing showed a strong rise in all commodity prices, with electronic components in short supply. Order backlogs and inventories were slightly more positive than Chicago PMI, but employment was slightly more negative.

Initial claims still show little sign of backing down. If they could just get down into the 400s it would be encouraging, although hardly a sign of dropping unemployment. But this mid 500 stuff does not make one want to celebrate.

Recessions are just economic adjustments. It is perfectly possible to have one segment of the economy reach trough and begin to rebound in the middle of severe recession, but it doesn't mean that the recession is over. See the links at the bottom of the last post.

One thing different about this recession is that it comes on the heels of a massive two-decade expansion in household credit, and at the end of a decade of basically stagnant real incomes. These two things do not go together to form a sustainable economy. Then there is another hunk of this - the demographic adjustment of the baby boomers. That one is front-loaded for the states, which are now facing significant and continuing constrictions of revenue even while their payouts for retirees must steadily escalate. I expect years of downward adjustments on the state and local spending side of the ledger. I do not believe that most of the states and localities have even begun to deal with their problems. There are major adjustments pending there.

But see this article on auto sales. Note that Hyundai turned in a nice September YoY gain. CARS still has a toe out, and like the general economy, all the life is turning up on the low end of the economy. Of course, that is the end with the least credit correlation!

A Recovery Only Its Mama Could Love

2009-09-30T10:58:00.000-07:00

But I think this one is destined to be a foundling laid at the orphanage door.

Chicago PMI - Really worth reading this month. The comments are worth reading. The overall drop from August's 50 to September's 46.1 is of course disturbing. Production dropped from 52.9 to 47.2. Whimper. Inventories are still contracting, but slower, new orders were down sharply (52.5-46.3), backlogs are contracting. It's a grumpy report - the brightest spot is that although employment is contracting, it isn't contracting any faster. Prices are still trying to shift up even if orders and backlogs are contracting, so I would say the Fed had better be thinking about rate hikes far sooner than they now project.

However this sort of thing is not inconsistent with recovery, and has happened before, so don't worry about those numbers. No, no, the thing that ought to worry everyone is the special question, which was:

Your budget or plan for 2010 contains assumptions/forecast of revenue generation. Your answers to these two associated questions provides a context for economic forecast for 2010. 1. What percent growth (decline) in DOLLAR sales/revenue is contained in your company’s baseline plan for 2010? 2. What percent growth (decline) in UNIT sales/revenue?

The answer (see page 5):

I don't wish to render you all as soggy and dispirited as I am, but technically speaking, almost 60% of companies forecasting real flat to declining revenues and over 60% of companies forecasting nominal flat to declining revenue would be a recessionary indicator. It is quite hard to fit into a picture of the growth year after a very sharp recession. Combined with the remarkably poor trends in base-level goods buying, one would suspect that the carrying wave is just not there, unless we add in some putative factor on the theory that consumers will have paid off more of their short-term debt and can get out there and spend. Which is very hard to forecast unless employment picks up more....

However, if I look at the crude inventories report, I see that the gasoline consumption has picked up sharply over the last 6 weeks. There are more jobs out there. This is the indicator that pushed me over to call recovery - last week it was at +4.4%, and this week it is at +5.4%. You always see a sudden pop in gasoline consumption when the job market starts to pick up again. But I believe most jobs are in low-end retail.

ADP employment was not particularly joyous. They have the monthly decline in lost jobs continuing (-254,000 in September), but the pattern of job losses in small businesses (1-49 employees) is disturbing:

Small Business Jobs Gained or Lost: April-May: -172,000 May-June: -160,000 June-July: -131,000 July-Aug: -114,000 Aug-Sept: -100,000 Large Business Jobs Gained or Lost: April-May: -91,000 May-June: -87,000 June-July: -70,000 July-Aug: -57,000 Aug-Sept: -61,000

There are many more total jobs in small businesses than in large businesses. Normally small business employment tends to be less volatile in downturns, but now I am wondering if that will hold. Go to Chart 4 on page 4 of the link and look at the graph and you'll see. Again, the movements themselves are not disturbing, because there generally is a consolidation stage a few months after emergence from a recession, and according to my indicators, we did emerge into a short span of growth around June.

But what is disturbing are the levels. This graph is percent month-to-month change, and the level is generally linked to the 3 month average of the CFNAI. I believe the mechanism of that linkage is through purchases by small business owners. Anyway, see this post of CR's. CFNAI is not reaching points at which one would normally declare that a recession has ended, and in fact CFNAI blipped down in August. Here is the data series. If you look at both CFNAI and CFNAI-MA3 (the 3 month average), you see we are still at levels that do not indicate broad economic growth, although the move upwards over the summer was quite nice.

Now go back and review the 1979-83 period, and you can see how that double-dip looked. Here's a graph, but you really have to split it up to see what's going on:

You will note that we haven't managed to get to zero yet, or even sustain above -0.50.

So then I guess we would come to Greenspan's remarks. It is possible he is looking at data like Chicago PMI and figuring that it will just be a slow, hard slog, but I am looking at data that almost forces another downturn

The wickedest thing about this is that all the push forward I see is coming from deflation of basic costs. Let inflation for food, fuel and clothing kick up significantly, and it's gone. At the beginning of the year, I expected the second half of 09 to be worse than it is going to be, and the difference is that I thought food prices and so forth would deflate much less.

I am using the 08 Census data to rebalance all my models, and I'll try to calculate from there.

