In an article “Michigan and the Knowledge Economy” published in the June 16th Wall Street Journal the author, William McGurn, tells readers the middle class can no longer rely on jobs in manufacturing. The automobile industry and manufacturing jobs leaving Michigan will not be back, but must be replaced with new jobs in the “knowledge economy.”
The author defines the knowledge economy to be industries with 30 percent or more of jobs using college or professional degree skills. He names knowledge industries from the federal government’s list of service industries: information services, finance and insurance, professional services, health care and education.
If Michigander’s produced everything they bought and sold they wouldn’t need to buy oranges from Florida, furniture from North Carolina, digital cameras from China, or shoes from Taiwan. As long as they buy out of state their money leaves Michigan and their spending creates jobs elsewhere.
Buying from out of state requires selling out of state if Michigan expects to keep itself employed. Otherwise it must produce and sell more services to replace lost manufacturing jobs.
Take social services. Like all states Michigan has social service facilities staffed with college educated counselors and social workers. Most of these jobs require at least a master’s degree, which puts them in the knowledge economy.
Social services are local services, produced and used by Michigan residents. Like all services they are hard to sell out of state. If Michiganders will buy fewer oranges from Florida, or fewer cameras and electronics from China, but more social services from each other then college educated social service jobs will replace auto manufacturing jobs; otherwise not.
Take Education, where all faculty jobs and many administrative jobs require college degrees. Education serves local residents, which makes it hard to sell out of state. College students might be an exception, but even if it is politically feasible and economically successful to attract out of state students with lower tuition other states could do the same and compete for students.
Competition adds to the difficulty of selling services out of state since other states can easily copy Michigan strategies and try to export their services. For services like information services in publishing and communications, and finance, insurance, and some professional services, inexpensive digital technology allows easy entry and competition between states and other countries: outsourcing to India for instance.
Take tourism where Michigan has the advantage of the Great Lakes and out door recreation. Bringing in out of state money with tourism might help despite competition, but jobs are at hotels, motels, restaurants, boat marinas and golf courses and not part of a knowledge economy.
Competition and the local use of services make it economically difficult to replace manufacturing jobs with service jobs. Many service industries have jobs that need college degree skills and pay good salaries, but having these jobs, or more of these jobs, is different from expecting them to replace manufacturing jobs.
Michigan needs manufacturing. America needs manufacturing. The knowledge economy offers only false hopes.
Tuesday, October 6, 2009
Tuesday, September 29, 2009
Health Care and Doctors
The need for health care reform and new health care policies keeps making the news almost every day. Better access to health care includes better access to the knowledge and services of physicians. That would imply new health care graduates should grow as the population grows, but medical school degree data published by the National Center for Education Statistics shows no growth at all. For the academic year 1985-86, they report 15,938 Medical School Degrees. They have not reported a number as high as that since, although MD degrees reached 15,730 for the year ending June 2007.
In that same period the resident population reported by the Bureau of Census increased 66.2 million. It was 237.9 million in 1985 but reached 304.1 million in 2008. Despite continuous growth in America’s population it does not train more physicians.
Becoming a physician is a long and expensive process that takes four years of college prior to 4 years of medical school. Medical school tuition reported by the American Association of Medical Colleges in 2008 averaged $23,593 for the 75 public university medical schools; $41,235 for the 50 private university medical schools.
In some states a medical school graduate can get a license to practice medicine after completing a one year internship, but most states require two years in a medical residency program. During residency programs hospitals typically define pay as a stipend, apparently to save money paying low wages, so the residency period continues to be a period of financial drain on medical students.
Those admitted to America’s service academies at Annapolis, Maryland and West Point, New York pay no tuition. America trains its military officers at public expense. For medicine though America puts the burden to pay for at least 10 years of training on the individual. Much of this medical expense comes during a time in life when people usually begin to support themselves and pay their own living expenses. For many in medical training living expenses are a burden that generates even more debt to pay off later.
Some of the strain in the current system shows up in physician employment reported by the Bureau of Labor Statistics. Family and General Practitioner jobs are in decline. There were 135 thousand reported as recently as 2001, but 106 thousand reported for 2008. It also has the lowest entry pay of reported physician specialties, $73 thousand.
An entry wage of $73 thousand dollars will not be sufficient to support a family and pay the debt from 10 years of medical education. It is time to recognize that a major component in health care reform needs to be more physicians. They need to grow at least as fast as the population. That is not happening with the current system and we have to doubt it ever will. It’s time to train our physicians like we train our generals: at public expense.
In that same period the resident population reported by the Bureau of Census increased 66.2 million. It was 237.9 million in 1985 but reached 304.1 million in 2008. Despite continuous growth in America’s population it does not train more physicians.
Becoming a physician is a long and expensive process that takes four years of college prior to 4 years of medical school. Medical school tuition reported by the American Association of Medical Colleges in 2008 averaged $23,593 for the 75 public university medical schools; $41,235 for the 50 private university medical schools.
