Obamacare as Symptom

I am coming up on a choice to sign up for Medicare. I am healthy with no preexisting conditions requiring ongoing care and I don’t need ongoing drug prescriptions.

I have four choices for healthcare insurance and annual cost exposure in 2014 as follows:

  • Private Policy: If healthy $4,000 – If sick $17,000. (This choice goes away for 2015.)
  • Obamacare Policy: If healthy $7,800 – If sick $14,150.
  • Medicare & Supplement: If healthy $3,260 – If sick $3,260.
  • Medicare & Advantage Plan: If healthy $1,400 – If sick $6,700.

I am not an actuary but Medicare is like Santa Claus coming to town every day of the year. Not only is it the least expensive choice by far but Medicare with a Supplement policy offers universal access while the other choices have severely limited networks. Looking at the comparative numbers above a guess is that my Medicare coverage will be subsidized by other taxpayers to the tune of at least $7,500 a year.

Heck, even a typical obamacare subsidy recipient at my age making $30,000 in taxable income would pay $2,500 in premium with a $6,350 out of pocket max for a 2014 obamacare policy.

Ah, but you say I paid into Medicare my entire working life! Correct, but that money is almost gone. The Medicare Trust Fund for Part A Hospitalization will be broke in little more than 10 years and over 70% of Part B and Part D funding comes from current general and payroll tax revenues (not from premium payments made by those enrolled).

Obamacare is bad news but the real problem is much bigger. Most of the 155 million working Americans (“working” people) have employer based coverage for their family’s health insurance (covering a total of 170 million people) AND are paying most healthcare expenses for the other  140 million other Americans; roughly 66 million receiving $430 billion in Federal Medicaid support (“poor” people), 50 million receiving over $500 billion in Medicare support (“old” people), plus billions of dollars more available for Medicaid expansion and premium support under Obamacare (“uninsured” people constituting about 25 million people).

The real problem with Obamacare is that it adds to rather than resolves the actuarial problem of healthcare funding across generations and income groups as time goes by.

Mr. Obama and his progressive friends think this funding stress is a great thing because it sets up universal entitlement to healthcare and then forces somebody to pay for it, presuming “the rich” will  be “justly” soaked in the political process as a majority receiving subsidies vote to sustain their subsidies. This is just petty political manipulation that fails to address the real problem.

The real problem is that we have protected political constituents and politicians, both more interested in protecting their subsidies and their power than in solving the problem of funding reasonable healthcare across generations and income groups.

When I sign up for Medicare I become a political constituent with a vested financial interest in protecting my subsidy. Should I do it? Should my children pay to subsidize my healthcare with no assurance there will be any money left to pay for their healthcare in retirement? Is this a responsible way to run a country?

Can you help me with my questions?

Regards, Pete Weldon

The FFEB (Federal Financial Extortion Bureau)

The recently formed Consumer Financial Protection Bureau (CFBP) is an arm of the US Treasury accountable to no one and funded independent of Congress, charged with taking consumer complaints (seemingly at random with no limiting criteria) and doing something about them (what, exactly, is uncertain). It should be renamed the FFEB.

The CFBP stated mission: “Our mission is to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” Yes, you are right, that mission statement has no meaning whatsoever. They do get more specific, however, with this list:

Congress established the CFPB to protect consumers by carrying out federal consumer financial laws. Among other things, we:

  • Write rules, supervise companies, and enforce federal consumer financial protection laws
  • Restrict unfair, deceptive, or abusive acts or practices
  • Take consumer complaints
  • Promote financial education
  • Research consumer behavior
  • Monitor financial markets for new risks to consumers
  • Enforce laws that outlaw discrimination and other unfair treatment in consumer finance

For each bullet point above we need to ask some questions. To what purpose? At whose expense? For what benefit?

Effectively, CFPB forces banks, depositors, borrowers, credit and debit card users, and those paying income tax to pay to supposedly “protect” the financially illiterate from their own illiteracy as the cost of compliance and enforcement is necessarily built into the pricing of the products being regulated and taxpayers contribute to the nearly $500 million annual CFPD budget.

But wait.

So, why does the CFPB exist?

The CFPB’s effective mission statement is “to use the unaccountable power of the Federal government to extort monetary and political concessions from companies offering consumer financial products and services — mortgages, credit cards, or any number of other consumer financial products.”

I would think the above wording severe except for the realities of how the CFPB is actually operating. Two recent articles in the Wall Street Journal clarify that CFPB is merely a political entity.

“Consultants Snap Up Alumni of Consumer Watchdog Agency” confirms that the industry is already co-opting the loyalties of people who work for CFPB.