PS: Let's say you were recovering from the flu, as I am. You would not want to read this and this from CERF. I did yesterday and just whimpered back under the blankets. I am pretty sure I am going to come out better than CERF. CERF has US GDP going weakly positive in Q3, reverting strongly negative in Q4, and remaining in negative territory all through 2010. Here's hoping old Greenspan is right. If you are from CA, this is really not the thing to read.

Recovery!

2009-09-23T10:56:00.000-07:00

That's a real recovery. The ugliest little bug of recovery, but it is alive and growing.

The self-sustaining chunk of it is almost all in the lower 2/5ths of the population by income, and it is acutely sensitive to inflation, for one thing. We have to stagger through until next summer without dropping back for it to start forming a chrysalis, but hey, it could happen.

I seem to read nothing but articles state that CARS was a complete waste of money, but IMO, CARS pushed it over. Not only did it move a bunch of stuff around the country for a couple of months, but it also got some vehicles into hands of people who needed them to take up the (mostly lower-end) jobs which are opening up. A lot of people needed reliable transport to get those jobs.

Oh, I am so relieved.

I should point out that there are far more mechanisms by which this thing could be stomped flat than there are ways for it to shift into higher gear, so this could be the short leg of the W. A lot now depends on government policy.

I'm so excited. I'll explain later.

The Floggings Will Continue Until Morale Improves

2009-09-22T14:59:00.000-07:00

I feel truly rotten, so I will depend upon others for the next step:

Laffer. Reliable fellow. WSJ article summarizing the tax hikes and their contribution to the Great Depression, plus the role of gold:

At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.

The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.

Let's just say that the role of gold then is being split between oil, other commodities and gold now. There are differences and similarities between this period and that period, but moving on to Macro and Other Market Musings, it is notable that velocity is dropping:

Read the whole post, but I quote this:

This figure also shows that the Federal Reserve has been significantly increasing the monetary base, which should, all else equal, put upward pressure on nominal spending. However, all else is not equal as the movements in the money multiplier and the monetary base appear to mostly offset each other. Therefore, it seems that on balance it has been the fall in velocity (i.e. the increase in real money demand) that has driven the collapse in nominal spending.

Theoretically, as long as people are saving their money in banks rather than in coffee cans or mattresses, the banking system recycles the money and prevents your savings from becoming your doom. This greatly simplifies household economics, because the average individual is not well equipped to calculate the relative risks of, say, not having funds for car repairs and therefore not being able to get to work as compared to the risk that saving money for car repairs will contract velocity enough so that our average joe or jane will find himself laid off.

Government guarantees on bank deposits plus high costs of incidental credit have sustained the flow of money into bank deposits currently, unlike the early phases of the Great Depression.

Of course, when the banks are tightening consumer credit there is a much greater need to have money saved. When the flow of money from banks starts to be toward the Treasury and away from lending, money circulation is impaired unless the government is doing something that sustains the flow of money in the marketplace. Thus, the no-stimulus features of the stimulus bill have been a problem. Throwing a few hundred billion into infrastructure would have replaced the funds that are being effectively withdrawn by banks and sent to Treasury or put on deposit at the Fed. Alternatively, the Fed could just hand out money to consumers to extinguish high-margin debt and thus improve their incomes, or could offer low-rate loans to offset high rate loans. That would not have the multiplier of infrastructure spending. Consumers will tighten until they get their economic feet back, and the evidence is that they have not.

Thus, although it is a gentler gradient than during the period of the Great Depression (Praise G_D and pass the ammunition), we have entered a similar dynamic and should feel an impetus to do something about it. We can't really do much about state and local taxation. It is going to have to be fought out municipality by municipality and state by state. States will have to cut spending since lenders are wary of financing state deficits, and the demographic problem of the upcoming retiree benefits is upon us.

Oil: Oil as a refuge from monetary problems creates a separate economic dynamic, because both PPI and CPI are strongly related to the cost of oil. When oil goes up, they go up until a breaking point is reached and consumer spending on non-necessities is deeply impaired. When that occurs, trade cycles down and money flows are restricted in many channels, employment drops in some, diamonds deflate, etc. Of course, buying gold and storing it in your basement or buying oil and pumping it into storage or keeping it in a tanker temporarily removes money from circulation. It is not trade, but storage of money. When Chinese farmers are stockpiling copper, we can concede that monetary worries are not sequestered in the US and that the US alone will be unable to fight them, but we should do what we can.

US incomes were dropping in 2008 and are surely dropping now. It is not just wages, but returns on investments and interest paid to households. I also have widespread indications of downward trends in rents, etc. Tight incomes combined with inflation are not going to induce a spending dynamic.

Many authorities have encouraged the Chinese to try to boost domestic demand, but so far that doesn't seem to have happened in any structural way, although it is nice to know that Chinese families without electricity or running water have dutifully bought washing machines. Thank you, Mark.. There are many reasons for this. Chinese farmers and other rural workers were hit very hard by previous inflation in China, and so may be wary. The Chinese worker doesn't have much of a social safety network compared to most countries, so naturally they are pushed to save. They don't, for example, have effective hospital insurance.

All of this leads us to the next aspect of the insurance/health care reform discussion. If insurance is failing, one would definitely expect a savings impetus to travel through the economy and consumer spending to retract.

Insurance is really a means of efficiently saving in the aggregate for highly unpredictable individual expenses. It is economically efficient because the average cost is less than the 20% or 30% individual risk Say I have a 20% risk of racking up 600K in hospital bills over my working life. I reasonably have to save for something close to that, because throwing relatively large amounts of money into homes or businesses does not make sense if I may lose them due to the large medical bill. But if I have a 20% risk of 600K in hospital bills, that means that 80 out of 100 households won't have bills anywhere near that. So grouping the risk allows each household to save less individually and overall cover their aggregated risk more efficiently. This leaves the individual households able to spend more money on average on other things (which could include investments, business expansion, education) and boost the economy.