In some states a medical school graduate can get a license to practice medicine after completing a one year internship, but most states require two years in a medical residency program. During residency programs hospitals typically define pay as a stipend, apparently to save money paying low wages, so the residency period continues to be a period of financial drain on medical students.
Those admitted to America’s service academies at Annapolis, Maryland and West Point, New York pay no tuition. America trains its military officers at public expense. For medicine though America puts the burden to pay for at least 10 years of training on the individual. Much of this medical expense comes during a time in life when people usually begin to support themselves and pay their own living expenses. For many in medical training living expenses are a burden that generates even more debt to pay off later.
Some of the strain in the current system shows up in physician employment reported by the Bureau of Labor Statistics. Family and General Practitioner jobs are in decline. There were 135 thousand reported as recently as 2001, but 106 thousand reported for 2008. It also has the lowest entry pay of reported physician specialties, $73 thousand.
An entry wage of $73 thousand dollars will not be sufficient to support a family and pay the debt from 10 years of medical education. It is time to recognize that a major component in health care reform needs to be more physicians. They need to grow at least as fast as the population. That is not happening with the current system and we have to doubt it ever will. It’s time to train our physicians like we train our generals: at public expense.
Wednesday, September 16, 2009
Taxes and Health Care Reform
The headline in the Washington Post reads “Tax on Health Benefits Weighed: Senate Calls Levy ‘Perhaps the Best Way’ to pay for Overhaul.” [June 10, 2009] Actually it was Senator Max Baucus who is drafting the legislation for the Senate who said that, but we can be sure he discussed it with his Senate colleagues.
The qualifier “perhaps” in front of best should be translated into the best we can do given that a majority in Congress wants to avoid raising income tax rates at the top of the Federal income tax scale. The top rate continues to be 35 percent, which began in 2003.
The Internal Revenue Service publishes detailed income and tax data on its website. The latest detail is for 2006, a year in which 940,384 returns had taxable income over $500,000. Suppose Congress declared a one percent increase in the tax rate for just the taxable incomes over $500,000. Having a 36 percent top marginal rate instead of 35 percent for tax year 2006 comes to $9.5 billion dollars of additional revenue.
Higher incomes in 2009 would make it more than 9.5 billion. Raising the top marginal rate 4.6 percent to 39.6 percent will bring in more than $40 billion. A top marginal rate of 39.6 was the top marginal tax rate from 1993 to 2000.
Congress knows taxing employer health benefits is a regressive tax because employer health care benefits do not go up in proportion to income. Taxing health benefits when benefits decline as a percent of higher income guarantees those with higher incomes will pay a lower percentage of income in tax. Ignoring dividends and capital gains only makes their proposal more regressive.
Senator Baucus is already retreating and offering moderating qualifications like phasing in, and a “grandfather” clause for union negotiated health plans. Maybe he is anxious making proposals for regressive taxes, but others in Congress are making other proposals.
Other proposals include, higher alcohol taxes, a new tax on flexible savings accounts and health reimbursement accounts, taxing half of all employer provided health premiums, eliminating tax deductions for high medical expenses, and a “3-cent tax” on sugary drinks. Many proposals, but all regressive and none to raise marginal tax rates.
America’s health care is too expensive for millions. To have health care for everyone some will have to pay more to finance health care for others who can only pay less or America will continue to exclude millions.
American’s need to feel concern for their fellow citizens to help pay subsidies, but the regressive finance proposals reflect the attitudes and political strength of the well placed and the well to do. If a family of four in 2008 used the standard deduction, a 39.6 marginal tax rate instead of the current 35 percent rate, increases taxes by $5,615.13 on $500,000 of gross income. Those high earners do not want to pay and Congress continues to go along. It makes it hard to feel optimism for extending health care to all.
The qualifier “perhaps” in front of best should be translated into the best we can do given that a majority in Congress wants to avoid raising income tax rates at the top of the Federal income tax scale. The top rate continues to be 35 percent, which began in 2003.
The Internal Revenue Service publishes detailed income and tax data on its website. The latest detail is for 2006, a year in which 940,384 returns had taxable income over $500,000. Suppose Congress declared a one percent increase in the tax rate for just the taxable incomes over $500,000. Having a 36 percent top marginal rate instead of 35 percent for tax year 2006 comes to $9.5 billion dollars of additional revenue.
Higher incomes in 2009 would make it more than 9.5 billion. Raising the top marginal rate 4.6 percent to 39.6 percent will bring in more than $40 billion. A top marginal rate of 39.6 was the top marginal tax rate from 1993 to 2000.
Congress knows taxing employer health benefits is a regressive tax because employer health care benefits do not go up in proportion to income. Taxing health benefits when benefits decline as a percent of higher income guarantees those with higher incomes will pay a lower percentage of income in tax. Ignoring dividends and capital gains only makes their proposal more regressive.
