Keynesian Monetary Policy keeps Interest Rates low and Bankrupts Pension Funds

Posted by PITHOCRATES - November 10th, 2012

Week in Review

For a long time Keynesians in government said borrowing money was not a big deal for governments.  At first it was people owing money to themselves.  No big deal, right?  As the people would never call those loans in.  Then it was foreign investors buying a nation’s sovereign debt.  No big deal, right?  As long as the additional cost of borrowing didn’t increase dramatically for the next issue of debt what was the harm?  Well, as long as you didn’t live off of your savings or a pension it was hard to see the harm.  But if you did live on a fixed interest income or a pension you saw a HUGE amount of harm (see British company pension deficits soar past 230 billion pounds – report by Sarah Mortimer posted 11/7/2012 on Reuters).

“Things have got much worse for defined benefit (DB) final salary pensions,” said Mel Duffield, head of research at the National Association of Pension Funds (NAPF).

“Our fear is that the firms might decide to close these pensions altogether, further undermining the UK’s ability to save for its old age,” Duffield said…

Repeated rounds of central bank easing have contributed to a sharp drop in the yield on British government gilts – a staple investment for pension funds – making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.

Keynesians are all for taxing, borrowing, printing and spending.  For they think there is no harm that government spending can’t overcome.  But there is.  First of all when the government borrows money it pulls investment capital out of the private economy.  Raising the cost of borrowing for business.  But it’s even worse when the government starts printing money to lower the interest rates even further.  Because retirees live off of the interest of their savings.  As do pension plans.  When the government keeps interest rates artificially low to ‘stimulate economic activity’ it neither stimulates economic activity nor provides a livable income for retirees.  As the resulting price inflation eats up their savings at an accelerated pace.

This is the cost of excessive government spending.  Passing the bill for today’s spending onto future generations.  And destroying the retirement of today’s retirees.  And future retirees.  As their pension funds become so underfunded that business can no longer maintain them.  And abandon them.  Having the state pick up the cost of these retirees.  Guaranteeing these retirees will get even less in retirement as the government struggles to pay these pensions in an expanding budget amidst falling tax revenues thanks to an aging population.  And if you want to get an idea of just how this can get just take a look at Greece.

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Birth Control and Abortion have reduced Tax Revenue and House Values for Seniors

Posted by PITHOCRATES - August 26th, 2012

Week in Review

Birth control and abortion will bankrupt Social Security and Medicare.  And they will bring down Obamacare, too.  When Social Security became law we had a growing birth rate.  More people were being born each year.  So the population was expanding.  And the Roosevelt administration thought it would keep expanding.  So they created a Ponzi scheme.  Social Security.  Where more young people (i.e., taxpayers) pay into the system than retirees (i.e., tax consumers) collect from the system.  A foolproof system.  As long as the population continues to expand.  Keeping the base of the pyramid growing larger than the top of the pyramid.

Well their assumptions didn’t hold.  Women stopped having babies beginning in the Sixties.  Just as the Johnson administration gave us the Great Society and Medicare.  Based on the previous assumption that women would keep having babies.  So the funding mechanism was a flawed as it was for Social Security.  And now Obamacare is going to expand the Medicare model.  In the face of what is now a declining population growth rate.  Meaning the number of taxpayers will dwindle as the number of tax consumers retiring will explode.  Causing the aforementioned bankruptcies.  And that declining birth rate is causing even more financial damage (see Is Our Aging Population Partly to Blame for the Slow Recovery? by Philip Moeller posted 8/21/2012 on U.S. News & World Report).

As the unusually weak economic recovery continues, you’ve at least got to wonder if future studies of what ails us will include our aging population as a material cause. Simply stated, older people tend to liquidate assets to fund their retirements. Younger people tend to acquire financial assets as their personal wealth rises and they build their own nest eggs.

The United States has enjoyed nearly 40 years where the number of people acquiring assets was greater than the number of people disposing of them. This condition is being turned on its head. We now face roughly 40 years where there will be more people in this country wanting to sell financial assets than buy them. This supply-demand shift could put a lid on asset values and depress overall economic growth.

So on top of the government failing us in our retirement even our own retirement savings are going to fail us.  It will be like being on the far side of a housing bubble after the bust.  Where seniors want to sell their houses to finance their retirement.  Only to get tens of thousands of dollars less than they had planned.  For just as there are fewer taxpayers to pay the taxes to support an aging population there are fewer homebuyers (as well as other asset buyers) to buy the houses of an aging population.  Lower demand means lower selling price.  And a less comfortable retirement.  All because of that generation of greed and selfishness.  The baby boomers.  Who were all about sex, drugs, rock & roll, birth control and abortion.  And not so much about raising children.  Of course they, too, will suffer the effects of their selfish ways.  As there will be fewer taxpayers to support them in their retirement.  Or to buy their houses.

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Japan’s Future is Bleak thanks to their Welfare State and their Aging Population

Posted by PITHOCRATES - April 28th, 2012

Week in Review

Japan made two great mistakes since World War II.  Establishing a great welfare state.  And interfering into the private sector economy during the Eighties.  Causing a great asset bubble.  And a deflationary spiral lasting a decade or two.  Which has compounded their first mistake (see As Japan strains to care for elderly, sacrifices begin by Chico Harlan posted 4/28/2012 on The Washington Post).

In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund Japan’s soaring social security costs.

And the potential tax hike is only a sneak preview of the burdens to come as Japan grows into the world’s grayest society, a nation where two decades from now seniors will outnumber children 15 and younger by nearly 4 to 1.

Economists and government officials say that Japan, in the coming years, will probably raise the retirement age, again increase taxes and trim spending on everything from education to defense, all to care for its elderly.

Young Japanese — those entering the workforce amid two decades of stagnation — will face the greatest burden: They will earn less in real terms than their parents, pay higher pension premiums, receive fewer social services and, eventually, retire with a less-generous pension package.

Talk about inverting the pyramid.  Which is what social security is.  A pyramid scheme.  Which will work as long as those entering the scheme outnumber those collecting benefits from the scheme.  Because everyone pays a little to support the big consumers at the top.  But what happens when the big consumers at the top outnumber those paying into the system 4 to 1?  You suffer.  And sacrifice.  With a capital ‘s’.  Especially those at the bottom.  Who will pay in more than those at the top ever did.  While only collecting a fraction of their benefits.  If they collect anything at all.

This is the problem an aging population causes a spendthrift government.  You simply can’t spend at a greater rate than the rate your population is growing.  Because all government spending has to be financed by the taxpayers.  Those with jobs.  In the private sector.  So if the population growth rate falls (i.e., the population is aging) the tax contributions from the individual taxpayers must increase.  Basically enslaving the younger generation to the older generation.  The lesson of Japan should be a cautionary tale to governments everywhere.  For it will happen to you if you try to be too generous with your state benefits.

As it rose into an economic power after World War II, Japan created a generous social security net, with a universal health-care system and a universal pension system in which people were covered as employees or via a basic national program. But since the collapse two decades ago of the real estate and stock market bubble, the foundation of that system has started to crack. Tax revenue has dropped amid deflation, forcing Japan, whose debt-to-GDP ratio is highest among developed countries, to fund its social programs with more and more borrowing…

Kakuta [a 20-year-old college student] said he didn’t think the cutbacks to the current system were coming fast enough. And he doubted the ability of Japanese politicians to draft the right policies.

“To me,” he said, “it sounds more and more like we’re passing this on to the younger people. . . . I feel especially bad for the generation after mine. And that certainly doesn’t motivate me to have more children.”

Who would want to burden their children with a life of near-subsistence?  So it is not surprising that the younger generation may not have the same number of children that their parents did.  Which is the worst thing possible for the government.  For there will be fewer people entering the workforce.  While the population of those leaving the workforce will grow ever larger.  Making the burden on the young even greater.  For each individual will have to support more retirees.  The retirees will, in effect, become their children.

The U.S. is following the Japanese.  For we already know Social Security and Medicare are going bankrupt.  And now with Obamacare thrown in the mix the U.S. will run to catch up with Japan.  As the Europeans are trying to do as well.  Perhaps heralding the end of Western Civilization.  As we turn the hands of time back.  To when there was a ruling elite and impoverished masses.  Who will work for no one but the state.  In exchange for their meager state allowance.