I need to go into the question of efficient insurance in more detail, but I'm running a fever now and after I administer my medication it's going to go higher, so I think that will have to wait.

But the bottom line is that insurance is not an efficient method of paying for highly predictable levels of expenses. Your predictable expenses will always be more efficiently covered by saving for them. When insurance is serving a dual purpose of welfare (redistribution of income from wealthier to less wealthy families who cannot save for predictable expenses) it is inefficient. This does not mean we shouldn't provide for the needs of poorer families, but redistributing income for welfare purposes should be done with direct welfare policies wherever possible.

Having a certain amount of savings, even if those savings were generated for one specific purpose, will lower a household's total payments and therefore maximize that household's real income and economic options over time. Thus saving for predictable expenses is a fundamental feature of household economy, and diverting those savings into medical insurance is going to be a problem over time.

Rebecca wrote a post some time ago speculating that some of the withdrawal of household equity over the last decade had occurred due to medical expenses. I would venture to guess that she is correct, because I would expect that very high medical insurance bills are stripping many households of the ability to save. I've got to find that post.

My belief is that the US has created a situation in which private medical insurance is increasingly inefficient. This offers some hope of reforming the situation in ways which would support economic growth.

And as for the post title, I got a good laugh out of Steven Chu's latest edicts from on high. This is great stuff, and I think he hasn't seen the political temper tantrums begin. Chu needs to be kept with Biden in the basement of doom:

Dr. Chu said he didn’t think average folks had the know-how or will to to change their behavior enough to reduce greenhouse-gas emissions.

“The American public…just like your teenage kids, aren’t acting in a way that they should act,” Dr. Chu said. “The American public has to really understand in their core how important this issue is.”

A couple of weeks ago I went to a supermarket in one of the richest 100 US counties. The store had introduced store brand flour, and 5 lb bags of it were sold out for $1.88. I think Chu greatly misunderstands the situation of the average American.

They Have Not The Common Touch

2009-09-21T06:31:00.000-07:00

This post actually is about information in systems, most particularly in political and economic systems. However, I'm going to get there a long way around because I am not sure most people understand the relevance without examples.

So first, we have Dana Milbank's hilarious contemplation of Michelle Obama's yen for organic food (hat tip The Macho Response):

Obama, in her brief speech to the vendors and patrons, handled the affordability issue by pointing out that people who pay with food stamps would get double the coupon value at the market. Even then, though, it's hard to imagine somebody using food stamps to buy what the market offered: $19 bison steak from Gunpowder Bison, organic dandelion greens for $12 per pound from Blueberry Hill Vegetables, the Piedmont Reserve cheese from Everson Dairy at $29 a pound. Rounding out the potential shopping cart: $4 for a piece of "walnut dacquoise" from the Praline Bakery, $9 for a jumbo crab cake at Chris's Marketplace, $8 for a loaf of cranberry-walnut bread and $32 for a bolt of yarn.

The first lady said the market would particularly appeal to federal employees in nearby buildings to "pick up some good stuff for dinner." Yet even they might think twice about spending $3 for a pint of potatoes when potatoes are on sale for 40 cents a pound at Giant. They could get nearly five dozen eggs at Giant for the $5 Obama spent for her dozen.

I am pretty sure the people leaving work would find the inconvenience of stopped traffic outweighed any potential joy gained from organic arugula at $20 a pound. I am also thinking I owe the NY Times reporter an apology for his worries over pricey lettuce. Sir, I apologize.

I read Milbank's article and I thought "The Trianon". It lies outside the scope of this post to discuss the political and economic events that led up to the French revolution, but it included unsuccessful wars and losses of foreign possessions, a government that was tipping into bankruptcy, multiple wheat crop failures, and a ruling class that had gradually split away from the military leaders. The society pancaked when the original hold-them-close strategy of the French royal house finally buckled from the disconnect.

Marie Antoinette's hameau and her habit of occasionally milking cows that had been specially groomed in stables that had been specially cleaned, in a villlage with real peasants which had been specially built, with an artificial watercourse which had been created by diverting water for miles (diverting water from working farms) were just a symbol of the gradual loss of understanding between the people and the royal family. She was used as a rallying cry because it was such an effective way to illustrate the real problem. I am not sure that most people can understand how bitterly offensive the upper middle class, the middle class and the peasantry would have found her behavior, but the milk falling into those royal receptacles was even pricier than $20 arugula. Marie Antoinette found a way to alienate absolutely every group in French society of that time, and although she was not bright, she seems to have been personally a somewhat generous individual. This makes her accomplishment even more notable.

If you are interested, the French text of Madame de la Tour du Pin's memoirs is available on Gutenberg (part 1, part 2). This is one of the most fascinating things I have ever read. There is an English translation, but it is out of print and very hard to find, plus it is under copyright. Her observations about the interactions between court, clergy and the military fascinated me.

Anyway, leaving the guillotines for the moment, let us take a big leap forward in time to our present day, and contemplate two WaPo articles about health care reform.

The first is about the Mayo clinic, and it critically analyzes the assertion in President Obama's health care speech that the Mayo model can deliver cost savings. Now although the title claims that the jury is still out, it is only out in Washington. The bottom line is that the Mayo clinic does not serve anywhere near a representative slice of the US population:

"It's not [Mayo's] model. It's their patients and money. If you have the money, you can attract good staff, good doctors, good nurses," said Richard A. Cooper, a professor of medicine at the University of Pennsylvania. "You are going to force hospitals to find ways to avoid taking care of poor people just because they are going to be penalized because poor people cost more."
...
Cooper and others note that Mayo's other facilities, in Jacksonville, Fla., and Phoenix, have total spending rates that are roughly proportional to those in other hospitals in those areas. And across the Upper Midwest, per-patient spending is low, including at centers where doctors are not on salaries.

