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The First Law of Growing Middle Class Wealth

To grow middle class wealth you must be making things bigger, better, faster, or cheaper.

This law is an acknowledgement that financial stimulus, bubbles, and wealth redistribution schemes create a temporary sense of wealth and aggravate the problems with income inequality. The crux of the problem is that financial stimulus, bubbles, and “bad” wealth redistribution schemes increase the risk of bad and delayed investment decisions on products that have the potential to create middle class wealth. Unless we are able to perpetuate a cycle of stimulus, bubbles, and new “bad” redistribution schemes, this temporary wealth is not sustainable and eventually the bad decisions have to be paid for. The key to growing middle class wealth is making good decisions that reduce risk and encourage the investment in products that can grow middle class wealth.

The background for making this statement is that history has shown that gains from productivity increases are sustainable. The best examples of these gains are the Industrial Revolution in the 1800’s, the innovative products at the beginning at the 20th century(e.g. automobiles, telephones, steel, oil, farming, etc.), and more recently the productivity gains from computers and computerization in the 1980’s. Arguably the increased risk felt by businesses in the 1930’s with the increased regulations and wealth redistribution schemes reduced capital investment and prolonged the depression. This was an argument put forth by Amity Schlaes in her book, The Forgotten Man. A similar argument can be made about the last thirteen years. With the real estate, financial, and health care sectors leading the way income inequality has gotten worse and we have not invested in products that grow middle class wealth. Instead we created a system that perpetuates decision making that results in temporary wealth and stagnant middle class growth. At the beginning of this century it was real estate and now its stocks and health care. Arguably the biggest beneficiary to the Federal Reserve quantitative easing policy is stocks. Eventually the Federal Reserve will taper off its quantitative easing policy and our health care expenses will reduce to the rates paid by the rest of the world. We have gone from one bubble to the next and gotten more separated from the policies that help the middle class grow their wealth. Until we get back to making things bigger, better, faster, or cheaper we will be caught in a zero sum game with emerging economies we cannot win.

The first corollary to the law is:

Growing middle class wealth is the only economic tide that lifts all ships.

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Echoes From Vietnam

Since I am old enough to personally remember the Vietnam war I am surprised how far we have strayed from the lessons of that war. As the Vietnam war wound down we promised ourselves we would only enter “good” wars we could win both militarily and politically and to not enter into “bad” wars we could not win either militarily or politically. That left a lot of wiggle room in the middle but from our Vietnam war experience the term, “limited” war, is both an oxymoron and a red flag. The first Iraq war was a good example of politicians and military leaders abiding by these lessons. We won the military war handily but had mixed results with political changes inside Iraq. The second Iraq war and the Afghanistan wars were less successful with the military and political objectives but at least we tried to win the hearts and minds of the people to a mutually beneficent cause. When we look at the proposed limited strike against Syria and the political plan to win the hearts of the Syrian people, this is a “bad” war. If this war is actually a campaign to counter a global Islamist insurgency then how do we pick a side? Do we help our terrorist friends in Al-Qaeda or Hamas? Is this another fourth generational war we are doomed to lose because our thinking is still stuck in the 1960’s? Similar to our problems trying to arbitrate Sunni-Shiite problems in Iraq, it is even less likely that the end game for this war will result in Syrian Sunni and Shiite people agreeing to a mutually beneficial political objective. Unfortunately for our politicians the American population know a “bad” war when they see one. It is ironic to hear John Kerry make the case to engage in this “bad” war. If anyone should know, Mr. Kerry should know that “bad” wars can make or dramatically shorten political careers. This is a war we need to walk away from.

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What Explains the Slowdown in Health Care Spending?

John Goodman wrote a post, What Explains the Slowdown in Health Care Spending?, and included the following quote from a NYT article by Uwe Reinhardt.

One concludes from this analysis that both year-to-year fluctuations in national health spending and the longer-term trend in that growth rate are driven primarily by current and prior-year changes in macroeconomic conditions.