Senator Baucus is already retreating and offering moderating qualifications like phasing in, and a “grandfather” clause for union negotiated health plans. Maybe he is anxious making proposals for regressive taxes, but others in Congress are making other proposals.
Other proposals include, higher alcohol taxes, a new tax on flexible savings accounts and health reimbursement accounts, taxing half of all employer provided health premiums, eliminating tax deductions for high medical expenses, and a “3-cent tax” on sugary drinks. Many proposals, but all regressive and none to raise marginal tax rates.
America’s health care is too expensive for millions. To have health care for everyone some will have to pay more to finance health care for others who can only pay less or America will continue to exclude millions.
American’s need to feel concern for their fellow citizens to help pay subsidies, but the regressive finance proposals reflect the attitudes and political strength of the well placed and the well to do. If a family of four in 2008 used the standard deduction, a 39.6 marginal tax rate instead of the current 35 percent rate, increases taxes by $5,615.13 on $500,000 of gross income. Those high earners do not want to pay and Congress continues to go along. It makes it hard to feel optimism for extending health care to all.
Saturday, August 29, 2009
Productivity and Jobs
America’s annual gain in productivity in many sectors of the economy is often overlooked as a source of saving. Productivity is measured by output per work hour and the gain in productivity is measured by the percentage increase in output per work hour.
If productivity in appliance manufacturing goes up 3 percent, then a 3 percent increase in appliance manufacturing takes place at the same cost, or the same output can be produced with a 3 percent cost savings, or a combination. The manufacturing firm is the first beneficiary of the savings from a productivity increase because it lowers costs and the savings translates into profits.
Selling extra output puts downward pressure on prices because it is almost always necessary to lower price to sell more output, including appliances. In this way a productivity increase can generate savings for consumers from lower prices.
Productivity also affects employment. If a price decrease leads to a 3 percent increase in appliance sales following a 3 percent increase in productivity, then employment will remain the same.
However, there could be more than, or less than, a 3 percent increase in appliance sales. If it’s more than 3 percent, then more jobs will be needed and employment will go up, but if it’s less, then layoffs result. The newly unemployed will have to look for work at other firms or other industries.
Whenever productivity goes up there are savings with potential benefits for business owners as higher profits, consumers as lower prices, and job holders as more jobs and higher wages. In the 1980’s advances in computer technologies raised productivity so much that business earned new profits, consumers saved with falling prices, and new jobs opened up as business competition for workers with computer skills raised wages and employment.
National productivity continues to go up across many industries, but lately at modest rates. How the savings from productivity are distributed varies, but working Americans are in the worst position to benefit. For nearly 20 years manufacturing productivity and sales have been going up but jobs in manufacturing have been going down. As people leave manufacturing for other jobs they flood service sector job markets.
With a growing percentage of Americans looking for work in service industries, it gets harder and harder for labor to share in productivity gains with better wages. For industries like health care and education where productivity gains generally lag behind, continued growth of these services helps to increase jobs. The skills needed for these jobs limit applicants and make it necessary to pay better wages.
For other service industry though wages are not going up and productivity gains go to business. Productivity gains amount to national savings, which can benefit everyone. Lately though they are contributing to America’s inequality of income.
If productivity in appliance manufacturing goes up 3 percent, then a 3 percent increase in appliance manufacturing takes place at the same cost, or the same output can be produced with a 3 percent cost savings, or a combination. The manufacturing firm is the first beneficiary of the savings from a productivity increase because it lowers costs and the savings translates into profits.
Selling extra output puts downward pressure on prices because it is almost always necessary to lower price to sell more output, including appliances. In this way a productivity increase can generate savings for consumers from lower prices.
Productivity also affects employment. If a price decrease leads to a 3 percent increase in appliance sales following a 3 percent increase in productivity, then employment will remain the same.
However, there could be more than, or less than, a 3 percent increase in appliance sales. If it’s more than 3 percent, then more jobs will be needed and employment will go up, but if it’s less, then layoffs result. The newly unemployed will have to look for work at other firms or other industries.
Whenever productivity goes up there are savings with potential benefits for business owners as higher profits, consumers as lower prices, and job holders as more jobs and higher wages. In the 1980’s advances in computer technologies raised productivity so much that business earned new profits, consumers saved with falling prices, and new jobs opened up as business competition for workers with computer skills raised wages and employment.
National productivity continues to go up across many industries, but lately at modest rates. How the savings from productivity are distributed varies, but working Americans are in the worst position to benefit. For nearly 20 years manufacturing productivity and sales have been going up but jobs in manufacturing have been going down. As people leave manufacturing for other jobs they flood service sector job markets.
With a growing percentage of Americans looking for work in service industries, it gets harder and harder for labor to share in productivity gains with better wages. For industries like health care and education where productivity gains generally lag behind, continued growth of these services helps to increase jobs. The skills needed for these jobs limit applicants and make it necessary to pay better wages.