It's a long article, but the bottom line is that Mayo's efficiencies are gained from keeping their share of Medicaid patients extraordinarily low,

Even in Rochester, a city of 85,000, Mayo serves a higher-income echelon than the town's other hospital, Olmsted Medical Center. Just 5 percent of Mayo's hospital patients receive Medicaid, an exceptionally low figure, compared with 29 percent at Olmsted, where officials say they do more to help people in the community apply for Medicaid.

and for limiting their services to Medicare patients. Mayo doesn't accept Medicare patients from outside the state unless they agree to pay more than Medicare for services. So they are not serving the old and the poor in proportion to the US population, although they do provide excellent medical care to those they do serve. Mayo has a large referral clientele, and it also has a big group of foreign patients. It would be rare indeed to find a hospital that didn't have better outcomes and cheaper services if the hospital's clientele were hugely shifted toward the young and the wealthy.

So perhaps now my readers can begin to understand why my reaction to Obama's speech was so bad. Either he is appallingly ignorant of the facts, or his plan is to strip funding from medical services for the poor and the elderly. The proposal in Obama's speech was to pay more to hospitals like Mayo that have good stats but may have created those stats by not providing services to the poor and the elderly. Is it right that a hospital like Olmstead with 29% of its patients on Medicaid should get paid less to care for those with the more severe problems, whereas Mayo would be paid more to pay for a clientele that has already been sorted to be in the upper socio-economic group?

Anyone who holds traditional democratic values and who understands what is being proposed ought to be just as upset as I am.

Whether Michelle Obama truly believes that the poor will be rushing to the Vermont Avenue organic farmer's market for their double food stamps and whether Barack Obama really desires to defund the medical system for the elderly and poor is a big question. "Dumb or dastardly?" is how I frame it to myself.

Dumb can be fixed, but only if the circle of advisors is changed. It doesn't help matters that President Obama is talking about a recovery when the recovery is increasingly jeopardized. (See this Calculated Risk post, and read on to CR's explanation of how consumer spending and business investment is correlated. I had earlier referred to the same relationship at the end of this post, but CR always has great graphs.) The best, most optimistic picture I can frame to myself is of an administration that has a severe reality disconnect but its heart in the right place. Oh, I want to believe, but this double food stamp stuff for $20 lb arugula is taxing my powers of belief.

This leads me to the second WaPo article discussing the average employee's confusion over what the employee is really paying for health care. The observation is true. The numbers are good - 80 million or so on Medicaid plus Medicare, and about 160 million with private insurance. However there are some gaping holes in the the article, because the high concentration of employment in small-to mid-sized employers is wreaking havoc on the private insurance market.

The primary factors driving the need for health care reform are:

An ever-increasing percentage of the US population on government insurance plans that do not reimburse anywhere near the full cost of providing services, which
Shifts ever more costs onto the privately insured group, and which
Drops the economic return of insurance to many relatively well-off or higher-cost individuals without access to true group ratings, which
Is causing the overall insurance participation rates to drop.

Another way to look at this is that by providing government insurance which does not pay the cost of care, all individuals in the society who are not on government insurance are paying a hidden tax. However the tax is exceedingly oddly distributed in a way that an overt tax never would be distributed. What we are doing now imposes a fearfully high societal cost because it destroys information and price signals.

Just as wacky funny money mortgage lending destroyed price signals and information within the system to produce a seemingly sudden collapse, destroying information in any system will produce sudden collapses.

Since the economic efficacy of insurance involves large pools of people paying average group cost rates, this destroys the fundamentals of the insurance system. Instead of creating a situation in which the maximum number of people can afford to pay the average cost of health care in the form of insurance, we are creating a situation in which it is formidably difficult to figure out what the average cost of treatment is, absolutely impossible to develop strategies to lower the average cost of treatment, and completely impossible for individuals or smaller groups to control their costs. Thus, since have stripped all the real cost information out of the system, insurance groups are competing on the basis of who they can exclude and their ability to negotiate rates with providers. And that is how a person like Mark who is not sick at all (see his comment on the prior post) finds himself shifted into a high risk pool. He is making a rational decision not to participate in that pool, because he is not a high-risk individual. Now when insurance becomes a logistically bad arrangement for a healthy, wealthy person like Mark, it should be obvious that we have a broken system.

So what broke the system?

Costs of treatment have to take into account the cost structures of the hospitals in the areas in which individuals who are insured live. But hospitals no longer bill by treatment, but by negotiated group rate. Hospitals only survive by taking the cost of providing services and allocating different costs for the same services to different groups.

Of course this leaves the uninsured or small-group insured individual in the worst situation, because they will not be paying any average cost of care at all to receive insurance. Instead, the only benefit such small groups or individuals receive from insurance are the negotiated rates.

The fact that size of negotiator has become the primary driver of costs provided to a particular group of insured persons has created a drive toward regional insurance monopolies, which are not a good way to induce economic competition.