Marx and Engels had it all wrong.  You don’t destroy the middle class with a revolution of the working class.  You do it with the welfare state.  And let the middle class destroy themselves.  By demanding ever more from the welfare state.  It may take a little longer.  But it is so much easier to do.  All you have to do is give people lots of free stuff.  And the people will take it from there.  To the European sovereign debt crisis.  Or to something worse.  To something like that lurking in Japan’s future.

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FT100: “Benefit recipients agree that responsible governing should start AFTER they get theirs.” -Old Pithy

Posted by PITHOCRATES - January 13th, 2012

Fundamental Truth

Legacy Health Care (and Pension) Costs Bankrupted GM

Franklin Delano Roosevelt ruined General Motors (GM).  And created the health care crisis.  How?  With price controls.  By interfering with market pricing mechanisms.  In a misguided effort to fix the economy he instituted a maximum wage.  Meaning companies couldn’t compete for good workers by offering them a higher wage.  So to compete for good workers they started us down a path that is destroying our economy.  Instead of higher wages (which were illegal) they offered benefits.  And the United States would never be the same.

Health care.  Before FDR, we paid for our health care.  After FDR, other people paid for our health care.  And we demanded more because we weren’t paying the bill.  It worked well for awhile.  When there was an expanding population.  When there were always more younger workers than older workers.  And retirees.  But the population aged.  Thanks to birth control.  And abortion.  During FDR’s time it was common for a family to raise 10 children.  Now it’s closer to 2 or 3.  Which means a generation or two later there were no longer more younger workers than older workers and retirees.  And what does this mean?  Well, older workers and retirees consume more health care than younger workers.  So the cost of health care soared for business.

This is what bankrupted GM.  These legacy health care (and pension) costs.  Instituted during a time when they were cheap and easy to provide.  But they became unsustainable.  Because of that declining population growth rate.  Union contract after union contract discussed these legacy costs.  But the way the rank and file felt was that it was their turn.  The system may be flawed.  But it worked before them.  So let them have their benefits they say.  And fix the system after they get theirs.

Social Security and Public Sectors have the same Problems GM Had

Social Security has the same problem.  That declining population growth rate is forcing fewer and fewer workers to support a retired worker.  And they’re living a lot longer than FDR’s actuaries ever calculated thanks to better and better health care.  Which just compounds the problem.  Social Security is a pyramid scheme gone bad.  The top is far wider than the base.  There are more benefit recipients than benefit contributors.  And it will follow GM into bankruptcy.  It’s just a matter of time.

There’s been a lot of talk about privatizing Social Security to prevent its collapse.  But it always meets fierce resistance.  Especially from the elderly and retirees.  Who are stuck in the system never having provided for their own retirement because they believed in the Ponzi scheme that is Social Security.  They say the system may be flawed.  But it worked before them.  So let them have their benefits they say.  And fix the system after they get theirs.

If you combine the rising health care costs and the rising pension costs inherent with a declining birth rate we come to the public sector.  Who have always enjoyed far better benefits than those in the private sector.  But that aging population is requiring ever higher taxes to support these most generous benefits.  And the taxpayers simply can’t sustain them any longer.  Those in the public sector know these systems need to be reformed.  But they worked before them.  So let them have their benefits they say.  And reform the system after they get theirs.

This Generation will Always Kick the Can to the Next Generation

That’s the problem with bad public policy.  Everyone can agree that bad policy needs to be reformed.  But what harm could one more generation do?  So kick that can down the road.  We have time.  After all, it took generations to get where we are now.  So another generation won’t ruin the country.  Even though it very well could.  But the important thing for them is that they get their benefits.  And the responsible governing can start after they get theirs.

But that’s the problem.  This generation always wants the following generation to fix things.  They always want to kick that can down the road.  But the problem is that there will always be another generation to kick that can to.  So they always will.  And no one will fix these problems while there’s a chance to fix them.  One generation will just suffer the consequences of all this can kicking.  As will every generation that follows.

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Obama Threatens Seniors and Veterans if he doesn’t get his Way in the Budget Debate to Raise the Debt Limit

Posted by PITHOCRATES - July 13th, 2011

Hypocrisy is a Two Way Street

Arguing over debt limits is nothing new.  Neither is the hypocrisy.  It’s not about doing the right thing.  It’s about politics.  Always has been (see Debt Crisis Déjà Vu by Howard Kurtz posted 7/12/2011 on The Daily Beast). 

Democratic Sen. Kent Conrad is losing patience with arguments for raising the debt ceiling.

“The question is: Are we staying on this course to keep running up the debt, debt on top of debt, increasingly financed by foreigners, or are we going to change course?” he asked.

But Republican Sen. Chuck Grassley says there is no alternative, with lawmakers facing “a choice between breaking the law by exceeding the statutory debt limit or, on the other hand, breaking faith with the public by defaulting on our debt…”

“To pay our bills,” said John Kerry, who had just lost his presidential bid, “America now goes cup in hand to nations like China, Korea, Taiwan, and Caribbean banking centers. Those issues didn’t go away on Nov. 3, no matter what the results.”

And always will be.  Parties typically stand by their president.  As the Republicans stood with George W. Bush in 2006.  Who then made the same arguments that the Democrats are making now.  And the Democrats are making the same arguments now that the Republicans made then.  Nothing ever changes.  Just their principles change to suit the politics.

In fact, every Senate Democrat—including Barack Obama and Joe Biden—voted against boosting the debt ceiling, while all but two Senate Republicans voted in favor. It was Bush’s fourth debt-ceiling hike in five years, for a total of $3 trillion.

Eric Cantor and John Boehner voted then to raise the ceiling, and on other occasions during the Bush administration; now they’re leading the opposition. Obama, who warned Tuesday in a CBS interview that he can’t guarantee Social Security checks will go out after the August 2 deadline, has said his 2006 vote was a mistake.

Obama and Biden were against raising the debt limit then because it was fiscally irresponsible.  They’re for it now.  Even though the debt is higher.  And more fiscally irresponsible.

Obama said his 2006 vote was wrong?  I guess we can forgive him being that he was young and inexperienced coming into the U.S. Senate.  Of course, he was even more young and inexperienced as far presidents are concerned.  So perhaps his policy is wrong, too, like that 2006 vote.  The stimulus.  The auto bailout.  The Wall Street bailout.  All that Keynesian tax and spend.  Perhaps when he grows up and learns from experience he will be saying he was ‘wrong’ a lot more often.

Monetary Policy fails to Eliminate the Business Cycle

And speaking of all that Keynesian policy, how has it worked?  (see Bernanke: Fed May Launch New Round of Stimulus by Jeff Cox posted 7/13/2011 on CNBC). 

Federal Reserve Chairman Ben Bernanke told Congress Wednesday that a new stimulus program is in the works that will entail additional asset purchases, the clearest indication yet that the central bank is contemplating another round of monetary easing…

Markets reacted immediately to the remarks, sending stocks up sharply in a matter of minutes. Gold prices continued to surge past record levels, while Treasury yields moved higher as well.

It hasn’t been working.  But never say die.  Just because QE1 and QE2 failed it doesn’t necessarily mean QE3 will fail.  But it will.  And it will further depreciate the U.S. dollar.  Which is why gold prices and Treasury yields are up.  They’re priced in dollars.  So when you make the dollar smaller, you need more of them to buy things priced in dollars.

The Fed recently completed the second leg of its quantitative easing program, buying $600 billion worth of Treasurys in an effort to boost liquidity and get investors to purchase riskier assets…

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke told the House Financial Services Committee on the first of two days of Capitol Hill testimony.

Bernanke also said it was possible that inflationary pressures spurred by higher energy and food prices may end up being more persistent than the Fed anticipates.

So the Fed is looking at policy to fight both inflation and deflation.  Interesting.  Because you use monetary policy to fight one with the other.

This is the Business Cycle that Keynesian economics purportedly did away with.  As inflation starts rising you contract the money supply via higher interest rates.  As deflation reduces asset value you lower interest rates to stimulate borrowing and asset buying.  There’s only one problem to this Keynesian economics theory.  It doesn’t work.

Playing with interest rates to stimulate borrowing does stimulate borrowing.  People take advantage of low rates, take out loans and buy assets.  Like houses.  In fact, there is such a boon in the housing market from all this stimulated borrowing that house prices are bid up.  Into a bubble.  That eventually pops.  And a period of deflation sets in to correct the artificially high housing prices resulting from artificially low interest rates.

The Dollar Loses against the Embattled Euro

So how bad is the depreciation of the dollar (see Bernanke says more support possible if economy weakens posted 7/13/2011 on the BBC)? 