For other service industry though wages are not going up and productivity gains go to business. Productivity gains amount to national savings, which can benefit everyone. Lately though they are contributing to America’s inequality of income.
Thursday, August 6, 2009
Depression Economics
The Return of Depression Economics and the Crisis of 2008, Paul Krugman, (New York: W.W. Norton & Co., 2009), 191 pages, no index or bibliography, $24.95.
The first sentence in The Return of Depression Economics reads “Most economists, to the extent that they think about the subject at all, regard the Great Depression of the 1930’s as a gratuitous, unnecessary tragedy.” That is economists agree on the causes of depressions and the policies that end them.
Since the economics profession agrees the Great Depression was caused by inadequate aggregate demand, or inadequate total spending, made worse by a folly of bad policy, depressions are a problem solved, and a thing of the past.
But not so fast, says Krugman, who argues through the remainder of the book that recent global crises have similarities to each other and the Great Depression, especially similarities in banking and credit.
Banks are essential, but troublesome institutions that keep checking accounts for depositors, but only hold a fraction of deposit liabilities in reserve to pay for checks. In practice they hold around 15 cents on the dollar in reserve and make loans with the other 85 cents.
In the normal course of business 15 cents will be adequate because those writing checks will about equal those making deposits. In the normal course of business borrowers will be paying monthly principal and interest to further assure that banks have reserves to pay on their checking accounts.
Banks direct savings back into the spending stream as investment spending. Loans can generate more income and employment and help the economy grow, but banks can disrupt the flow of spending when they make risky and foolish loans. Loans that default disrupt the flow of spending and can create recessions and depressions.
There in lies the trouble, or moral hazard, a term used by Krugman to characterize “any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”
Krugman gets right to the heart of the matter on page 63 when he writes “Borrowed money is inherently likely to produce moral hazard. Then he makes up a story of a modern moral hazard.
“Suppose that I’m a smart guy, but without any capital, and that based on my evident cleverness you decide to lend me a billion dollars to invest any way I see fit, as long as I promise to repay within a year’s time. … If the investment prospers, so will I; if it does not, I will declare personal bankruptcy, and walk away. Heads I win, tails you lose.”
Walking away from billions in loans brings a halt to billions in transactions that amount to hoarding cash and pulling money out of the spending stream. It can also lead to panic selling of financial assets.
Krugman’s story and narrative accounts of global recessions reflect his tendency to believe that people can be greedy, irrational and destructive in their economic behavior. Unlike so many in the economics profession he does not see panics, crises and recessions as just another technical matter. Narrative from the recent panics and crisis of Mexico, Japan and Asia that dominate the first four chapters reflects his views on human perversity.
Chapter 5 is the first of four more topical chapters that cover the problems of currency speculation and then “hedge funds” and their relation to crisis, panics and recessions. Krugman takes a few jabs at former Federal Reserve Chairman Alan Greenspan in Chapter 7 titled “Greenspan’s Bubbles.” The bubbles are the stock market bubble and housing market bubble.
Chapter 8 takes a quick tour through banking in order to define shadow banking. Because a bank’s liabilities include personal and business checking accounts, i.e. money, the larger society has a special need to regulate banks to make sure they have reserves to meet their account liabilities. Shadow bankers figured out new and innovative ways to make loans with other people’s money like banks do, but avoid regulations requiring a minimum of reserves to meet account liabilities.
Shadow bankers did the same thing as Krugman’s smart guy above so we are not surprised when he writes this simple rule: “… anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank.”
The first eight chapters are really a preliminary for Chapter 9 because elements of the crisis in Latin American, Japan and Asia all re-occur in the American crisis of 2008 and 2009. Krugman brings them all together in a chronology starting with America’s housing bubble, then America’s hedge fund failures and the worst of all, the collapse in monetary policy as an economic stimulant to total spending.
The last chapter makes sobering reading as its title, The Return of Depression Economics, so well implies. Krugman defines depression economics as recession brought about by inadequate aggregate demand: decline amongst plenty.
He suggests two immediate policies to get through the 2008 and 2009 recession: get credit flowing again and prop up spending. The phrase “get credit flowing again” jumps out like a jewel on the head of a toad, at least to those in economics, banking and policy. That is because monetary policy and lower interest rates should always get credit flowing again.
Instead of traditional policies Krugman breaks with the past and suggests direct action to recapitalize banks and have the Federal Reserve Bank enter commercial paper and other lending markets. Likewise he doubts monetary policies will be effective and recommends government spending as a stimulus for right now, or as long as necessary. He doubts tax cuts will be effective either; after all taxpayers can save, not spend.
Krugman is one of a small group who are well known within the academic ranks but decide to write to a larger general audience. Lester Thurow would be another but the list is short. It is hard to do because academic journals will not publish journalism, but the popular press must have something readable and saleable.