“Banks Seek a Détente With New Consumer Bureau” confirms the industry and CFPB management are working together in private to reach accommodations hidden from public view. In other words, “we will do the this if you do that” and all consumers of financial services as well as the general taxpayer pay for the cost of regulation, compliance, and the cost of the agency itself.

CFPB will contribute zero improvement in consumer education at the margin and will do nothing but increase costs to consumers and taxpayers. This is clear from readily observable voluntary consumer behavior the CFPB (and anyone else) can do nothing about. Two examples of such behavior are “rent to own” and State lotteries.

You can purchase a 60 inch Sharp LCD television with Wi-Fi for less then $1,000 today, or you can “rent to own” an equivalent television from Aaron Rents for 24 monthly payments of $142.98, totaling $3,431.51. Effectively, with “rent to own” you are borrowing $1000 for 24 months at a cost of $2,431 resulting in an Annual Percentage Rate of 164%. This is perfectly legal and fully disclosed today, yet there is a market for this, people voluntarily sign up for this.

Perfectly legal lotteries (the Powerball jackpot odds are one in 175 million) and other forms of legalized gambling exist. Over $57 billion in lottery tickets were sold in the US in 2011. The States permit lotteries and gambling to get a rake-off (money) from the willingness of consumers to gamble (as it has been clearly demonstrated that such gambling would exist underground if illegal).

So, where is the Consumer Financial Protection Bureau to “protect” those poor souls “renting to own” and participating in legal lotteries and legal gambling? The only difference between consumers voluntarily using financial services and voluntarily buying lottery tickets/gambling is that there have been disclosure requirements governing financial services before CFBP existed and no disclosure requirements governing legalized lotteries and gambling. The absence of such disclosure results from the vested financial interest of the States. The States actually spend money advertising, telling you lotteries and gambling are “games” while CFPB (as a small example) requires banks to put signs on ATM’s disclosing that there may be a fee for using that service (but you already knew that).

Those who established CFPB believing it would help consumers need to take a closer look at the real world. CFPB is just another Federal power grab over the financial industry and a self-perpetuating bureaucracy that adds cost and complexity for the very consumers its claims to “protect.”

CFPB is another Federal bureaucracy that costs us half a billion to a billion dollars a year that does more harm than good and needs to be closed down.

Regards, Pete Weldon

CFBP, Protect Us From State Lotteries (a satire)

The recently formed Consumer Protection Bureau (CFBP) has regulations concerning disclosures on bank teller machines, Loan Originator Compensation Requirements, and credit card fees, among many others. Isn’t it about time that those purchasing lottery tickets had the same protections?! By God!

I recently filed the following complaint with CFPB here (its the only complaint category that seems to apply) on behalf of those who buy Powerball lottery tickets.

Dear CFBP:

I became interested in the recent “$590,500,000.00” Powerball lottery and found I had been subjected to unfair and deceptive practices. Why don’t we have laws to stop state lotteries from exploiting citizens who don’t understand math and statistics and freely buy lottery tickets without understanding what they are signing up for? Given CFPB’s earnest efforts to protect the innocent in consumer finance I am counting on CFPB to hold state lotteries accountable for their unfair, deceptive, and abusive practices as is your mission.

Lottery jackpots are deceptively advertised, unfair, and abusive.

Advertisements and public relations efforts broadly disseminated information that the Powerball jackpot for May 19, 2013 was $590,500,000.00. Wow!

  • Actually, that number represents the amount a sole winner of the Powerball jackpot would receive as an annuity in equal installments over 30 years ($19,683,333.22 per year before taxes).
  • The actual cash available from lottery ticket customers for the May 19, 2013 Powerball drawing after fees and the take from ticket distributors and the state was $370,896,780.54, the amount a single winner can take as a lump sum payment in lieu of the annuity. This is after paying an unknown amount to those selling the tickets (e.g., 7-elevens), $85,000 to the store that sold the winning ticket, and some amount that went to the state of Florida.
  • The Florida state lottery web site says, “This series of POWERBALL jackpot rollovers generated more than $40 million for the Educational Enhancement Trust Fund.” That $40 million is over a series of six “rollovers” and the statement does not clarify how much went to education as a result of the “$590,500,000.00” Powerball event being reported. (And all you Floridians, keep in mind that lottery money going to “education” since inception of the state lottery has simply been a replacement of other funding sources, not additional funding for education.)
  • When buying a ticket there is also no disclosure that you have to pay income taxes on the winnings. If a sole winner took the lump sum payment the net payment after Federal income taxes at 39.5 percent would be about $224,392,255.22. If a sole winner is a taxable resident of Manhattan, New York they would net about $200,000,000.00 after an additional 12.618 percent in taxes.
  • The chances of winning are certainly material in making a decision to buy a lottery ticket but the odds of winning are not disclosed when purchasing lottery tickets. I had to poke around the Internet to locate the actual odds of the Powerball jackpot prize which are 1 in 175,223,510.