The dollar extended earlier losses against the euro following Mr Bernanke’s comments, with the euro rising more than a cent to $1.4088.

The Eurozone is teetering on collapse with the Greek crisis.  Especially if their problems spread to the larger economies of Italy and Spain.  Further pressuring the Euro.  The Euro had been falling against the dollar.  It’s not anymore.  Not because the Euro is getting stronger.  But because the dollar is getting weaker.

Tax, Borrow, Print and Spend Keynesians love to Spend Money

And the safe haven from a falling dollar?  Gold (see Gold hits record high on Bernanke, euro worries by Frank Tang posted 7/13/2011 on Reuters).

Gold surged to a record above $1,580 an ounce on Wednesday as the possibility of more Federal Reserve stimulus coupled with Europe’s deepening debt crisis gave bullion its longest winning streak in five years…

Gold benefits from additional U.S. monetary easing because such a move would likely weaken the dollar and stir inflation down the road.

“The worst thing for gold would be to have the economy doing well enough that the Federal Reserve starts to normalize monetary policy, or conditions in the European Community begin to settle down,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott, a broker/dealer with $54 billion in assets.

That’s right.  Gold loves bad monetary policy.  And it loves Keynesian economics.  Because the weaker the dollar gets the more expensive gold gets in U.S. dollars.  Gold says, “Print on, Chairman Bernanke.  Keep printing those dollars.  I’ve never felt so alive and powerful.”

Gold is a tangible asset.  Dollars are just pieces of paper.  Gold gets more valuable during periods of inflation because you can’t print gold.  That’s why Keynesian governments refuse to reinstitute the gold standard.  Because having the power to print dollars lets them spend more money than they have.  And tax, borrow, print and spend Keynesians love to spend money.

Democrats Screwing Seniors and Veterans to get their Way

One government advantage of printing money is reducing the value of dollar-priced assets.  Such as government debt.  Economists call it monetizing the debt.  By making the treasuries and bonds people invest their retirement in worth less, it costs less to redeem them.  This is bad for retirees who have to live their retirement on less.  But screwing retirees helps the government to spend more.

Despite this the debt is at a record level.  They still need to borrow more.  Screwing retirees just isn’t paying the bills anymore.  So President Obama, the Democrats and the Republicans have been bitterly arguing about raising the debt limit.  But making little progress (see Obama walks out of tense debt meeting: aide by Andy Sullivan, Reuters, posted 7/13/2011 on the Chicago Tribune).

President Barack Obama abruptly ended a tense budget meeting on Wednesday with Republican leaders by walking out of the room, a Republican aide familiar with the talks said.

The aide said the session, the fourth in a row, was the most tense of the week as House of Representatives Speaker John Boehner, the top Republican in Congress, dismissed spending cuts offered by the White House as “gimmicks and accounting tricks.”

Gimmicks and accounting tricks are all the Democrats want to offer.  Because they just don’t want to cut back on spending.  It’s not who they are.  Big Government tax, borrow, print and spend Keynesians who love to spend money (see Eric Cantor: Obama abruptly walked out of debt meeting by Jonathan Allen posted 7/13/2011 on Politico).

President Barack Obama abruptly walked out of a debt-limit meeting with congressional leaders Wednesday, throwing into serious doubt the already shaky debt limit negotiations, according to House Majority Leader Eric Cantor (R-Va.) and a second GOP source.

Cantor said the president became “agitated” and warned the Virginia Republican not to “call my bluff” when Cantor said he would consider a short-term debt-limit hike. The meeting “ended with the president abruptly walking out of the meeting,” Cantor told reporters in the Capitol.

That bluff would be, off course, not printing Social Security checks or paying the military.  The Education Department will probably get paid.  But seniors will get screwed.  As those serving in the military.  And veterans.  Because when all else fails, take hostages.  Threaten their wellbeing unless you get what you want.

The Democrats believe it’s all their Money

Why is there such a divide between the Republicans and the Democrats?  It’s because of their underlying philosophies.  Republicans believe that this is a nation of ‘we the people’.  Whereas Democrats believe it’s a nation of ‘we the government’ (see We have a taxing problem, not just a spending problem by Ezra Klein posted 7/12/2011 on The Washington Post). 

The Bush tax cuts were not supposed to last forever. Alan Greenspan, whose oracular endorsement was perhaps the single most decisive event in their passage, made it very clear that they were a temporary solution to a temporary surplus. “Recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives,” Greenspan said in 2001.

Okay, so maybe he wasn’t so clear. But everyone knew what he meant. And, broadly speaking, they agreed. We had a big surplus. It was time to do something with it. Brad DeLong, a former Clinton administration official and an economist at the University of California at Berkeley, didn’t want to see the surplus spent on tax cuts. He wanted to see it spent on public investments. “Nevertheless,” he wrote in 2001, “it is hard to disagree with Greenspan’s position that — if our future economic growth is as bright as appears likely— it will be time by the middle of this decade to do something to drastically cut the government’s surpluses.”

The Democrats believe it’s all their money.  Any money they let us keep is ‘government spending’ in their world.  That’s why they call all ‘tax cuts’ government spending.  And not simply returning money to its rightful owners.

But the Republican Party refuses to let any of them expire. And forget admitting that tax cuts meant for surpluses don’t make sense during deficits; they refuse to admit that tax cuts have anything to do with deficits at all.

It’s this belief that stands in the way of a debt deal. “We have a spending problem, not a taxing problem,” Republicans say. If the federal government defaults on Aug. 2, that sentence will be to blame. What a shame, then, that the sentence is entirely, obviously, wrong.

Obviously?  What is obvious is that this person ignores the economic prosperity caused by JFK‘s tax cuts.  Ronald Reagan‘s tax cuts.  And George W. Bush’s tax cuts.  Tax cuts stimulate economic activity.  More economic activity means more tax dollars flowing into Washington.  As history has proven.  And yet the economically naive hang on to Keynesian theories despite their history of failure.  Because they think they are oh so smart.  When in reality they’re not.  Just lemmings unquestioningly following the party line.

The Democrats favor unlimited Taxing, Borrowing and Printing

The budget debate over raising the debt ceiling is not a financial debate.  It’s a political debate.  Currently, the politics have the Republicans opposing the increase.  And the Democrats favoring it.  This is actually more in line with their underlying philosophies.  Democrats believe it’s all their money and they want to keep more.  The Republicans believe the money belongs to the people who earned it and are trying to let them keep more of it.  So you would expect the Democrats to be in favor of unlimited taxing, borrowing and printing.  And Republicans in favor of less taxing, borrowing and printing.  Which is the case in the current budget debate.

The question now is who will blink first?  The Republicans fearing another 1995 government shutdown?  Or the Democrats who are doing the preponderance of bluffing?  (There’s almost $200 billion in cash coming into Washington each month.  If they don’t pay seniors and veterans, people will want to know who they felt was important enough to pay.)

The stakes have never been higher.  What happens in the current debate could very well determine the outcome of the 2012 election.  Oh, and the future of America.

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FUNDAMENTAL TRUTH #67: “Free health care is very expensive.” -Old Pithy

Posted by PITHOCRATES - May 24th, 2011

No Such thing as a Free Lunch

Things cost.  In more ways than one.  A free lunch, for example, isn’t free.  If a client takes out a customer for lunch they’re hoping to get something in return.  A new contract.  A new sale.  Continued good will for a future contract or sale.  Even with the quintessential honest business person.  Who can’t be bought.  But can always be persuaded in the event of a tie.  Where all things being equal, the tie will likely go to the relationship that fosters the greater good will.  And there’s nothing wrong with that.  It’s one of the intangibles to consider.  And sometimes the intangibles can outweigh the tangibles.  Especially if there are tricky milestones to meet.  And a fastidious customer to please.

Then there’s the lunch itself.  It isn’t free.  Someone has to pay for it.  Because a restaurant is not just going to give their lunches away for free.  Because it costs them to make a lunch.  They have food to buy.  And people to pay.  From food prep to cooks to wait staff.  And food suppliers don’t give their food supplies away for free.  Because they have their own bills to pay.  And people don’t work for free.  Because they, too, have their own bills to pay.