Depression Economics is relevant and current events journalism with some elements of a textbook. It has some enduring economic analysis and historical material but remains readable and avoids the strident tone of a crusader. He does criticize his opposition and Alan Greenspan. There is nothing about income inequality or its contribution to inadequate demand.
Unlike so many in economics who will not acknowledge that free enterprise breaks down or fails, Krugman sees a break from the past and argues for what works and whatever is necessary. Depression Economics reflects that approach.
The first sentence in The Return of Depression Economics reads “Most economists, to the extent that they think about the subject at all, regard the Great Depression of the 1930’s as a gratuitous, unnecessary tragedy.” That is economists agree on the causes of depressions and the policies that end them.
Since the economics profession agrees the Great Depression was caused by inadequate aggregate demand, or inadequate total spending, made worse by a folly of bad policy, depressions are a problem solved, and a thing of the past.
But not so fast, says Krugman, who argues through the remainder of the book that recent global crises have similarities to each other and the Great Depression, especially similarities in banking and credit.
Banks are essential, but troublesome institutions that keep checking accounts for depositors, but only hold a fraction of deposit liabilities in reserve to pay for checks. In practice they hold around 15 cents on the dollar in reserve and make loans with the other 85 cents.
In the normal course of business 15 cents will be adequate because those writing checks will about equal those making deposits. In the normal course of business borrowers will be paying monthly principal and interest to further assure that banks have reserves to pay on their checking accounts.
Banks direct savings back into the spending stream as investment spending. Loans can generate more income and employment and help the economy grow, but banks can disrupt the flow of spending when they make risky and foolish loans. Loans that default disrupt the flow of spending and can create recessions and depressions.
There in lies the trouble, or moral hazard, a term used by Krugman to characterize “any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”
Krugman gets right to the heart of the matter on page 63 when he writes “Borrowed money is inherently likely to produce moral hazard. Then he makes up a story of a modern moral hazard.
“Suppose that I’m a smart guy, but without any capital, and that based on my evident cleverness you decide to lend me a billion dollars to invest any way I see fit, as long as I promise to repay within a year’s time. … If the investment prospers, so will I; if it does not, I will declare personal bankruptcy, and walk away. Heads I win, tails you lose.”
Walking away from billions in loans brings a halt to billions in transactions that amount to hoarding cash and pulling money out of the spending stream. It can also lead to panic selling of financial assets.
Krugman’s story and narrative accounts of global recessions reflect his tendency to believe that people can be greedy, irrational and destructive in their economic behavior. Unlike so many in the economics profession he does not see panics, crises and recessions as just another technical matter. Narrative from the recent panics and crisis of Mexico, Japan and Asia that dominate the first four chapters reflects his views on human perversity.
Chapter 5 is the first of four more topical chapters that cover the problems of currency speculation and then “hedge funds” and their relation to crisis, panics and recessions. Krugman takes a few jabs at former Federal Reserve Chairman Alan Greenspan in Chapter 7 titled “Greenspan’s Bubbles.” The bubbles are the stock market bubble and housing market bubble.
Chapter 8 takes a quick tour through banking in order to define shadow banking. Because a bank’s liabilities include personal and business checking accounts, i.e. money, the larger society has a special need to regulate banks to make sure they have reserves to meet their account liabilities. Shadow bankers figured out new and innovative ways to make loans with other people’s money like banks do, but avoid regulations requiring a minimum of reserves to meet account liabilities.
Shadow bankers did the same thing as Krugman’s smart guy above so we are not surprised when he writes this simple rule: “… anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank.”
The first eight chapters are really a preliminary for Chapter 9 because elements of the crisis in Latin American, Japan and Asia all re-occur in the American crisis of 2008 and 2009. Krugman brings them all together in a chronology starting with America’s housing bubble, then America’s hedge fund failures and the worst of all, the collapse in monetary policy as an economic stimulant to total spending.
The last chapter makes sobering reading as its title, The Return of Depression Economics, so well implies. Krugman defines depression economics as recession brought about by inadequate aggregate demand: decline amongst plenty.
He suggests two immediate policies to get through the 2008 and 2009 recession: get credit flowing again and prop up spending. The phrase “get credit flowing again” jumps out like a jewel on the head of a toad, at least to those in economics, banking and policy. That is because monetary policy and lower interest rates should always get credit flowing again.
Instead of traditional policies Krugman breaks with the past and suggests direct action to recapitalize banks and have the Federal Reserve Bank enter commercial paper and other lending markets. Likewise he doubts monetary policies will be effective and recommends government spending as a stimulus for right now, or as long as necessary. He doubts tax cuts will be effective either; after all taxpayers can save, not spend.
Krugman is one of a small group who are well known within the academic ranks but decide to write to a larger general audience. Lester Thurow would be another but the list is short. It is hard to do because academic journals will not publish journalism, but the popular press must have something readable and saleable.
