Southern Bread » Economics

A fresh warning about employee health care benefit costs.

Dave — Thu, 08 Dec 2011 20:12:34 +0000

I was just reading a post by Veronique De Rugy at the NRO blog. She quotes from Peter Orszag:

Writing for Bloomberg View yesterday, Peter Orszag explained how in the private sector, “defined contribution” pensions have become the rule:

“The defined-contribution concept is already familiar to most American workers through their retirement benefits. Over the past two decades, company retirement programs have moved decisively away from defined-benefit plans, in which workers are paid a given amount of retirement income, and toward defined- contribution 401(k) plans, in which risks — from fluctuating financial markets, for example — are borne by workers.”

“In 1985, a total of 89 of the Fortune 100 companies offered their new hires a traditional defined-benefit pension plan, and just 10 of them offered only a defined-contribution plan. Today, only 13 of the Fortune 100 companies offer a traditional defined-benefit plan, and 70 offer only a defined-contribution plan.”

Orszag predicts that the same trend should be expected in the health-care market too. In fact, he claims that the adoption of the president’s health-care bill will accelerate this transition.

–Veronique de Rugy, NRO Corner

What is Peter Orszag saying here? He’s saying that a transition period is beginning where more and more of our health care costs are going to be paid by us directly, instead of our employers. This won’t come in the form of higher premiums. It will come in the form of higher co-pays and higher deductibles. This has already begun in the place where I work.

Every company I’ve worked for over my career has split my monthly health care premium costs with me 50/50 and every year the premium goes up about 8%-10%. This is a fairly standard way of doing it in the private sector corporate world. But, two years ago, we were notified that in order to avert an increase in premiums, we were raising the deductibles for certain procedures and raising the co-pay by $10 per visit. The same thing happened again this year. You see what’s happening right? The premium didn’t rise, but my out-of-pocket costs still rose. I’m paying a larger percentage of my health care costs now, even though my premium hasn’t risen in two years. This is what you can expect to happen over the course of the next decade or two. It’s unavoidable.

As health insurance companies shift more of the cost on to us, it’s going to hurt. But, that doesn’t mean it’s a bad thing. Sure, some people will be hurt very badly by this. But, the net result will be a lowering of prices in the health care market as consumers have to pay more and more of the costs directly to the provider without going through the insurance company. It’s going to hurt doctors as well as consumers, since they will have to adjust to this new paradigm too.

But, as I said earlier, it’s unavoidable, and necessary. Prices simply have to come down or consumers won’t be able to pay. In case you haven’t noticed, being charged $100′s of dollars just to talk to a doctor for 5 minutes and have him write you a Zithromax prescription isn’t exactly sustainable market pricing. And the fact that the total(employee + employer) premium for my family coverage health insurance is now more than my monthly mortgage payment further indicates a massive correction coming at some point.

Honest Talk About Hard Money

Dave — Thu, 24 Sep 2009 00:21:00 +0000

One of the hardest things about having meaningful dialogue in today’s political climate is how so many words and phrases have taken on the wrong meaning, or been culturally redefined into something they are not. I find myself constantly having to search for new ways to explain things or even make up new terms entirely, simply to avoid being misinterpereted. It’s frustrating, and we see it all over the current media. For instance, 60 years ago, if you had been speaking of “capitalism”, it would have been understood as simply a condition where private entrepeneurs own the means of production in an economy. Today, the word “capitalism” is somehow synonomous with fascist transnational corporations and jingoistic right-wingers. Those definitions are totally innapropriate and one certainly doesn’t follow from the other. So we go in search of new terms. Thus we have ended up with crazy nonsense like neo-liberal anarchism and paleo-libertarianism. Give me a break. The truth is always much less nuanced. In fact it’s often quite simple. The concept of “hard money” is no exception.

Despite what is commonly implied today, hard money isn’t just some cooky thing cooked up by Ron Paul. It’s the only way of doing money that works long term. And I’ve got good reasons for saying this. Imagine for a moment that there is no such thing as money of any kind. How would people acquire the items they need in that situation? Well, there are only two ways that are possible. Theft or trade. In the absence of money, people have to either trade for what they want/need or else they have to steal it. This is pretty self-evident. This is going to apply to governments as well. Taxation is theft in the eyes of the one who doesn’t want to pay it and trade in the eyes of the one who does. We still are only left with two options. Even benevolence is the same way. If I give some food to a poor man, it’s basically trade. I gave him the food in return for the knowledge that I did something good and moral. It’s still trade. If someone forces me to give the food to the poor, it’s theft.