Even though you’re not picking up your own tab, you are still paying for it.  Buying lunches is an entertainment expense.  Part of the larger marketing and sales budget.  Which is part of the larger overhead account.  Here’s how it works.  You have sales revenue.  And cost of sales (i.e., direct costs to make those sales).  You subtract cost of sales from Revenue and you have gross profit.  You subtract overhead from gross profit to get net profit.  Which is greater than zero in a healthy business.  To do this you need to make sure your sales prices include the costs of all of these free lunches.  In other words, sales prices include a markup to cover the costs of the free lunches.  So you end up paying for your free lunch.  Even though someone else is picking up the tab at the restaurant.

The Remarkable Mechanism of the Free Market

For those of you who enjoy the occasional free lunch, do you notice how often you get one?  It’s usually occasionally, right?  Maybe a free lunch once a month or so.  Maybe a nice spread at the holidays.  You may even get a nice Christmas gift.  Say a nice bottle of scotch.  Or a gift certificate where you can buy something nice.  The free lunches and gifts are nice.  And you probably wish you could get these freebies on a more regular basis.  Because free is nice.  But, of course, they’re not free.  You in fact pay for every last one.  Or your boss.  Because it adds to the cost of whatever your company buys.  And the more free stuff you get, the higher the prices your company pays.  To cover the costs of the free stuff.  But if the markups get too high, your company will have to stop buying that stuff.  And find someone else to buy from at more reasonable prices.

Some of you may not care what your boss pays for this stuff.  You figure he or she is rich.  He or she can afford it.  But he or she is not as rich as you think.  Because running a business is not as easy as it seems.  You see, wherever you work, they sell stuff, too.  And they compete with other people selling similar stuff.  This competition keeps sales prices down.  So to be profitable, you have to keep your own costs down.  And if you buy things at highly inflated prices that include a lot of free lunches and gifts, your costs will be greater than your revenue.  Your company will lose money.  And look for ways to cut costs.  Like laying a person or two off.  And if you’re one of those people, then you’ll start caring about what your boss pays for this stuff.

This is the remarkable mechanism of the free market.  Competition keeps sales prices down.  And costs down.  Because someone’s sales are someone else’s costs.  That’s why people simply can’t charge what they want.  There’s a limit to the amount of markup you can place on any sale.  And a limit to the amount of free lunches and gifts that can be buried in sales prices.

Health Care Insurance became Expensive after it became a Benefit

Now let’s look at health care.  The ultimate free lunch.  Before World War II we used to pay for our own health care.  But when the government implemented price controls on wages, employers couldn’t entice the best and brightest anymore with higher wages.  So they came up with a new idea.  Benefits.  Can’t pay you more money?  Not a problem.  We’ll pay for your health care instead.  Let’s you keep more of your money.  So it’s just like getting a raise.  It started with GM.  And spread to the other automotive companies.  Soon, everyone was providing health care insurance as a benefit. 

Eventually, health care insurance began to pay for everything.  You went to the doctor’s office and paid only a small co-pay out of pocket.  Everything else was free.  Someone else paid.  Just like getting a free lunch.  Only problem was that these free lunches added up.  And there was no free market mechanism to keep prices down.  Someone else paid.  Who wasn’t even at the lunch.  They weren’t there to say, “Hey, I can’t turn in an expense report with a $200 bar tab on it.  It’ll come out of my pocket.  Then my boss will fire me.  Have a Coke instead.  They give free refills.”  Nothing like this happens in health care.  So the costs of health care went up.  And the sales price for health insurance sky rocketed.  It was breaking the back of businesses.  It was becoming the largest single expenditure they had.  And it kept going up.  And never came down.  Soon, employees started paying a portion of these costs through a payroll deduction.  And that deduction kept going up.  As did co-pays.  But these were just a drop in the bucket compared to what the employer was paying.  It got so bad that they had to choose between staying in business.  Going to a cheaper and less comprehensive health care plan.  Or dropping insurance altogether.

Worse, as these employee deductions went up, young, healthy people cancelled their health insurance.  This left only heavy uses of health care with health care insurance.  Older and less healthy people.  And families.  The young and healthy didn’t go to the doctor.  So most of their premiums helped to pay for those who did.  When they started to leave the system the insurance rates on those remaining went up to pick up their lost contribution.  Soon, health insurance wasn’t health insurance anymore.  A fortune was paid in premiums.  And a fortune was spent on health care costs.  It just took money from those not sick today to pay those who were sick today.  It’s now little more than a transfer payment.  And has more in common with Medicare than insurance.

Some of the most Expensive Free Health Care in the World

Medicare has the same problem.  Only worse.  Because it’s a program for the elderly.  Who are big consumers of health care services.  Who are also retired.  And living longer thanks to the good health care they’re getting.  Of course, Medicare isn’t insurance.  The government reimburses health care provides with money collected through payroll taxes.  When they set up Medicare, there was still an expanding birth rate.  So taxpayers then outnumbered retirees on Medicare.  But that changed soon.  The birth rate declined radically.  We went from having big families to having small families.  So retirees on Medicare now outnumber current taxpayers.  So fewer taxpayers must pay more in taxes.  Which is an even bigger problem than the private health insurers are facing.

This means that the free health care we get is some of the most expensive free health care in the world.  And it’s like this because the consumer of the health care isn’t paying the bill.  When a private insurer or the government pays, there is no free market mechanism keeping costs down.  Like in private business.  Who know the full cost of a free lunch.  And they don’t give so many away that they have to raise their prices so much that it makes their goods and/or services unaffordable.

There is no lunch crisis (free or otherwise).  But there is a health care cost crisis.  And the big difference between the two is the free market mechanism.  Health care needs more of it.  For it is the most effective thing in keeping costs down.  It would be so effective that it may even make health care insurance what it once was.  Insurance.  Where a lot of people pay a little bit in to protect their financial assets.  To pay for the few with an unexpected catastrophic expense.

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China to Eclipse the American Empire?

Posted by PITHOCRATES - April 25th, 2011

Detroit is a Microcosm of American Decline

If you want to see a potential future of the United States, take a look at one of our big cities.  Say Detroit, for example (see Motor City finds labor clout weakened amid spending cuts, new legislation by Michael A. Fletcher posted 4/25/2011 on The Washington Post).

Bold action by Republican governors to rein in government spending and labor power by curtailing collective bargaining rights have been met with raucous, if ultimately unsuccessful, protests from union leaders and their allies in places including Wisconsin and Ohio.

But [Mayor] Bing’s move to extract new concessions from Detroit’s 12,000 municipal workers has been met with no such outpouring…

First of all, let’s get are arms around the size of 12,000 municipal workers.  On average let’s say each worker grosses $35,000 annually.  That is just under half a billion dollars in wages.  Now add in their benefits and it approaches a billion a year.  Just for wage and benefits for city workers.  It doesn’t count the cost of light bulbs, electricity, toilet paper, road salt, buildings, vehicles, etc.  That’s just the cost of people.  And that’s a lot of money.  For an impoverished city with a declining population.  And a declining tax base.

By the way, Mayor Bing is a Democrat.  He is not alone.  The sinking weight of the big city budget deficits transcends political party.

The absence of any large protest highlights the conundrum facing labor and its progressive allies as more states, cities and towns run by their putative Democratic allies are confronted with staggering debt and budget problems…

In New York and California, Democratic governors have not attacked collective bargaining, but they have also demanded major concessions from workers to help close yawning budget deficits.

In Wisconsin and Ohio, new Republican governors have significantly curtailed or eliminated collective bargaining rights for public employees, moves they said were made to give themselves as well as local leaders a freer hand to make badly needed cuts.

Michigan’s new Gov. Rick Snyder (R) signed legislation last month empowering his appointed emergency financial managers to void municipal union contracts in distressed municipalities across the state.

Of course, we got here for a couple of reasons.  People are living longer.  Living retirees consume pensions and health care.  And these benefits are generous.  Created at a time when they could be generous.  Following World War II, the United States rebuilt war-torn countries.  Everyone worked.  And bought a car.  Some bought a couple.  From Detroit.  The Motor City could charge what they wanted.  For where else were people going to buy a car?  UAW line workers lived like kings.  Worked hard.  Retired early.  And doctors kept them alive with ever improving health care.  Some lived longer into retirement than they actually worked.  And all of these costs began to build up in the pipeline.  Waiting to burst out at the other end on some future generation.

And that’s what happened.  War-torn countries eventually rebuilt their manufacturing.  They began to provide for themselves.  Some even provided for others.  They started building quality products at affordable prices.  Long story short, Toyota surpassed General Motors (GM) as the number one car manufacturer.  And GM, saddled with those legacy costs from what proved to be a too generous time, went belly up, bailed out by the government.  And as went the U.S. automotive industry, so did the Motor City.