The reason why group negotiating power has become the controlling factor for insurance companies is that the government insurance does not pay for the cost of care, especially in hospitals. If you doubt this, you need to read up on Medicare's DRG system, and also look up DRG rates. Here is the 2006 HHS summary for short patient stays by state. Take CA as an example. Medicare reimbursed CA hospital 9.1 billion for 45.8 billion worth of covered charges. You don't make that up by raising the cost of the parking. Medicaid pays less. At a minimum, each hospital has four sets of prices. One is top secret, and only they know. That is the actual cost of providing the service. Then there are Medicare/Medicaid prices, then negotiated insurance prices (which usually vary by insurer), then the price to the uninsured. On average, the price to the uninsured patient will be at least 5 times what Medicare will pay for the same service.

Thus, the cost a patient pays (or an insurer pays on behalf of the patient) at a particular hospital is mostly a function of the patient mix AND NOT THE PER PATIENT COST AT THE HOSPITAL. Consider two examples of a hospital providing services for pneumonia:
Hospital M:

5% of its patients are Medicaid.
10% of its patients are Medicare.
15% of its patients are Medicare but have agreed to pay over Medicare rates.
45% of patients are privately insured.
35% of the patients are paying out of pocket.

The per patient cost is 5K if 1,000 patients are seen annually (there are fixed costs which are the bulk of the cost, plus per treatment costs.)
Medicaid is paying about .8K. Medicare is paying about 2K. Medicare plus is 3K. If the hospital treats 1,000 patients annually, the cost of care is 5,000,000 or 5 million dollars, which is 5,000K

Medicaid: 50 patients, total reimbursement $800 X 50 = 40K, percent of treatment cost 0.8%
Medicare: 100 patients, total reimbursement $2,000 X 100 = 200K, percent of treatment costs 4%
Medicare plus: 150 patients, total reimbursement $3,000 X 150 = 450K, percent of treatment costs 9% (now we are up to 30% of the patients, but we have only received 13.8% of the cost of treatment!)
Private insurance: 450 patients, average payment 6K, total reimbursement 2,700K, percent of treatment costs 54%.
Leftover cost has to be paid by the out of pocket group. 5,000K - 3390K = 1,610K/350 = 4.6k per patient, percent of treatment cost is 32%. Actually what you do is charge about 6-7K, because you aren't going to collect it all from many of these people. It depends on your mix. Actually, what you do is charge your rich patients a different fee, but we don't talk about that.

Hospital O:

25% of its patients are on Medicaid
45% of its patients are on Medicare
10% of its patients are privately insured
20% of its patients are uninsured.

The per patient cost of treatment is 3K if 1,000 patients are seen annually. The hospital is spartan, the doctors are paid less, the patients get adequate care for the most part, but it is a very different patient experience from being treated at Hospital M. Hospital O makes up some of its expenses by charging for things that are provided free at Hospital M. Medicaid and Medicare reimbursements are the same. Total annual cost of treating 1,000 patients is 3K X 1,000 patients or 3,000K - considerably less than Hospital M.

Medicaid, 250 patients, total reimbursement $800 X 250 = 200K, percent of treatment cost 6.6%
Medicare, 450 patients, total reimbursement $2,000 X 450 = 900K, percent of treatment cost 30%.
Privately insured, 100 patients, total reimbursement $6,500 X 100 = 650K, percent of treatment cost 21.6%
Uninsured, 200 patients who have to pick up the balance of 1,250K. Per person cost is 6.25K - considerably more than Hospital M's cost, because of the patient mix. Because the per person cost is higher, any patient who can choose and who will pay tries to go to Hospital M. Therefore, your uninsured population will pay at much lower rates than Hospital M's. You probably have to charge about 25K for a 3K service to get your money.

That is how you get ridiculous hospital bills such as the one Teri got for her husband's care. Medicare wouldn't have paid more than 25K at most, but she got a $170,000 bill. Note that Hospital O is in a trap. It can't charge very much more than Hospital M for the same service, because insurers will send their patients to Hospital M in preference. But it must get far more of its costs reimbursed from private insurance than Hospital M, because Hospital M is treating a much wealthier group of people who on average pay more.

So which hospital is more efficient at delivering medical care? From an out-of-pocket patient's or a private insurer's point of view, Hospital M is far more efficient. Because they spend more, patients on the whole have better outcomes. The out of pocket cost paid by either a patient or insurer is lower. Thus you choose Hospital M whenever you can if you are one of these groups.

But from the administrative/total cost point of view, Hospital O is far more efficient. To control total costs, you need to get rid of Hospital M entirely, which of course you cannot do. It's a free society. Of course, if everyone is enrolled in the same medical service, Hospital M's seeming advantage is eliminated overnight, and its doctors, administrators and patients are abruptly going to get an unpleasant wake-up call. So are its patients, who have been used to a higher standard of care than they will now be receiving.

If you will contemplate this example, which is pretty close to reality, you'll understand why Mayo is ferociously lobbying against the public insurance option.

Moving back to Hospital M, because I do not want to be sued, why would Hospital M be agitating for higher payments from Medicare based on its (spurious) cost advantage? Aren't they in the driver's seat? Well, Hospital M's budget includes funds for some pretty high-powered actuaries, and Hospital M is well aware that on average, most treatment goes to older patients, and on average, the mix of patients it sees will inevitably shift toward higher percentages of Medicare patients in the years to come. This is a massive threat to Hospital M's finances. In fairness to Hospital M, we should point out that their better care and the lower patient load per doctor/nurse allows them to provide other services to the community and the nation, which Hospital O's spartan existence does not permit. So Hospital M is quite concerned about the following:

Over the next decade the number of individuals who will move onto Medicare vastly exceeds the number of individuals who will exit Medicare. The median householder age in this country is now 49. As of the 2007 ACS, 10.9% of the population was aged 55 to 64, 6.4% of the population was aged 65 to 74, and 6.1% of the population was 75 and over. Assume that all of the older persons die (although they won't), and just take the two younger cohorts. As of 2007 the retired Medicare population was 12.5% of the total population. In 2017, you'd expect over 16.5% of the population to be retired onto Medicare (allowing for some early deaths). And it is the ratios that matter. There is another group of people on Medicare - the disabled. As the center of population ages, the disability rate rises quite dramatically. Thus the Medicare portion (disabled plus retired) is likely to go over 17% of the total population.