Certainly, enticing people to buy lottery tickets by overstating the value of the winnings, not disclosing the after tax value of the winnings, and failing to disclose the odds at the point of purchase must be regulated if the same types of abuse are regulated in consumer finance! By God!

Regards, Pete Weldon

Don’t Borrow Your Way to More Entitlements

UPDATE: Holman Jenkins has a concise and insightful follow-up on this story in the WSJ.

The economics and political communities have recently gone bonkers arguing over details of a study that concluded economic growth declines as national debt reaches 90 percent of annual Gross Domestic Product (GDP). An acknowledged math error in the analysis is being used by Keynesians (borrowers and spenders) to undermine the credibility of the study. John Mauldin wrote a useful summary here.

I think something is missing in this supposed controversy, that being both common sense and reality.

Any analysis about the relationship between national debt and GDP is meaningless in the absence of accountability for the use of the debt and the means of paying it off.

If we borrow money to build a bridge that carries freight for 100 years faster than could be done in the absence of the bridge we have a winner. The carrying cost of the debt is expected to be more than offset over time by the efficiency (GDP growth) offered by the bridge. The same argument is made in support of the 1980’s military buildup credited with causing the Soviet Union to evaporate, leading to a very real peace dividend in the 1990’s as military spending contracted while the US economy grew like a daisy in Spring and the nation had annual budget surpluses from 1998 through 2001..

Borrowing money to expand food stamps to 20 million more people (which has been done) has saddled current and future productive citizens with the burden of principle and interest for the term of the borrowing in exchange for current consumption for those 20 million more people without any possibility of long term improvement in economic efficiency (GDP growth). Money borrowed to pay for the expansion of food stamp recipients comes from the private economy (or is created out of thin air and given a fancy name) but needs to be repaid with the product of productive enterprise in the form of future taxes that will be taken out of the private economy later. Any GDP impact of expanded food stamp consumption now is necessarily reversed upon taxation of productive endeavor to pay off the borrowing later.

This reality leaves us with anticipation of the BANG!, that being the point at which the level of debt and its use to fund current consumption on the backs of a dwindling supply of current and future productive citizens undermines the credibility of the currency to the point where the lenders go away, charge higher rates of interest, or simply don’t exist because they have put themselves in the same position.

What is it again that underlies the assured value of sovereign debt? Nothing much.

Regards, Pete Weldon

The Politics of Money

The world wide focus on banks and related government regulation is only relevant to the extent governments lie, borrow beyond their current income, and print money. This focus results from government fabricated value undermining confidence in value actually earned from work and free exchange.

Understand clearly that bank regulations and government money printing have nothing really to do with human interchange (the fundamental force driving economics) and everything to do with the politics of satisfying constituents dependent on various forms of welfare (from corporate cronyism to food stamps).

Here is a juxtaposition worth consideration.

If you put your life savings in a Cyprus bank in 2008 you would have earned a modest amount of interest, now had at least 40% of your “uninsured” deposits confiscated by a European Union regulator to repay the pain caused by your Cyprus bank “investing” your deposits in supposedly “safe” Greek bonds, whose value was earlier propped up by the fact that the Greek government outright lied about their finances while the European Union regulator now confiscating your money forgot to check. Read that again.

You would have been better off putting your money in LVMH Moet Hennessy Louis Vuitton (MC.PA), a company that sells arguably frivolous and overpriced merchandize to people who value status more than substance. One could argue that LVMH is the most risky of investments because the stuff it sells is not essential or even needed, yet, the common stock of the company has grown from $85 USD per share in April 2007 to over $133 USD per share in April 2013 (an 8% annual return) and currently pays a 2.2% annual dividend. LVMH is not regulated by anything other than its credibility with its customers.


Now, if you live in the United States you can certainly put your savings in a bank, but keep in mind that Mr. Bernanke’s assurances that your money is “insured” is based solely on his ability to inflate the money supply while he pays you nothing for incurring the risk (or is it a certainty?) that he is devaluing your savings by doing so. So where do you put your money when the government prints $85 billion a month in new money (now over $3 trillion in money printing) used to purchase bonds in the open market for the known purpose of manipulating interest rates in an effort to force private savers to take risk? This is a circular game that compounds and delays the consequences of the uncertainty engendered by the policy.

Herein lies the social justification for a strong currency. A currency that has a proven reputation for holding its value exactly because the government issuing the currency does not lie, does not borrow beyond its means, and does not print money stabilizes the value of private savings and increases trust needed to justify private risk taking, thereby creating jobs and opportunity for those willing to work.

Regards, Pete Weldon