Decades ago, when Detroit earned the proud moniker Motor City, it was home to a thriving and decidedly blue-collar middle class built largely by the clout of organized labor. Detroit is now renowned as a national symbol of urban dysfunction, and as Bing tries desperately to change that reputation, he often finds himself at odds with the city’s labor unions…

Even as the city is shrinking, Bing calls the current state of city services unacceptable. And he says they are not going to improve unless he can reduce the city’s personnel costs, which are overwhelming the budget. This year, the city paid $200 million in pension benefits, which Bing said was $25 million more than the city paid for fire department and ambulance services last year.

“The old days when getting a good city job meant that you put in your 20 years with the expectation that city government could take care of you for the next 40 is no longer a realistic or viable option,” Bing said.

Generous automotive jobs could pay a lot of taxes.  And did.  The city government grew right alongside the U.S. automotive industry.   But with those auto jobs went the city’s tax base.  And now the municipal workers are going through the same thing the auto workers did.  Only worse.  Because their benefits were even more generous.

Now he wants workers to take on an additional 20 percent of their health insurance premiums. He also wants them to take smaller pensions, and to eliminate defined-benefit pensions for all new employees.

Bing said he has no choice. “If we do nothing, by 2015, fringe benefits are on pace to consume half of our entire general fund revenue,” Bing said. “That is not sustainable. We can’t afford benefit packages so rich.”

Supporters of the public sector will argue they aren’t getting rich.  They’ll argue that they could earn more in the private sector.  True, some could.  But most couldn’t.  Because if they could they would go to the private sector to make more money.  No one chooses to stay somewhere to earn less.  There’s a reason they stay.  And it’s not the wage or salary.  It’s the benefits.

That’s how it was for [a retiree], who went to work for the city as a typist in the health department in 1968. She retired as a 911 operator in 1998 at age 48, and the city is obligated to pay her $24,000 a year for life.

The current Social Security retirement age is 67 for anyone born after 1959.  And there’s talk about raising it still because people aren’t dying soon enough into retirement.  Improvements in health care are keeping people alive longer to consume ever more retirement benefits.  It’s busting the federal treasury.  As well as the treasuries in the big cities.  You just cannot have people retire at 48 years of age these days.  Not if you expect to remain solvent.

This kind of generosity is just not sustainable.  Retirees are consuming more than they ever contributed to their retirement and health care.  And the working young are paying more and more to support them while cutting into their own retirement savings.  Something’s gotta give.  To reverse the American decline.

China the new Japan of the Eighties?

What, you may ask?  What may give?  Perhaps the United States (see IMF bombshell: Age of America nears end by Brett Arends posted 4/25/2011 on MarketWatch).

According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now…

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.

China is still communist.  Like the Soviet Union was.  So the Age of China may feel more like the Cold War.  Only without us being a superpower.  So how will that feel in America?  Possibly like it felt to live in Eastern Europe behind the Iron Curtain.  Economically dependent on your overlord.  And wholly at their mercy.

“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

This sounds like what they were saying during the Nineties about Japan Inc.  Just before they entered a devastating deflationary spiral.  Before that, though, some were saying here that we needed to do what the Japanese were doing.  Business and government were working together.  It wasn’t that laissez-faire capitalism nonsense we were clinging to in the United States.  Japan Inc. was a juggernaut.  They got so rich that they were buying up landmark U.S. properties.  A National Lampoon cover showed a Japanese CEO sitting at his desk with a sign saying the United States was a wholly own subsidiary of his company.  It was the end of America as we knew it.

Well, it wasn’t.  The government built a huge asset bubble.  And the thing about bubbles is that they eventually burst.  And when it did, the Japanese economy tanked.  For a decade.  Or two.  The Japanese called the Nineties the Lost Decade.  The lesson the Japanese learned?  A “state-guided form of capitalism” doesn’t work.  It may in the short term.  But not in the long term. 

China may be surging now like the Japanese were in the Eighties.  Will they be able to avoid Japan’s fate, though?

The Difference between China and the United States is Labor Costs

The MarketWatch article misses one salient fact.  First of all, let’s consider the Soviet Union.  If the state was good at ‘guiding’ an economy, why did the Soviet Union fail?  I mean, they had a prosperous manufacturing industry.  Lots of people were building things.  The problem was, they were building things that no one wanted to buy.  Whereas the things they did want to buy (soap, toilet paper, etc.) were always in short supply.  You waited in line to buy those things.  Look at Cuba.  And North Korea.  These are all state-guided.  And they all suffer from abject poverty.  And, at times, famine.  Clearly, the ‘state-guided’ is not the reason why China is doing so well.  It’s that other thing.  The capitalism.  Which the Soviet Union, Cuba and North Korea did not/do not have.

Now we have capitalism.  As did Great Britain.  And at one time, we each had the world’s largest economy.  But we surpassed Great Britain.  And China is about to surpass us.  So is there anything we can draw from this.  Something the British and the Americans have that the Chinese don’t?  I’ll give you a hint.  Think about Detroit.

How many times do we hear about unions striking Chinese industry?  Not many.  For one, there is only one Chinese trade union.  All-China Federation of Trade Unions (ACFTU).  It’s not exactly what you would think of when you think of a union in the UK or the USA.  Some would say that the ACFTU represents the government’s interests more than the workers.  And that’s the difference.  China doesn’t have the high labor costs we have (or the British).  Or the generous benefits.  And they have no legacy costs.  For their industrial workers.  (Or their municipalities.)  And this is why manufacturing jobs left the U.S. and went to China.  They could make things cheaper.  And as we pay more of our income in taxes to support an ever growing public sector, the less we have to spend on material goods. 

It’s just simple arithmetic.  It’s not a matter of greed on the consumer.  Just like union workers want higher pay and benefits, so do they.  So they can buy more stuff.  And if they can’t have the higher pay and benefits like they have in the unions, they at least want low taxes.  Or low prices.  But their paychecks aren’t as generous.  And their taxes are high.  Which leaves them with less disposable income than their union brothers and sisters.  Making them the ideal market for those low-priced Chinese imports.  And as long as the ACFTU holds Chinese wages down, they’ll keep buying those imports.

But can they?  Will the Chinese workers rise up one day?  They have nothing to lose but their chains.  As Karl Marx would say.  Will they overthrow the ‘capitalism’ in ‘state-guided capitalism’?   Making it a more pure form of communism?  More like in the former Soviet Union?  It may be the only thing that can stop this Chinese juggernaut.  A workers revolt.  An authentic communist revolution.  In already communist China.

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Partnering with the Grim Reaper: Saving Medicare, Medicaid and Obamacare

Posted by PITHOCRATES - December 29th, 2010

Taxing the Young to Save Medicare for the Old

Medicare and Social Security make up the lion’s share of the federal budget.  The government is setting records for both deficits and debt.  And everyone is projecting both of these programs to go bankrupt.  A dim picture for anyone hoping to rely on either for their retirement.  And they’re worried (see AP-GfK Poll: Baby boomers fear outliving Medicare by Jennifer Agiesta and Ricardo Alonso-Zaldivar posted 12/29/2010 on the Associated Press).

A new Associated Press-GfK poll finds that baby boomers believe by a ratio of 2-to-1 they won’t be able to rely on the giant health insurance plan throughout their retirement.

The boomers took a running dive into adolescence and went on to redefine work and family, but getting old is making them nervous.

Now, forty-three percent say they don’t expect to be able to depend on Medicare forever, while only 20 percent think their Medicare is secure. The rest have mixed feelings.

The problem with both Medicare and Social Security is that they are both Ponzi schemes.  Scams by the government to make generations dependent on government.  And to funnel a lot of cash to Washington.  But the Baby Boomers mucked up the works.  Their free love in the 60s and use of birth control and abortion left their family tree a barren one.  The boomer generation of families with maybe 2-3 kids will support in retirement their parent’s generation of families with 10+kids.  There’ll be more people entering retirement than entering the workforce to pay for those retirees.

Here’s the math: when the last of the boomers reaches age 65 in about two decades, Medicare will be covering more than 80 million people. At the same time, the ratio of workers paying taxes to support the program will have plunged from 3.5 for each person receiving benefits currently, to 2.3.

And the numbers are worse.  Because Social Security will be covering those same people.  We’re approaching one working person supporting one person in retirement (Medicare and Social Security benefits combined).  Even Bernie Madoff’s great Ponzi scheme had a better ratio when his pyramid imploded.  It just isn’t sustainable anymore.  Something’s gotta give.  And by something I mean benefits paid out to people.