I was curious about how he reached his conclusions since it reminded me of the John McDonough’s macroeconomic premise in the article, “Does Massachusetts Have the Nation’s Highest Health Insurance Premiums? It Depends.” In that article Mr. McDonough speculated that the reason Massachusetts has the highest health insurance premiums in the country is because they have the highest median income. In other words health insurance premiums migrated to the highest price the Massachusetts market would bare. In Mr. Reinhardt’s article, Controlling Health Care Spending, Revisited, I found a fascinating graph of the year to year growth in real per capita health care spending. My immediate question is what happened to real per capita income over the same time frame? Since I know how to get income data from FRED here is my version of the two indicators on the same graph. For those who are curious I estimated the year to year growth in real per capita health care spending from the NYT graph so I could put it into an Excel spreadsheet. It sure looks like the year to year increases are trending down to the increase in real disposable income. This would be a logical result in an environment where out of pocket costs are increasing and the country is increasingly sensitive to health care spending increases that exceed the general inflation level. If the large businesses and government entities that sponsor large group health insurance plans are unwilling to expand their contribution to health care spending, you have to wonder how we can expand our health care spending without a major increase in GDP and real per capita disposable income. If the predictions of slow GDP growth are correct then it looks like we are playing a game of musical chairs and the music is winding down. Even if there is no health care inflation then “someone” is being set up for a cost squeeze as we expand the health care system and its not likely to be the consumer. They look like they are tapped out. This reminds me of the typical problems faced by out of control entitlement systems. We have seen the future of health care and it looks a lot like Detroit.

RealDPIvsHealthSpending1

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Probably The Smartest Thing The Affordable Care Act Has Done

A couple of years ago I purchased my health insurance using eHealthInsurance.com. It was easy to use and it had a large selection of plans available. I think that eHealthInsurance.com is what healthcare.gov and the state exchanges aspire to be when they grow up. Now I see that they have seen the future and are comfortable with letting the professionals do the work.

The federal government has signed a landmark deal setting the stage for leading online insurance exchange eHealthInsurance.com to enroll potentially millions of people on new Obamacare marketplaces being operated by the government, it was revealed Wednesday in a filing with Securities and Exchange Commission.

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The Individual Mandate–A Fool’s Errand By Another Name

Over at Kaiser Health News Roni Caryn Rabin made the argument that the reason New York insurance rates are dropping so dramatically is because of the individual mandate. Here is what she said:

The nosedive in health insurance prices that New York officials announced earlier this week was driven by many factors, but the most important was the individual mandate, a central component of Obamacare.

Arguably the poster child for the Affordable Care Act and the Individual Mandate has to be Massachusetts health care system, so let’s look at their experiences. Back in 2011 Austin Frakt pointed out in “The individual mandate: Evidence from Massachusetts” that the “mandate did the job it was designed to do”. I pointed out in a comment that this success did not translate into lower insurance rates in the individual health insurance market.  When I entered my demographic data into the Health Connector for Massachusetts in 2011, http://www.mahealthconnector.org, the lowest Bronze plan available would cost me $1,296 per month. When I looked up comparable plans on http://www.ehealthinsurance.com for Ohio and it costs me $305 per month. In fact there were 15 plans available for less than $400. It is interesting to note that Ohio seems to have a lot more competition than the states whose health insurance regulations look most like the Affordable Care Act, Massachusetts and New York. From the Massachusetts experience we can conclude that the individual mandate has not been a significant factor in reducing the cost of the health insurance in Massachusetts. In John McDonough’s article, “Does Massachusetts Have the Nation’s Highest Health Insurance Premiums? It Depends.”, he argues that the higher cost for Massachusetts is primarily the result of higher household income. A cynical person might conclude that Massachusetts is paying the highest rates it’s population will bare without screaming. What the Massachusetts experience has shown us is that the Affordable Care Act and in particular the Individual Mandate will drive the premium costs in the individual market upward to the rates paid by the large group plans and we are not going to know why. Are the higher rates because of the individual mandate, higher household income like they have in Massachusetts, or less competition as a result of more regulations like they have in New York and Massachusetts? The ironic part is that none of these reasons for higher rates are likely to result in better health care outcomes for the general population. So if you purchase health insurance in the the individual market you are confronted with the painful dilemma. Your health insurance rates will soar out of control if the individual mandate does not work or your health insurance rates will go up probably up to the point where they are barely affordable if the individual mandate does work. In either case you lose. The best solution is for us to go back to the system we had before the Affordable Care Act and think up a more equitable single payer system to pay for guaranteed access.