So, with that basic principle in mind, what happens when we apply money to that same economy? Do we all of the sudden have some new third option? No. Remember that money’s primary role is as a medium of exchange. It evolves naturally in a society as the fulfillment of a need. That need being that it’s exceedingly difficult to do direct barter transactions. At any given time person A would need to have exactly what person B wants and vice versa in order for any transaction to take place. That’s very hard. Money makes this much easier on a society by filling in as a value proxy. The money simply represents the value of a good in a generic way so that it doesn’t matter which good it is. This makes exchange much simpler. But, observe that the intrinsic value placed on a given good by the person who wants it is the same whether there is money involved in the exchange or not. Money is simply a generic placeholder of value. A medium of exchange.

With all of that groundwork in the can, let’s talk about why “hard money” (i.e. gold, silver, labour) has always been what has evolved naturally in society. The inherent risk of any money is that the money itself will be produced, absent of any exchange of value. This is why counterfieting is illegal. When you produce more money, the marginal utility of each unit of that money goes down. That’s the process of devaluation/inflation of a currency. The best mechanism to combat devaluation is to make the money extremely difficult to produce. That’s why gold and silver have always been such good choices. They are very rare and hard to mine, so the threat of an independent producer being able to devalue it as a whole is very slim. But, with paper money there is virtually no barrier at all. It can be mass produced with virtually zero cost. The only thing holding that back would be the good sense of the government, which is to say nothing at all.

The bottom line here is that a hard money is what best represents the value it stands in for. Fiat money is too easily(and inevitably) devalued and therefore will always undervalue the labour it represents. An honest wage for honest work is not possible with paper money since it is constantly being inflated, and therefore devalued. Some people are afraid of the idea of a money like silver that can be dug up out of the ground by anyone. They see it as a risk to the value of the currency. Their answer has been to give government the sole power to create money. Well, we see how that has turned out. The dollar is worth three cents of what it was less than a hundred years ago. On the contrary, gold and silver are worth $1000/oz. and $17/oz. respectively. Hard money isn’t some crackpot idea. It’s the only idea that places people before money. It’s the best money we can have that properly holds the value of the labour it’s supposed to represent.

Critical listening on this subject:

The Origin and Nature of Money, Hoppe:

The Social Imperitive of Sound Money, Rockwell:

Karl Denninger’s Prediction: Total Monetary Collapse

Dave — Wed, 16 Sep 2009 08:39:00 +0000

If you aren’t familiar with Karl then start tracking him. He’s a very sound economist. This might be the scariest video I’ve seen in a while. He is right of course. Everything he says makes sense. This country will never make it to a 60 trillion debt load. The system will come apart long before then. The only hope we have is that the American people continue to do what they are doing now and contract their debt voluntarily. This will at least keep things at bay for a while until we can get somebody in office that will do what’s right and end the Federal Reserve once and for all. But if Bernanke and company inflate another credit bubble then you can kiss the U.S. goodbye. We would see a total economic collapse within 20 years. The problem is that this President and Congress, just like the last one and the 20 before them, show absolutely no willingness to swallow the bitter pill now. They are going to try and kick the can down the road. The problem is that there is no more road, just a cliff.

Art Laffer Owes Peter Schiff a Big Apology

Dave — Wed, 26 Aug 2009 17:36:00 +0000

Watching this is downright embarrassing. I always considered Art Laffer to be a pretty smart dude with his development of the “Laffer Curve” and all that. I know the Laffer Curve has some issues, but the principle itself was sound. When you raise taxes enough, at some point tax revenue will actually begin to fall when people begin to look for every imaginable way to avoid the taxes. That includes businesses laying folks off, taking jobs with lower pay, etc. And reducing taxes in a certain window can actually increase revenue when just the opposite happens. This all seems kind of instinctive even if the actual Laffer Curve itself turns out not to be a curve or something.

But he gets totally schooled here by Peter Schiff. This is from back in 2006. Man, Laffer owes Schiff a major apology. I especially love the statement by Art that we have “great monetary policy” in this country. If his definition of great monetary policy is to keep interest rates artificially at zero when they should probably be 10 points higher, and print money like a drunken sailor then yes, we have great monetary policy:

Goldman Sachs Is Straight Up Creepy

Dave — Thu, 13 Aug 2009 23:42:00 +0000

It’s been known for quite a while that Goldman Sachs is the undisputed king of so-called “high frequency trading algorithms”. These are basically software monitoring programs that track the market second by second and make quick trades in response to other people’s buy and sell orders so that they are profiting a few cents per trade in rapid succession each time. I don’t fully understand it, but it evidently is a sort of stock market black magic that Goldman has mastered. Now we find out that this software is so powerful it could allow a single person to “manipulate markets” if it fell into the wrong hands. Jeez. Anybody else reaching for the tin foil? I need a thicker hat.