The government can’t balance its books without dealing with health care costs, and Medicare is in the middle. Some leading Republicans and a few Democrats have called for phasing out the program and instead giving each retiree a fixed payment — or voucher —to help them buy private medical insurance of their choice. The poll found doubts about the idea, and a generational debate.

Overall, a narrow majority (51 percent) of Americans opposed the voucher plan. But those born after 1980 favored it by 47 percent to 41 percent, while seniors opposed it 4-to-1. A majority of boomers were also opposed, with 43 percent strongly objecting.

And here’s the problem.  Those who don’t pay payroll taxes anymore (retirees) are all for raising taxes to pay for their current level of benefits.  No matter how much it bankrupts future generations.  And these people vote.  More than anyone else.  So for good reason they call Social Security the third rail of politics.  You touch it at your own peril.  Those with a lifetime of paying taxes ahead of them, on the other hand, would rather raise a family than support an individual in retirement.  Not only do they want to touch the third rail, they want to short it out.  But they don’t have the numbers.  Yet.

States to Make Steep Cuts in Medicaid to Stave off Bankruptcy

And we even haven’t talked about Medicaid yet.  This program is bankrupting the states.  It’s their biggest budget item.  And they can’t sustain it any longer (see Medicaid Pushes U.S. States Off ‘Cliff’ as Governors Seek Cuts by Christopher Palmeri and Pat Wechsler posted 12/22/2010 on Bloomberg).

Governors nationwide are taking a scalpel to Medicaid, the jointly run state and federal health-care program for 48 million poor Americans, half of whom are children. The single biggest expense for states, Medicaid consumes about 22 percent of their total $1.6 trillion in expenditures, more than what is allocated to elementary and secondary education, according to a National Governors Association report.

Talk about being stuck between a rock and a hard place.  You know that states aren’t going to cut education.  The unions won’t let them.  So they have to address the 800 pound gorilla in the room.  And cut Medicaid.

Governors are slashing Medicaid to close as much as $140 billion in budget deficits for the 12 months starting in July 2012, after eliminating $130 billion in gaps this year, according to the Center on Budget and Policy Priorities, a Washington-based research group. Spending is being cut even though state revenues rose for the three quarters ended Sept. 30, as the U.S. recovered from the longest recession since the Great Depression, the Nelson A. Rockefeller Institute of Government in Albany, New York, said in a Nov. 30 report.

“I don’t think most states want to sentence people to death,” said Judy Solomon, co-director of health policy at the Center on Budget and Policy. “But what we see is a pretty bleak picture of tough cuts made this year, and next year’s numbers look worse.”

The sad truth is that sick people are costly.  Dead people aren’t.  So you can see where this is going.  Rationing.

Spending on Medicaid nationwide rose 8.8 percent last year, the most since 2002, according to Kaiser. Nearly every state issued at least one new policy to cut program costs in the past two years, including benefit reductions, increased copays and lower reimbursements to health-care providers.

Cost cutting and reductions in benefits.  Rationing.  And you know where that will lead to.  More dead people.  Which is the only thing that will save Medicaid.  That, or federal contributions.

Every state has a unique formula for calculating the federal contribution for Medicaid. The 12 with the highest personal income, including California, New York, New Jersey, Connecticut and Colorado, typically depend on the U.S. government for about half their expenditures.

Lucky for the states that the federal government has money to spare.  Wait a tic, they don’t.  They’re setting record deficits and debt.  They don’t have the money.  Especially now that they’ve thrown Obamacare into the mix.  And the cost for this behemoth will dwarf Medicare and Medicaid.

States face the prospect of enrolling 16 million more people in Medicaid beginning in 2014 under the Patient Protection and Affordable Care Act, the health-care law Obama signed in March. It expands coverage to include certain childless adults under 65, according to Foley & Lardner LLP, a law firm in Milwaukee. The federal government will pay 100 percent of the increased expense for the first three years.

Well, perhaps not.  They’ll be sticking the states with some of those costs.  Poor states.  These unfunded federal mandates are killing them.  But they won’t be the only ones dying.  In three years time, when those federal subsidies expire, some of the current Medicaid patients may lose their heath care benefits.  And die.

Death Panels to Decide Life and Death

The problem with healthcare is that the raison d’être of healthcare is the very thing bankrupting it.  Providing healthcare to sick and dying people.  If the sick and dying would just hurry up and die these healthcare programs (Medicare, Medicaid and Obamacare) would be just fine.  If only there was some mechanism to encourage people to take a pill to manage pain instead of consuming expensive healthcare services.  I mean, they are only delaying the inevitable.  They should just suck it up.  And do the right thing.  After receiving something like, oh, I don’t know, let’s call it end of life counseling (see WSJ Opinion Death Panels Revisited posted 12/29/2010 on The Wall Street Journal).

On Sunday, Robert Pear reported in the New York Times that Medicare will now pay for voluntary end-of-life counseling as part of seniors’ annual physicals. A similar provision was originally included in ObamaCare, but Democrats stripped it out amid the death panel furor. Now Medicare will enact the same policy through regulation.

We hadn’t heard about this development until Mr. Pear’s story, but evidently Medicare tried to prevent the change from becoming public knowledge. The provision is buried in thousands of Federal Register pages setting Medicare’s hospital and physician price controls for 2011 and concludes that such consultations count as a form of preventative care.

No wonder they hid it.  Encouraging people to hurry up and die.  That’s something that doesn’t win you points at the PTA.  The law as written isn’t all that bad, though.  The panels are voluntary.  So far.  But everything Big Government has done started small.  They are, after all, the master of incrementalism.  And with out of control healthcare spending bankrupting Medicare and Medicaid, what do you think these panels will evolve into?

The regulatory process isn’t supposed to be a black-ops exercise, but expect many more such nontransparent improvisations under the vast powers ObamaCare handed the executive branch. In July, the White House bypassed the Senate to recess appoint Dr. Berwick, who has since testified before Congress for all of two hours, and now he promulgates by fiat a reimbursement policy that Congress explicitly rejected, all while scheming with his political patrons to duck any public scrutiny.

If there was nothing to hide they wouldn’t have hidden this provision so deep in the federal register.  But when you hide things, there are reasons you hide them.  So much for transparency.  And the most ethical Congress ever (of course an ethical Congress is a moot point when the executive rules by fiat).

Under highly centralized national health care, the government inevitably makes cost-minded judgments about what types of care are “best” for society at large, and the standardized treatments it prescribes inevitably steal life-saving options from individual patients. This is precisely why many liberals like former White House budget director Peter Orszag support government-run health care to control costs: Technocrats in government can then decide who gets Avastin for cancer, say, and who doesn’t.

When a government bureaucrat decides who gets life-saving medication and who doesn’t, that sounds like a death panel to me.  Because that decision has the power of life and death.  They can be as nontransparent as they want but the truth is pretty clear.  To control the out of control spending of Medicare and Medicaid (and, in time, Obamacare), they will be partnering with the Grim Reaper.  Because dead people don’t consume health care benefits.  And that is their biggest problem.  Consumers of benefits.

The Swedish National Health Care System Rations Care

So what about the social utopias of European Socialism?  Those advanced nations that have national healthcare?  Are they having these problems?  Of course they are.  In fact, their future is ours.  Here’s a small sampling of what to expect (see Man’s penis amputated following misdiagnosis posted 12/29/2010 in Science and Technology on The Local).

A Swedish man was forced to have his penis amputated after waiting more than a year to learn he had cancer.

The man, who is in his sixties, first visited a local clinic in Blekinge in southern Sweden in September 2009 for treatment of a urinary tract infection, the local Blekinge Läns Tidning (BLT) reported.

When he returned in March 2010 complaining of foreskin irritation, the doctor on duty at the time diagnosed the problem as a simple case of inflammation.

After three weeks passed without the prescribed treatment alleviating the man’s condition, he was instructed to seek further treatment at Blekinge Hospital.

But it took five months before he was able to schedule an appointment at the hospital.

When he finally met with doctors at the hospital, the man was informed he had cancer and his penis would have to be removed.

It remains unclear if the man would have been able to keep his penis had the cancer been detected sooner.

The matter has now been reported to the National Board of Health and Welfare (Socialstyrelsen) under Sweden’s Lex Maria laws, the informal name used to refer to regulations governing the reporting of injuries or incidents in the Swedish health care system.