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What I Am Eating – Grilled Thai Beef Salad

I found this recipe for Grilled Thai Beef Salad on ziplist.com. I made it for our family meal today. This Thai beef salad recipe is bursting with spicy, sweet, and tangy flavors. The beef is grilled, sliced thin, and tossed with lettuce. Here is the recipe I followed from Leite’s Culinaria. Since my grocery store was out of basil and the cilantro was pretty dismal looking, I substituted cucumbers from the garden and cherry tomatoes. I brought a little Sriracha for those who wanted a bit more spice.

INGREDIENTS

For the marinade and dressing

  • 3 tablespoons fresh lime juice
  • 3 tablespoons low-sodium soy sauce
  • 3 tablespoons canola oil
  • 1 1/2 to 2 tablespoons firmly packed dark brown sugar
  • 1 clove garlic, minced (about 1 teaspoon)
  • 1 1/2 teaspoons peeled and minced fresh ginger
  • 1 1/4 teaspoons red curry paste or chili-garlic sauce

For the salad

  • 1 pound top round London broil or flank steak
  • Canola oil
  • 1/2 head red-leaf lettuce, torn (about 5 cups lightly packed) or mixed lettuces
  • 3 shallots, thinly sliced (about 1/2 cup)
  • 1/4 to 1/2 cup coarsely chopped fresh cilantro leaves
  • 1 cup fresh basil leaves, sliced into ribbons
  • 1/2 marinade and dressing mixture
DIRECTIONS
  • Make the marinade and dressing
  • 1. In a bowl, whisk together 1 tablespoon of the lime juice, the soy sauce, oil, brown sugar, garlic, ginger, and red curry paste or chili-garlic sauce. Pour half the mixture into a resealable container and reserve as the dressing. What remains in the bowl is the marinade.
  • 2. Rinse the steak and pat it dry. Place it in a resealable plastic bag or a glass baking dish and pour the marinade over the steak. Add the remaining 2 tablespoons lime juice to the bag. Seal or cover and refrigerate, turning the meat occasionally, for at least 4 hours or up to overnight.
  • Make the grilled Thai beef salad
  • 3. Coat a grate or a grill pan with oil and preheat over medium-high heat until hot. Cook the steak until the desired degree of doneness, 3 to 5 minutes per side for medium-rare depending on the thickness. Let rest for at least 5 minutes. Thinly slice the steak on the diagonal against the grain.
  • 4. Combine the lettuce, shallots (reserving a few slices for garnish), cilantro, basil, and steak in a large serving bowl. Add the reserved dressing and toss to coat. Divide the salad among 4 plates and garnish with the shallots.
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Are New Yorkers the Dumbest Shoppers in the World or Did They Discover a Cure for Cancer?

Healthcare Lunchbox128When I read the article, “Health Plan Cost for New Yorkers Set to Fall 50%”, I immediately wondered how did they do that? That is a pretty dramatic drop in insurance premiums. Did they discover a cure for cancer and forgot to tell the rest of us? Here is what  Roni Caryn Rabin and Reed Abelson wrote:

State insurance regulators say they have approved rates for 2014 that are at least 50 percent lower on average than those currently available in New York. Beginning in October, individuals in New York City who now pay $1,000 a month or more for coverage will be able to shop for health insurance for as little as $308 monthly. With federal subsidies, the cost will be even lower.

So I decided to enter some data into the ehealthinsurance.com website and see what they would recommend for a healthy young male born in 1991 and living in lower Manhattan(zip code 10004). Here is what I got:

eHealth_2013-07-19 10_42_20

We can see that most of the plans are less than $1,000 per month with the lowest cost plan, $184.70,  being the most attractive to a healthy young man. In the ehealthinsurance.com November 2012 report, The Cost and Benefits of Individual & Family Health Insurance Plans, they said that the average cost for an individual policy in the state of New York was $357 per month. It is disappointing that only sixteen plans are offered. If I enter the same data but use a location in Ohio(Clermont county, zip code 45122) we see that he could get health insurance for a low price of $42.60 per month and have over 77 different plans to choose from. In fact 75 of those plans have a monthly premium that is less than $200. So I am confronted with a couple of problems with the New York Times report.