Depression Economics is relevant and current events journalism with some elements of a textbook. It has some enduring economic analysis and historical material but remains readable and avoids the strident tone of a crusader. He does criticize his opposition and Alan Greenspan. There is nothing about income inequality or its contribution to inadequate demand.
Unlike so many in economics who will not acknowledge that free enterprise breaks down or fails, Krugman sees a break from the past and argues for what works and whatever is necessary. Depression Economics reflects that approach.
Wednesday, July 15, 2009
Risk and Health Insurance
With a new President, America has a new pledge to expand health insurance coverage to everyone. It is a complicated subject but all types of insurance are supposed to let people pay premiums into a risk pool that generates a reserve fund to pay losses. Insurance companies employ mathematicians to analyze actuarial data on mortality: accidents, sickness, disability, retirement and other risks. Actuarial data are necessary to construct probability tables that will determine the premium payments to charge that will generate cash reserves to pay future losses.
The risk pool has to be defined and the probability tables have to be calculated as random risk. Life insurance actuaries use data accumulated from many years to know the random risk that someone age 50 will die during their 51st year. They don’t know who will die but they know the probability, which lets them determine the premiums necessary to build an adequate reserve fund. Life insurance policies typically exclude death caused to soldiers in warfare because it is not random risk and prevents actuaries from building a reserve fund.
In home owners insurance, the premiums go to cover only those homes, and those risks, that occur in a random fashion. Insurance companies exclude flooding from homeowner’s policies because flooding is not random. The home in the valley or next to the stream always gets flooded while the home on the hill never gets flooded.
Risks and losses from flooding along rivers, flood plains or hurricane zones are high enough that excluded home owners acted through the political system to pressure Congress. To insure against the single peril, flooding, means defining a risk pool of homes and property with risk of flooding. With a risk pool of potential flood victims, premiums create a reserve fund to pay losses from random flooding to those in the risk pool. However, homeowners and property owners subject to flooding are widely scattered and geographically spread out in a way that has prevented private sector insurance companies from creating a large and random risk pool for flood victims.
The answer turns out to be a government sponsored National Flood Insurance Program(NFIP) administered through FEMA, the Federal Emergency Management Agency. On their website they explain that communities participate in the program by adopting and enforcing floodplain management ordinances to reduce flood damage in exchange for federally backed flood insurance available to homeowners, renters and business owners in these communities.
The NFIP identifies and maps the Nation's floodplains to provide the data needed for floodplain management programs and to actuarially rate new construction for flood insurance. In other words, Congress turned to the government for a solution to a problem that the private sector could not solve.
Similar problems with risk have plagued the health care system for many years. President Truman advocated and proposed national health insurance 60 years ago, which the American Medical Association opposed and defeated. During the Eisenhower administration the medical profession decided to build and expand the private health care insurance system as a way to reduce the pressure for national health insurance.
From the beginning of the expansion of private health insurance in the 1950’s, there were problems with random risk. Someone who already has heart disease or diabetes when they apply for insurance has a health problem, but they are not insurable in a private health plan because they are not a risk, they are a certainty. To use insurance jargon they have a pre-existing condition. In effect, their probability of loss is one and their premium would have to equal the cost of treatment to avoid draining a reserve fund.
In the early 1950’s insurance companies started marketing group policies in large numbers and defined a risk pool through the work place. People started buying health insurance and hence joining a risk pool through their employer.
One trouble with a health care risk pool that depends on jobs comes at retirement, when people lose their employer sponsored health insurance. Age and the likelihood of pre-existing conditions assure it will be difficult or impossible for retirees to re-enter a risk pool and buy insurance. Pressure to cover retirees increased when the United Auto Workers convinced the auto companies to cover retiree’s health care in the 1950’s. Pressure continued until the passage of Medicare health insurance for retirees in the Johnson Administration.
The second trouble with a health care risk pool that depends on jobs is that not everyone has one, or has one they can keep until age 65 when they become eligible for Medicare. Employers without health care amount to an exclusion from a health insurance risk pool. Layoffs and unemployment are not just loss of income, but removal from health insurance.
Before a layoff someone is in a risk pool they may have entered long ago when they were young and healthy. In the mean time they may have developed heart disease or some medical condition that is not a risk for a private insurance company, but a certainty or pre-existing condition, which cannot be covered when someone has to reapply for health insurance in mid-life.
In this way defining a risk pool for health care is a problem of timing. If everyone entered a common risk pool at birth and stayed in the same national risk pool until death then all Americans would share in the risks of all our injury and illness. The pre-existing condition for someone age fifty would be a random risk to share by all if the risk pool started after birth and continued to death.
Private health insurance companies do not have the ability to define a national risk pool. They have to process applications when they receive them, or go out and propose and sell group policies to employers. Other private insurance companies do the same thing and each of them has an incentive to assemble risk pools with the healthiest people they can find, and avoid the sick and all those with pre-existing conditions.