Misdiagnosis.  And long waits.  National healthcare.  Where government bureaucrats cut costs and make doctors work long hours.  Not a very attractive offer for all those years of medical school.  So there’s a doctor shortage.  And, consequently, long waits.  In this case, 6 months to be advised he needed to go someplace else.  Then another 5 to get an appointment someplace else.  In the mean time the cancer spread.  This is what happens when you ration health care.

Is this the future you want?  It’s not the future I want.

The Third Rail of Politics is a Generational Thing

It’s a generational battle.  The young want to cut taxes (and benefits).  Because they’re paying those taxes.  And not consuming the benefits.  The old want to raise taxes and maintain benefits.  Because they’re not paying those taxes.  But are consuming the benefits.  Right now there are more old than young.  So you can guess who will win this struggle.  Bankrupting the future will help the politicians stay in office today.  So the old will win.

But there is a little irony in all of this.  To save these programs (Medicare, Medicaid and Obamacare), they need old people to die.  But once they do, the politicians will lose their political support.  The younger generation (whose future the politicians mortgaged) will then broom them out of office.  And they will be all too glad to short out that third rail once and for all.

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Out of Control State Spending – Greece, France, the U.K. and the U.S.A.

Posted by PITHOCRATES - December 15th, 2010

Greece Burning – Public Sector Pay and Pensions Bankrupting the Nation

Things got ugly in Greece during their 2010 financial crisis.  At least three died one day during rioting (see Greek financial crisis explained posted 5/6/2010 on The BBC).

Three people, including a pregnant woman, have been killed during riots in Athens.

And why were the Greeks rioting?

Many of the protesters are public service workers, whose salary comes from the tax payer…

They object to their government’s plan to get Greece’s economy back under control.

It includes a freeze on public sector pay, raising the tax on fuel, and cutting pensions.

And why did Greece find herself in a position to take these austerity measures?

For years, Greece has been spending money it doesn’t have.

The government there took advantage of the economic good-times to borrow money and spend it on pay-rises for public workers and projects such as the 2004 Olympics.

France Burning – Early Retirement Age Bankrupting the Nation

Things weren’t much prettier in France.  They, too, were facing out of control state spending.  So they, too, tried to cut their spending.  And it didn’t go over well with the people (see Proposed retirement age change prompts riots in France by The Associated Press posted 11/4/2010 on The Chicago Sun-Times).

Workers opposed to a higher retirement age blocked roads to airports around France on Wednesday, leaving passengers in Paris dragging suitcases on foot along an emergency breakdown lane.

Outside the capital, hooded youths smashed store windows amid clouds of tear gas.

Riot police in black body armor forced striking workers away from blocked fuel depots in western France, restoring gasoline to areas where pumps were dry after weeks of protests over the government proposal raising the age from 60 to 62.

And what was their greatest fear of these austerity cuts?

Many workers feel the change would be a first step in eroding France’s social benefits – which include long vacations, contracts that make it hard for employers to lay off workers and a state-subsidized health care system – in favor of “American-style capitalism.”

The United Kingdom Burning – Cheap College Tuition Bankrupting the Nation

Meanwhile, in the U.K., they’re having their own riots.  And the rioters attacked the Royal Family.  Fortunately for Prince Charles, his car took the brunt of the attack (see Prince Charles’s car kicked in tuition riot by The Associated Press posted 12/9/2010 on CBC News). 

“We can confirm that the royal highnesses’ car was attacked by protesters on their way to their engagement at the London Palladium this evening. The royal highnesses are unharmed,” a statement from Prince Charles’s press secretary said.

And why were the people rioting?  Much like in Greece and France, the U.K.’s generous social benefits are bankrupting the nation.

Cameron’s government describes the move as a painful necessity to deal with a record budget deficit and a sputtering economy. To balance its books, the U.K. passed a four-year package of spending cuts worth $129 billion, which will lead to the loss of hundreds of thousands of public sector jobs and cut or curtail hundreds of government programs.

The government proposed raising the maximum university tuition fees in England from $4,780 a year to $14,000. Students reacted with mass protests that have been marred by violence and have paralyzed some campuses.

Not Burning Yet – Social Security and Medicare Bankrupting the Nation

Social Security and Medicare are going broke.  And will.  It’s just a matter of time.  When they came into being, there was an expanding birth rate.  Actuaries counted on those birth rates to continue.  But they didn’t.  The baby boom generation had only about 3 children per family.  Whereas their parent’s generation often had 10 kids or more.

Social Security is like a Ponzi Scheme.  There are no retirement accounts.  Payroll taxes from workers today pay the retirees of today.  Think pyramid scheme.  As long as the base of the pyramid (those workers paying taxes) grows at a greater rate than the tip of the pyramid (those collecting benefits) the scheme works.  But with the reduction in birth rates and our aging population, the pyramid has inverted.  The tip of the pyramid is growing at a greater rate than the base is.  As the ‘size’ of the tip and the base approach each other, eventually one worker will support one retiree.  And if a retiree lives on, say, $30,000 a year, do the math.  In a two-income family, one income will support a retiree.  And nothing else.  And that just ain’t sustainable.  Ergo, Social Security will go broke.

Ditto for Medicare.

Obamacare – Tinder, Gasoline and a Match

All right, we’ve seen how out of control state spending has led to austerity measures throughout Europe.  And rioting.  We have two huge entitlement programs pushing our county down the same path.  Europe is cutting costs (even when cities are burning in the process).  And what do we do?  We double down.  We add a third entitlement behemoth that will make Social Security and Medicare look tiny in comparison.

Obamacare.  Affordable health care for everyone.  Because the government is going to force everyone to buy health insurance.  Because the more people who pay premiums, the lower each premium needs to be.  Think pyramid scheme.  You need more to pay in (the base) than collect benefits (the tip).  Because this ain’t insurance.  It’s the mother lode of welfare entitlements.  And it’s also something else.  Unconstitutional (see Opposition to Health Law Is Steeped in Tradition by David Leonhardt posted 12/14/2010 on The New York Times).

On Monday, a federal judge ruled part of the law to be unconstitutional, and the Supreme Court will probably need to settle the matter in the end.

But that doesn’t stop the Obamacare cheerleaders.

We’ve lived through a version of this story before, and not just with Medicare. Nearly every time this country has expanded its social safety net or tried to guarantee civil rights, passionate opposition has followed.

The opposition stems from the tension between two competing traditions in the American economy. One is the laissez-faire tradition that celebrates individuality and risk-taking. The other is the progressive tradition that says people have a right to a minimum standard of living — time off from work, education and the like.

Yes, the two competing traditions.  The individuality and risk-taking that has defined America until Woodrow Wilson and the Progressives came along.  And the entitlement mentality.  Also known as European Socialism.  Like they have, had, have in Greece, France and Great Britain.  And we’ve seen how that has worked.  But we don’t learn from the lessons of history, do we?

The federal income tax, a senator from New York said a century ago, might mean the end of “our distinctively American experiment of individual freedom.” Social Security was actually a plan “to Sovietize America,” a previous head of the Chamber of Commerce said in 1935. The minimum wage and mandated overtime pay were steps “in the direction of Communism, Bolshevism, fascism and Nazism,” the National Association of Manufacturers charged in 1938.

When my dad worked gross pay meant something.  Today it’s all about net pay.  What’s left after taxes.  Taxes have grown so great that a single wage earner has trouble raising a family.  Unlike those families back before the baby boom.  When a single wage earner could raise 10 kids.  So, yes, the federal income tax has greatly changed the American experiment in individual freedom.

Social Security has ‘Sovietize’ America.  Retirees live in fear of losing their state benefits.  And they know that it’s in their ‘best interest’ to support the state.  And they do.  At the voting booth.  Potato.  Tomato.  The only difference is that we don’t have gulags in Siberia here.  But we don’t need them.  Because the threat of cutting a retiree’s benefits scares them enough to toe the party line.

And now we want to add national health care to the mix.  Because every other rich country has jumped off that bridge.

It is clearly one of the least radical ways for the United States to end its status as the only rich country with millions and millions of uninsured.

There’s a reason why the U.S. does not pay for millions and millions of uninsured here.  Why?  See Greece, France and the U.K. above. 

Guaranteeing people a decent retirement and decent health care does more than smooth out the rough edges of capitalism. Those guarantees give people the freedom to take risks. If you know that professional failure won’t leave you penniless and won’t prevent your child from receiving needed medical care, you can leave the comfort of a large corporation and take a chance on your own idea. You can take a shot at becoming the next great American entrepreneur.