To understand the implications for the medical system, you have to realize that older/disabled persons consume a much higher proportion of medical services than their proportion in the population. Thus below cost Medicare reimbursements will rapidly drive up the individual cost for service on the rest of the population. Compare the cost sharing for Hospital O and M to see how that might work out.

Adding more people to Medicaid is not helping. Although children have overall low medical costs, many of the SCHIP recipients added most recently were shifted from private insurance to government insurance. So the net load of total costs the private and uninsured population is carrying has escalated and will continue to escalate.

Further, private insurance provided through employers must go up proportionally to age of the insured population plus percent of costs picked up by private insurance from those insured in government programs, and as the ratio of the employed/total population drops, things are going to get very frightening very fast:

The recessions induce distortion, but if you look at the interims, we have been on a downward slope since 1999 or so. Mind you, most households with the householders under 75 STILL have one working person in them, and almost half of the income of such households derives from wages, salaries, and proceeds from self-employment.

Therefore any chittering about raising the retirement age is as dumb as $20 arugula with double food stamps and expecting that building 90,000 Mayo Clinics around the country is going to cut your medical costs.

In fairness to the Dems, at least they are trying to discuss reform. After his election, President Bush threw everything he had into trying to address this problem, and the Republicans in Congress wouldn't touch it. There is a reason why we now have a Democratically-controlled Congress, and it is a good reason. The results are not thrilling, but I personally don't think the Republicans would be willing to discuss the problem if they were in power at this time. In part, that might be due to Pelosi's drivel about mythical trust funds, but in part it was due to idiocy.

This post is awfully long already, but I have much more to discuss. It will have to be tomorrow, I suppose. One of the topics I want to address is the economic efficacy of insurance and what type of growth impact it can have.

Democrats ARE Stupid (on Healthcare)

2009-09-16T19:08:00.000-07:00

This is driving me nearly nuts, but I am laughing at the same time.

First we've got the wild claims that anyone who is not for Obama's healthcare plan is racist. Shrinkwrapped gives an explanation, which may well be true, because according to this Rasmussen poll only about 12% of voters really think most the opposition is racist.

In the meantime, this raft of racism accusations are beginning to frazzle some Obama voters. Ann Althouse seems to be in the frazzled group, observing that a president that we are not allowed to criticize is "revolting". Any moment now the woman will be photographed wandering around waving teabags, wearing a "Don't Tread On Me" t-shirt and brandishing a rifle. This is what happens when you marry a guy who works for a living and suddenly spend a lot of time outdoors.

Now we move on to the ?racists? at DU, who are completely horrified at Baucus' plan. They do not want mandated coverage. They mostly want universal health care, but they generally do not want to pay for universal health care. They want it free, or for maybe 5% of their incomes. Or maybe Warren Buffett should pay for most of it, and Bill Gates should cover most of the rest.

Here's a DU thread that asks people if they would pay 13% of their incomes in order to get on Medicare:

66. As a singe person with no dependents, I have paid almost nothing at most employers during my career.

The employer has paid the whole premium for the employee, and then the employee pays for dependents. Or I have paid a small amount, like up to $60 a month for one employer. 13% would come out to about $540 a month (if you take it out of the gross pay). That woud be a HUGE bill to suddenly have when I have been used to paying much less or nothing. So, I would repeat what others have asked... would this be assuming the employer will pass on the savings to me, so whatever was being paid toward my benefit I can now turn around and put toward that 13%? If not, then I would probably have to sell my house, because I can't afford a new $540 per month bill.

Some people are just so clueless that they have never understood any of this. Here's one:

10. Isn't it like 2% now? A 600% increase seems a tad steep.

Some persons just seem confused about percents:

18. Let's assume for the moment that you don't have health care through your company. That's the situation for a lot of small business owners and their employees, not to mention independent contractors (construction to software).

Your take home pay (after federal and state and local taxes) is likely $3500 a month, so we are talking about 1/4 of the after tax income. That's what most people in that income range will pay for rent or the mortgage ( they might be at, say $1200/month for that). Combined, it would take over half of their income, leaving $1500 a month for utilities, car payment, gas, car insurance, clothing, and food.

...

73. No my employer pays 100% of my insurance premium. I pay 10% of my bills up to a yearly maximum of $1000.

Another set of posters still think they are in an anti-Vietnam march, chanting "Hell no, I won't go".

76. Hell no. Insurance is a lot cheaper.
...
78. I guess they'll do anything not to disturb the rich...Fuck No ! I won't pay.
...
39. It would not be 13% if paid for under a progressive tax system
Yet another benefit of tax-funded single payer.

No one can convince this last person that in fact a payroll tax is a progressive system - right now, with employer-funded healthcare, the employer is basically paying the same for everyone as a cost of employment, which is the same as wages to the employer. Therefore, the low-income person relatively pays more. The attempt to explain is made, but fails.

Okay, but some people are a little more clued in, and realize this isn't going to be a bad deal:

32. In a heartbeat!
Right now, I'm paying about 18% for a catastrophic policy.
...
36. Yes. My husband would probably end up with an increase in pay
Right now my husband's share of our health insurance is about 7% of his monthly income. I am sure that his employer pays a far higher percentage of his wages per month for their share. If the employer's share were part of my husband's income, 13% for Medicare would likely give him a net increase in take home pay.