  1. What is the actual price for health insurance for a healthy individual in 2013? Is it the $1,000 per month as reported by the New York Times or is it closer to the prices quoted at eHealthInsurance.com? If it is closer to the rates available on eHealthInsurance.com then the rates are likely to go up in 2014.
  2. Assuming that New Yorkers have not discovered a cure for cancer or obesity in 2013, why are the insurance premiums going down in 2014? Is this a bet that the amount of medical care that is not covered by health insurance, Medicaid, or Medicare will go down dramatically in 2014 or an admission that New York City health insurance numbers are “funny” numbers? When you look at insurance rates in other states a 50% drop in insurance premiums for New York screams that someone is using “funny” numbers.
  3. Are we to believe that some of the most incredibly savvy business men and women in the country really paying over $1,000 a month for health insurance when they could be paying less than $700? If these guys and gals are really that savvy, why can’t they get a rate like they have in Ohio?
  4. With the obvious problems that an unexplained 50% drop in insurance premiums bring to the table, you would think the New York Times would not want to bring more attention to the fact that the idiosyncrasies of the New York insurance market are not duplicated elsewhere. In this case I would have thought it would be better to be thought a fool than to open your mouth and remove all doubt.
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Fact Checking the New York Times Claim That Obamacare Cuts N.Y. Health Premiums By 50 Percent

Avrik Roy’s article, The Times Falsely Claims That Obamacare Cuts N.Y. Health Premiums By 50 Percent, caught my attention so I decided to check out the numbers in the ehealthinsurance.com November 2012 report, The Cost and Benefits of Individual & Family Health Insurance Plans. Sure enough the price listed as the average individual plan premiums for New York was $355. You can find it on page 16. Since New Yorkers are pretty savvy shoppers, my guess is that the ehealthinsurance.com number is more likely to be the correct price.

In an enthusiastic front-page story in today’s New York Times, Roni Caryn Rabin and Reed Abelson claim that, as a result of Obamacare, health insurance premiums for individuals shopping on their own for coverage will be “at least 50 percent lower on average than those currently available in New York” because “individuals in New York City who now pay $1,000 a month or more for coverage will be able to shop for health insurance for as little as $308 monthly.” See, Obamacare works!

Sounds great, except for a couple of points:

  • New York has one of the costliest and least functional individual-insurance markets in the nation, because many of the regulations that Obamacare imposes nationwide are already present in New York, on steroids. Hence, New York’s market is far from typical.
  • In 2010, average per-person monthly premiums in the New York individual market were not “$1,000 or more,” but $357. Even less expensive plans can be found today on ehealthinsurance.com.

I’ll publish a more detailed analysis of New York’s insurance rates soon, but in the meantime, take the Times piece with a big grain of salt.

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Will Immigration Reform Make Americans Poorer?

It looks like the folks over at Powerline blog are asking the same question I have been pondering about immigration reform, “Will Immigration Reform Make Americans Poorer?” Last month I wondered out loud, “How Does The Economy Grow with Immigration Reform?” Below is a comment I wrote on the Powerline blog that brought up an aspect no one seems to want to talk about.

I am still confused how the economy can grow if we do not make any progress employing the existing citizens who have low education, low job experience, and low job skills. This employment problem has not gone away. Unfortunately I do not see the businesses that hire low income workers growing. Adding more immigrants into this employment sector will necessarily make this situation more competitive and provide an incentive for the illegal immigrant to maintain their tax free status. At its best immigration reform displaces one disadvantaged group with another disadvantaged group.

About the only way I can see the economy growing under a scenario involving  adding 40 to 60 million new low skill immigrants is if we have a boom in low tech industries that absorbs not only the new immigrants but also the unemployed/under employed. A low tech boom like that has not occurred in the US economy in a very long time and if one was to occur in North America, Mexico would be the more likely choice.