There is nothing in an economic system of private contracts and market competition that will move private health insurance to a national risk pool, or provide health care insurance that includes everyone. Private health insurance creates an expectation that cannot be served. Only the Federal government has the ability to maintain a national risk pool. Private health insurance cannot solve America’s health care failures, but will leave people without health insurance, exactly as it has been doing for more than 60 years.
The risk pool has to be defined and the probability tables have to be calculated as random risk. Life insurance actuaries use data accumulated from many years to know the random risk that someone age 50 will die during their 51st year. They don’t know who will die but they know the probability, which lets them determine the premiums necessary to build an adequate reserve fund. Life insurance policies typically exclude death caused to soldiers in warfare because it is not random risk and prevents actuaries from building a reserve fund.
In home owners insurance, the premiums go to cover only those homes, and those risks, that occur in a random fashion. Insurance companies exclude flooding from homeowner’s policies because flooding is not random. The home in the valley or next to the stream always gets flooded while the home on the hill never gets flooded.
Risks and losses from flooding along rivers, flood plains or hurricane zones are high enough that excluded home owners acted through the political system to pressure Congress. To insure against the single peril, flooding, means defining a risk pool of homes and property with risk of flooding. With a risk pool of potential flood victims, premiums create a reserve fund to pay losses from random flooding to those in the risk pool. However, homeowners and property owners subject to flooding are widely scattered and geographically spread out in a way that has prevented private sector insurance companies from creating a large and random risk pool for flood victims.
The answer turns out to be a government sponsored National Flood Insurance Program(NFIP) administered through FEMA, the Federal Emergency Management Agency. On their website they explain that communities participate in the program by adopting and enforcing floodplain management ordinances to reduce flood damage in exchange for federally backed flood insurance available to homeowners, renters and business owners in these communities.
The NFIP identifies and maps the Nation's floodplains to provide the data needed for floodplain management programs and to actuarially rate new construction for flood insurance. In other words, Congress turned to the government for a solution to a problem that the private sector could not solve.
Similar problems with risk have plagued the health care system for many years. President Truman advocated and proposed national health insurance 60 years ago, which the American Medical Association opposed and defeated. During the Eisenhower administration the medical profession decided to build and expand the private health care insurance system as a way to reduce the pressure for national health insurance.
From the beginning of the expansion of private health insurance in the 1950’s, there were problems with random risk. Someone who already has heart disease or diabetes when they apply for insurance has a health problem, but they are not insurable in a private health plan because they are not a risk, they are a certainty. To use insurance jargon they have a pre-existing condition. In effect, their probability of loss is one and their premium would have to equal the cost of treatment to avoid draining a reserve fund.
In the early 1950’s insurance companies started marketing group policies in large numbers and defined a risk pool through the work place. People started buying health insurance and hence joining a risk pool through their employer.
One trouble with a health care risk pool that depends on jobs comes at retirement, when people lose their employer sponsored health insurance. Age and the likelihood of pre-existing conditions assure it will be difficult or impossible for retirees to re-enter a risk pool and buy insurance. Pressure to cover retirees increased when the United Auto Workers convinced the auto companies to cover retiree’s health care in the 1950’s. Pressure continued until the passage of Medicare health insurance for retirees in the Johnson Administration.
The second trouble with a health care risk pool that depends on jobs is that not everyone has one, or has one they can keep until age 65 when they become eligible for Medicare. Employers without health care amount to an exclusion from a health insurance risk pool. Layoffs and unemployment are not just loss of income, but removal from health insurance.
Before a layoff someone is in a risk pool they may have entered long ago when they were young and healthy. In the mean time they may have developed heart disease or some medical condition that is not a risk for a private insurance company, but a certainty or pre-existing condition, which cannot be covered when someone has to reapply for health insurance in mid-life.
In this way defining a risk pool for health care is a problem of timing. If everyone entered a common risk pool at birth and stayed in the same national risk pool until death then all Americans would share in the risks of all our injury and illness. The pre-existing condition for someone age fifty would be a random risk to share by all if the risk pool started after birth and continued to death.
Private health insurance companies do not have the ability to define a national risk pool. They have to process applications when they receive them, or go out and propose and sell group policies to employers. Other private insurance companies do the same thing and each of them has an incentive to assemble risk pools with the healthiest people they can find, and avoid the sick and all those with pre-existing conditions.
There is nothing in an economic system of private contracts and market competition that will move private health insurance to a national risk pool, or provide health care insurance that includes everyone. Private health insurance creates an expectation that cannot be served. Only the Federal government has the ability to maintain a national risk pool. Private health insurance cannot solve America’s health care failures, but will leave people without health insurance, exactly as it has been doing for more than 60 years.
Wednesday, July 8, 2009
The Health of Social Security
first published on Automaticfinances.com
A committee of Social Security trustees has published another report on the financial health of the Social Security System. The new report tells us what social security reports always tell us; the social security system is failing, or headed for collapse “Alarm Sounded, on Social Security” the caption reads on the Washington Post article of May 13th.