When he paid into COBRA in 2002 while between jobs and while not covered with one job, the monthly payment was 50% of his previous take home. I don't even want to think what COBRA would cost these days. Probably more than he'd get from unemployment.

We would not have to worry about that if we were covered by Medicare. No worry about losing coverage between jobs, or paying massive amounts for COBRA, or being denied coverage, or being turned down for a job because of his age and how that would increase the insurance payments for the company.

Unfortunately, these people are a minority, and then some have other problems (as explained by SW):

31. I think Medicare is not accepted by my doctors.
so no.
...
37. Same here
Our docs don't take Medicare, Medicaid or TriCare
...
62. Wow! Do these people have any idea how hard it is to survive
on low paying jobs that don't qualify for any assistance? I work as a nurse aide. Government says I make too much money to qualify for a grant towards furthering my education. In fact, on my job the healthcare cost way too much for me to afford.... about the 13% we're talking about. I had to choose between healthcare or an apartment to live in. I choose not to be homeless. The plan my employer has is with Grouphealth... a co-op! Now they want to take that choice away from me a force me to either take on a roommate or take to the streets? What the hell kind of choice is that?

Well, you will be alive, unless you pick your roommate unwisely, but I guess this person has already made the choice. It's no.

Germany's current system is transitioning to a central fund, and the ongoing payroll tax is supposed to be close to 16%. We couldn't possibly do it for less, and in fact it would cost more. For one thing, we'd definitely have to raise a lot of Medicare reimbursement rates. Plus, Medicare is 80/20 coverage, with a premium of about $100 monthly and another premium of about $30 monthly for partial prescription coverage. It costs hundreds more a month if you want expanded coverage over that. Also, 75% of SMI is paid for through general tax revenues, so it would be more like a 20% payroll tax. Right now less than 1/6th of the population is covered by Medicare, so obviously it will cost a great deal to add everyone to Medicare.

The bottom line is that most people don't want to pay more than they are paying now, so the only people really supporting the universal coverage stuff are those who don't realize what it will cost or who are already paying more now.

Under these circumstances, it is unlikely that reform will succeed, because the end result is that the Ann Althouse bracket is going to wind up paying considerably more for their coverage than they do now, either in the form of premiums, or in the form of much higher income taxes.

Actually, the single-payer payroll tax would be much fairer than the proposed system. For example, under the proposed system illegal aliens still get covered but basically don't have to pay. They can't get fined, either. And if they don't have insurance and show up at an emergency room, they will get treated anyway, because that is what the law requires. If it's funded through a straight payroll tax, they'll be paying what they can afford to pay, like everyone else.

Does everyone understand how Medicare is funded? It is completely busted. This is the 2009 full report on Medicare (pdf, 245 pages). If you don't understand, go to page 11 of this file.

Part A (hospital insurance) is paid for by a wage tax of 2.9%. There is no limit on the wages. If you earn 2 million, you pay the 2.9% on all 2 million. In 2008 that payroll tax brought in 198.7 billion. Other payments were taxation of benefits (11.7 billion plus premiums of 2.9 billion for non-qualified retirees). Benefits cost 235.6 billion. The general fund (income taxes) had to pay for the difference which was about 16 billion. Every year that gap will grow.

Parts B and D physican, outpatient and partial drug coverage(or part C, which replaces them, also known as SMI) are supposed to be funded about 25% by enrollee payments and 75% by the general fund (income tax). In 2008, total premiums were 50.2 billion for part B (that about $100 premium paid each month) and 5.0 billion for part D. States paid 7.1 billion, and the general fund paid 146.8 for Part B and 37.3 billion for Part D.

So, total Medicare costs were about 468 billion, and the share paid by income tax was about 200 billion and the share paid by Medicare payroll tax was about 200 billion. .

In 2008, about 45 million people were enrolled. Long term disability recipients also receive Medicare - slightly less than 38 million people were retirees. Total cost per enrollee was about $11,000. Mind you, this is for 80/20 coverage and partial drug coverage only. Most retirees pay additional premiums to cover other expenses, or they pay those expenses out of pocket.

What would it cost to extend Medicare to everyone?
The US population is around 300 million people. Younger people are cheaper, but many of the individuals in their 50s or 60s are not, and Medicaid recipients are often pretty expensive. There are also high costs in maternity, and sick infants can be incredibly expensive. Let's say the average cost per younger enrollee was $6,000 a year. (The average employer plan is well over 10K a year now for a family, so we are not far off, because these are the healthier persons on average).

That is still over 250 million new enrollees, or 250,000,000. 250 * 6,000 = 1,500,000 million, or $1,500,000,000,000. That is an additional cost of 1.5 trillion. Now if you add 1.5 trillion plus .47 trillion ( the 468 billion cost for the current recipients), you get 1.97 trillion. Q2 09 annualized GDP was around 14.2 trillion, so we are looking at about 13.8% of GDP for insurance costs, but the average recipient would be paying considerable dollars out of his or her own pocket (over $1,200 in SMI, plus drug costs, plus the 20% that Medicare doesn't pay. So we are right back at 16-17% of GDP, which ought to clue everyone in right away that universal coverage is not going to lower our medical costs. You can forget about that. It's complete BS.

Mind you, as our population increases the average cost per person increases, so we would expect the percent of GDP to move higher.

The next question is how much would this cost per person who was paying? Obviously you are not going to be charging the children, although they would be covered. Therefore you are somehow going to get it out of payroll (wage tax) or income taxes. Sooooo, the easiest way is to induce the wage tax percentages from the current costs.