With every previous major expansion of the safety net, history has had a chance to prove the naysayers wrong. It may yet in the case of universal health coverage. But the decision now seems to rest with the nine members of the Supreme Court.

Again, see Greece, France and the U.K. above.  As nice and compassionate as it sounds, it just doesn’t work.  European Socialism.  If it did, it would have worked in Greece, France and the U.K.  But it didn’t.  And that should scare the hell out of us here.  Because we’re heading down the same road.

And history may just prove the naysayers were right.

www.PITHOCRATES.com

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LESSONS LEARNED #40: “Big Government is more efficient when old people die sooner.” -Old Pithy

Posted by PITHOCRATES - November 18th, 2010

Big Government is a Ponzi Scheme

When it comes to government funding, birthrates and death rates are key.  Think of government as a great Ponzi scheme.  Ponzi schemes work when more people pay into the scam than collect from the scam.  Like in a pyramid scheme.  Those collecting benefits are the few at the top.  Those paying in are the many at the base.

An increasing birthrate means more taxpayers for each successive generation.  This keeps the base of the pyramid growing.  A steady or increasing death rate keeps the top of the pyramid smaller than the base.  A declining death rate, on the other hand, will flip the pyramid upside down.  Because the population at the top will grow larger than the population at the bottom.

Big Government tries to keep as many people as possible dependent on government.  Lots of different programs attach lots of different people to the welfare state.  But when it comes to big numbers, old people can’t be beat.  The lion’s share of government assistance goes to them via Social Security and Medicare.  And they are the most politically active.  That means they vote.  And when they vote, they vote to keep their benefits.

Of course, this is a dual-edged sword.  Yes, old people can provide a loyal voting base to sustain Big Government.  But on the other hand, the cost of their benefits is growing so large that it is undermining the very foundations of Big Government.  How?  By the double whammy of a falling birthrate and a declining death rate.  For various reasons, fewer people are being born.  And old people are living longer.  This has flipped the pyramid in the great Ponzi scheme upside down.  The growth rate of those collecting benefits is greater than the growth rate of those paying into the scheme.

An Increasing Life Expectancy is Bankrupting Social Security

FDR signed Social Security into law in 1935.  The average life expectancy in 1930 was approximately 59 years.  The retirement age in the Social Security Act of 1935?  65.  That’s right, the average American would have been dead for 6 years before qualifying for Social Security retirement benefits.  That’s a 6 year cost cushion.  But not everyone died at 59, though.  So a lot of people lived to receive those benefits.  But one thing the actuaries were sure about then, this Ponzi scheme was going to be a big winner.  For Big Government.

The average life expectancy increased to approximately 70 years in 1960.  In other words, people were living approximately 11 years longer.  That 6 year cost cushion just became a 5 year cost exposure.  That’s a swing of 11 years.  The actuaries in 1930 never saw this coming.

Social Security had its first crisis in 1975.  To save the program, they increased payroll taxes and decreased benefits.  Another crisis came in 1983.  Now they started taxing some Social Security benefits.  Even taxed federal employees (who previously didn’t pay these payroll taxes).   And they would increase the retirement age for later retirees.

By 2000, the average life expectancy increased to approximately 77 years.  That’s another 7 years.  That’s a swing of 18 years from 1930.  A huge actuarial miscalculation.  The population was getting far older then the FDR administration ever guessed.  And, to make matters worse, the birthrate was declining.

A Declining Birthrate is Bankrupting Social Security

The birthrate (per thousand of population) had been declining from 1910 (30.1) to 1920 (27.1) to 1930 (21.3).  That’s about a 10% decline from 1910 to 1920.  And a 20% decline from 1920 to 1930.    Perhaps that’s the reason for the 6-year cost cushion they gave themselves.  They saw fewer babies being born.  Which meant fewer taxpayers would be paying for later retirees.

The birthrate fell to 19.4 in 1940.  Though it was falling, it wasn’t falling as much.  Only 9% from 1930 to 1940.  Then came the baby boom generation.  The birthrate in 1950 shot up to 24.1, a 24% increase from 1940.  More babies meant more taxpayers.  This birthrate held pretty steady in 1960.  No doubt the LBJ administration felt optimistic. 

LBJ exploded federal spending.  He added Medicare and Medicaid.  Made Social Security more generous.  And why not?  Things were looking up.  Birthrate-wise.

But it was short-lived.  The birthrate went from 23.7 in 1960 to 18.4 in 1970.  That’s a 22% decline.  The birthrate was 15.9 in 1980.  That was a 14% decline from 1970.  Or a 33% decline from 1960.  Birth control and abortion were taking their toll on the U.S. birthrate.  Fewer babies meant fewer future taxpayers.  And fewer taxpayers could pay for less government, not more.  The LBJ administration was wrong to feel optimistic.

The Selfish Baby Boomers Invert the Ponzi Scheme Pyramid

The baby boom generation has really thrown a wrench in the works.  The government used their spike in the birth rate as a baseline for future government spending.  But they screwed the government in the end.  Instead of being good little taxpayers by making even more little taxpayers, they stopped having babies.  They didn’t stop having sex.  They just stopped having babies.  It was the era of free love.  And ‘free love’ had no room for babies.

And it’s these baby boomers that are working themselves up to the top of the pyramid.  But being the selfish ingrates that they are, they’ve left no one to follow behind them to keep the Ponzi scheme going.  And to make matters worse, they’ll be living longer in retirement than anyone ever guessed.

It’s a perfect storm of sorts.  A declining death rate.  An even more declining birthrate.  And a huge chunk of the population about to go on the public dole.  But it gets even worse.  The boomers will be living longer in retirement because of huge outlays in Medicare spending to keep them alive.  In other words, the government is spending a fortune to make their financial problems worse.

Amnesty, Catholics and Dead Retirees May Save Social Security

They’re trying to fix things on the taxpayer side.  The Big Government legislators are desperate to give illegal aliens amnesty and citizenship.  To them it’s simple math.  More people equal more taxpayers.  And these taxpayers will be Catholic.  Catholics don’t use birth control and abortion like Americans currently do.  Their birthrate is less likely to decline.  (Approximately 1 in 5 of young children in the United States is Hispanic already.  They project that to increase to 1 in 4 within a few decades.)

On the benefit side, they’ve already raised the retirement age to 67.  And there’s talk about raising it to 69.  If more people die before they’re eligible to collect retirement, that’s a lot of benefits the government doesn’t have to pay.  They’re also talking about cutting the Medicare budget.  The less they spend, the more may die.  And dead people don’t consume Medicare benefits.

There’s no getting around the fact that old people are a huge drain on government.  Though they worked hard to get these people dependent on government, their continued living is becoming more of a burden than a benefit.  An increasing lifespan is anathema to Big Government.  Old retirees take more than they give.  Young workers, on the other hand, give more than they take.  The government needs more young workers.  And fewer old retirees.

(Social Security + Medicare) Spending = 2 X Defense Spending

To be efficient government has to minimize costs in relation to revenue (i.e., taxes).  And there’s an 800 pound gorilla in the room.  Old people.  Nothing can impact the budget more.  Even war.  Social Security and Medicare combined make up approximately 40% of the federal budget.  Defense spending is approximately 20%.  A blind man can see the gorilla.  Government needs these old people to hurry up and die.

And now add Obamacare to the equation.  Which will cover more people than Social Security.  The costs will be astronomical.  Social Security, Medicare and Obamacare will easily eclipse 60% of the total federal budget.  That kind of spending cannot be sustained.  Greece, France and Great Britain have proven this in the 21st century.

That’s some serious cost to contain.  And how do you contain that kind of cost?  You do what the Left says the private health insurers do.  Deny coverage to sick people.  And they will.  They’ll have to.  And with the power of life and death literally in their hands (i.e., death panels), they’ll be able to.  They’ll be able to maximize the number of young workers (by treating them).  Minimize the number of old retirees (by not treating them).  As well as minimize the number of undesirables who take more than they give (by not treating them).  Or even take more serious measures with those seriously ill or impaired (euthanasia).

Don’t think it can happen?  It’s happened in other Big Government states.  In fact, the Progressives even talked about the scientific benefits of eugenics and euthanasia here in the United States in the early 20th century.  To deal with undesirables.  So, yes, it could happen here.  Because it almost once did.

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