New Social Security reports allow politicians to reassure retirees of their commitment to shore up the system and make sure it remains solvent. It also allows these same politicians to recite the status quo by telling us they have only two choices: cut benefits or add another percent on to the steeply regressive payroll tax.
This time is the same as always. The article quotes unnamed administration sources who say Congress can save the system by raising payroll taxes from 12.4 to 14.4 percent, or it can cut benefits 13 percent or a combination.
As of 2009 the payroll tax for Social Security, the OASDI(Old Age Survivors and Dependents Insurance) deduction on pay stubs, continues to be 6.2 percent with an additional Medicare tax of 1.45 percent for employees. The OASDI tax is actually 12.4 because the employer has to match the employee contribution. The same matching occurs with the Medicare portion of the payroll tax, but there is a difference because OASDI has a wage cap, which stops the tax for wages over the cap.
In 2009 the cap is $106,800; in 2008 the cap was $102,000; in 2007 it was $97,500. Beginning in 1991 Congress doubled the cap on the Medicare part of the tax. In 1994 the rising cost of health care convinced a majority of Congress to lift the cap for the Medicare portion of the tax, but they did not do so for the 6.2 percent of payroll taxes going to OASDI.
The Social Security Administration reports data for the distribution of workers by compensation. The year 2007 is the most recent year reported, which shows 146.7 million workers with wages of $99,999.99 or less. It shows 8,869,798 with wages above $100,000 including 151 who earned wages of $50 million or more. In other words, 146.7 million pay a 6.2 percent payroll tax on all of their wages while 8.9 million get a special privilege and pay nothing on wages over the cap.
Someone earning a salary of $25,000 already pays $1,912.50 of payroll tax for Social Security. Raising the tax as proposed would bring it to $2,162.50, before any other taxes are paid.
If the Congress adds another percent to the employee half of the payroll tax, making it 7.2 percent, then the extra revenue will be $51.3 billion, using the same data as above.
If the Congress treated America’s wage earners equally and applied the 6.2 percent tax to all of America’s wages reported by the Social Security administration, then the additional OASDI revenue from the employee half of the tax comes to $103.9 billion dollars. Dropping the wage cap would end a lucrative privilege for the well to do and the very rich and raise lots of money for the allegedly failing Social Security system, but as always that is a topic the politicians refuse to talk about.
A committee of Social Security trustees has published another report on the financial health of the Social Security System. The new report tells us what social security reports always tell us; the social security system is failing, or headed for collapse “Alarm Sounded, on Social Security” the caption reads on the Washington Post article of May 13th.
New Social Security reports allow politicians to reassure retirees of their commitment to shore up the system and make sure it remains solvent. It also allows these same politicians to recite the status quo by telling us they have only two choices: cut benefits or add another percent on to the steeply regressive payroll tax.
This time is the same as always. The article quotes unnamed administration sources who say Congress can save the system by raising payroll taxes from 12.4 to 14.4 percent, or it can cut benefits 13 percent or a combination.
As of 2009 the payroll tax for Social Security, the OASDI(Old Age Survivors and Dependents Insurance) deduction on pay stubs, continues to be 6.2 percent with an additional Medicare tax of 1.45 percent for employees. The OASDI tax is actually 12.4 because the employer has to match the employee contribution. The same matching occurs with the Medicare portion of the payroll tax, but there is a difference because OASDI has a wage cap, which stops the tax for wages over the cap.
In 2009 the cap is $106,800; in 2008 the cap was $102,000; in 2007 it was $97,500. Beginning in 1991 Congress doubled the cap on the Medicare part of the tax. In 1994 the rising cost of health care convinced a majority of Congress to lift the cap for the Medicare portion of the tax, but they did not do so for the 6.2 percent of payroll taxes going to OASDI.
The Social Security Administration reports data for the distribution of workers by compensation. The year 2007 is the most recent year reported, which shows 146.7 million workers with wages of $99,999.99 or less. It shows 8,869,798 with wages above $100,000 including 151 who earned wages of $50 million or more. In other words, 146.7 million pay a 6.2 percent payroll tax on all of their wages while 8.9 million get a special privilege and pay nothing on wages over the cap.
Someone earning a salary of $25,000 already pays $1,912.50 of payroll tax for Social Security. Raising the tax as proposed would bring it to $2,162.50, before any other taxes are paid.
If the Congress adds another percent to the employee half of the payroll tax, making it 7.2 percent, then the extra revenue will be $51.3 billion, using the same data as above.
If the Congress treated America’s wage earners equally and applied the 6.2 percent tax to all of America’s wages reported by the Social Security administration, then the additional OASDI revenue from the employee half of the tax comes to $103.9 billion dollars. Dropping the wage cap would end a lucrative privilege for the well to do and the very rich and raise lots of money for the allegedly failing Social Security system, but as always that is a topic the politicians refuse to talk about.
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