In 2008 a wage tax of 2.9% brought in about 199 billion, total premiums for SMI were about 55 billion, and the balance (468 billion - 255 billion) was about 213 billion. The balance came from the general fund, i.e. income taxes. We need to raise another (gasp) 1.5 trillion in revenue, but remember, most employers are paying a lot for insurance now, so it is not as bad as it sounds. Also, we can take back somewhere around 300 billion that is spent on Medicaid, so that helps; it brings it down to 1.2 trillion. There are about 150 million workers. If each of them paid $100 a month in premiums, that is $1,200 a year * 150 million or 180,000,000,000 or 180 billion. Plus we are going to charge maybe another 18 billion for the drug coverage, so that takes us to 198 billion. Let's call it 200 billion. Okay, we are are still looking for 1 trillion.

Now here Richard Cohen, who does not dilly-dally with algebra and who believes writing is the highest form of reasoning, would be flat stumped and resort to writing a column on racism to demonstrate his complete lack of confusion and overall intellectual superiority. (I like Cohen, but I don't understand how one survives without fractions and percentages. How do you even figure out which food container is cheaper, or whether a sale is a good deal?) One suspects that the same process produced the string of Salon articles mourning our collective racism. But we, the cretinous racist math nerds causing Salon so much angst (and epistemological confusion, because so many of us are people who are not Caucasian), are not stumped.

If 2.9% of X wages brought in 200 billion, and 200 billion is one-fifth (20%) of 1 trillion, we redneck gun and slide-rule toting racists know that 5*2.9% in wage taxes is going to net us a trillion. We be brilliant! We can even multiply 2.9 * 5 to get 14.5%, which means our new, universal Medicare wage tax will be 14.5% plus 2.9% or 17.4%. Hokey dokey. If half is paid by the employer, and half is paid by the employee, the new Medicare tax is going to be 8.7% or thereabouts.

Here is where we truly begin to grasp the reason for all of the confusion. We know that the government would be quite happy to get their hands on this extra trillion, but they have so many brilliant plans for it, and yet the cretinous racist math nerds of the nation are going to expect medical care. That alone is reason to obfuscate the issue. And then there is the problem that professors earning 100K and upwards a year would be paying considerably more for less benefits. 8.7K annually plus a $100 monthly premium for 80/20 coverage would be a real comedown for so many higher-paid workers. The employer share would not be a problem, because the employer is probably paying that or more already.

Nonetheless, at this point one begins to suspect that Ann Althouse can handle percents and kind of has already guessed this, and therefore finds the healthcare bills truly confusing and not very inviting, because of course she is going to wind up paying for this.

And then there is another problem, which brings us back to the Shrink's post on McGovern's idiotic proposal to just open up Medicare to everyone. As SW writes:

Yesterday George McGovern solved the healthcare crisis, obviated the need for any further debate, and simplified the entire problem to one line:

It's Simple: Medicare for All
Why didn't I think of that? How obvious, take all that money being wasted on insurance company profits, do away with the middlemen, and "voila," problem solved. Perhaps because Senator McGovern does not work in the Medical field or think too deeply about what he is writing about, such a simple and obvious solution seems plausible. A few points that the good Senator misses should be incorporated into his thinking since the details make all the difference.

First, and most obvious, Medicare is going broke. The current set-up is unsustainable. If we extend it to everyone, it will go broke more quickly. However that is really the least of the problems with the idea. The fact is that the only reason Medicare works for most people over 65 is because private insurance, private payers, and private Doctors all offer the Medicare recipients a hidden subsidy.

So we are going to be raising Medicare provider premiums (if we want to see doctors and have actual hospitals). Perhaps I have enough in my 6K premium per new enrollee to cover it. Perhaps not. I suspect not, after reading the full 2009 Medicare Trustees report linked above. From the introduction:

The SMI trust fund is adequately financed over the next 10 years and beyond because premium and general revenue income for Parts B and D are reset each year to match expected costs. However, further Congressional overrides of scheduled physician fee reductions, together with an existing “hold harmless” provision restricting premium increases for most beneficiaries, could jeopardize Part B solvency and require unusual measures to avoid asset depletion. Part B costs have been increasing rapidly, having averaged 7.8 percent annual growth over the last 5 years, and are likely to continue doing so. Under current law, an average annual growth rate of 5.5 percent is projected for the next 5 years. This rate is unrealistically constrained due to multiple years of physician fee reductions that would occur under current law, including a scheduled reduction of 21.5 percent for 2010. If Congress continues to override these reductions, as they have for 2003 through 2009, the Part B growth rate would instead average roughly 8.5 to 9.0 percent. For Part D, the average annual increase in expenditures is estimated to be 11.1 percent through 2018.

In any case, we already know that people just don't want to pay even 13% of their incomes, so it is clear there is not really popular support for this measure. This was an exercise in futility.

We are not gonna drown the old people. We are going to pay the doctors. If we are not willing to pay for universal coverage, we are not willing to do it. We should find another way to improve the system, but regardless, we are going to be paying higher tax rates because as the retiree/worker benefit enlarges, the share of costs shifted to the private sector will have to drop and we will be paying relatively more for each retiree as well as having more retirees.

The estimate in the Trustees report is that the 2.9% payroll tax needs to go to 3.88% to cover the HI deficit. We will have to raise premiums to cover the SMI deficit, and make the premium structure even more progressive than it is now. It's doable. And we will have to constrain costs somewhat, but we aren't going to be able to take it out of the doctors' pockets. They're pretty much down to their underwear already.