Here’s a very good article on HFT and how much of a scam it is: HFT: The High Frequency Trading Scam.

Economics 101 – Marginal Utility

Dave — Thu, 13 Aug 2009 02:08:00 +0000

If there’s a silent backbone to the understanding of economics, the law of marginal utility is it. I say it’s silent because other economic laws, such as supply and demand, tend to get far more play in typical economic discourse. But, as important as supply and demand is, marginal utility fills that important gap in the economic puzzle that tells us why certain things are demanded in the first place, and how that translates into a price for a given good. The best explanation I’ve heard on this subject comes from Joseph Salerno over at the Mises Institute. His lecture at this year’s Mises University was particularly good. So I’ll draw from Professor Salerno a lot.

A straight up definition of marginal utility is as follows: the value of any good to a person is determined by the use one would have for the least needed unit of that good. I know there are far more technically precise definitions out there, but that’s the gist of it. As usual, this is best shown by example. I’ll use Salerno’s example:

…let us examine the case of a hypothetical farmer who has a number of different wants that can be satisfied by a sack of grain. His most pressing want for a sack of grain is for use in producing a quantity of bread necessary to sustain his existence during the forthcoming year. Of next greatest importance is satisfaction of the want for an additional quantity of bread that allows him to preserve his health and vigor for the year. Ranked progressively lower in importance are uses for a sack of grain that satisfy the following wants: 3rd. for seed-grain to ensure a harvest a year hence, and thus his continued existence and health in the future; 4th. for the production of beer and whiskey; 5th. for feed to maintain farm animals whose dairy and poultry products allow him to enjoy a varied diet. We may further assume that the farmer experiences an additional fifteen unidentified wants of progressively lower rank, so that he would be unable to completely satisfy his wants for a sack of grain with a harvest yielding less than twenty sacks.

If we now suppose that his current harvest yields five sacks of grain of equal quality, then grain is for him a scarce good that must be economized-that is, used in satisfying only his five most important concrete wants, while foregoing the satisfaction of his fifteen less important wants. What is the value of a sack of grain in this case? Since all five sacks are, by hypothesis, qualitatively identical, they must be equal in value, and, yet, they satisfy wants of manifestly unequal importance.

…regardless of which particular physical unit of his supply was subtracted, the actor would economize by choosing to reallocate the remaining units so as to continue to satisfy his most important wants and to forego the satisfaction of only the least important want of those previously satisfied by the larger supply. It is, thus, always the least important satisfaction that is dependent on a unit of the actor’s supply of a good and, that, therefore, determines the value of each and every unit of the supply. This value-determining satisfaction soon came to be known as the “marginal utility.”

–Joseph Salerno, Biography of Carl Menger

So, to put it succinctly, the value to you of a certain good, is always going to be equal to the value you give to the unit of that good that satisfies the least of your wants. So, let’s say you have an XBOX. What would another XBOX be worth to you? Currently, XBOX’s are priced at $299 in retail stores. So, why do you not go out and buy another one for that price? It’s because the marginal utility of XBOX’s, to you, has dropped. One is all you really know what to do with. And any satisfaction that would be gleaned from having another is not worth $299. But, what if someone wanted to sell you an XBOX for $50? That price would be more likely to fall in line with your marginal utility valuation. You could probably add one to the upstairs TV for when guests come over, or something like that.

And that is the crux of this law. As your supply of a certain good goes up, the value of the whole of that good, to you, goes down so that, that particular good is only worth whatever value you place on having the least useful unit. Let’s look at another one of Salerno’s examples. Say you’re a farmer, and you have 3 horses and 2 cows. The first horse and second horse are used for plowing. The first cow is used for milk for you family. The second cow is used for butter and for selling excess milk. The final horse is used for pleasure riding. Now lets say that the stable where all these animals are kept catches fire and you only have time to save four animals. Which animal are you not going to save? Of course – the third horse.

In that scenario, the marginal utility of horses is lower to you than the marginal utility of cows. You will therefore save both cows and two of your horses. Now, after the fire, the marginal utility of horses is close to that of the cows. The cows probably still have more utility than the horses since you could possibly get by with just one horse for plowing, but you get the point. All this might seem pretty intuitive, and it is. But it’s amazing how many times the most intuitive things seem to elude us. This is most definitely true in regards to value theory. The idea of marginal utility finally solved many of the most pressing condundrums for economic thinkers around the turn of the century, 1900.

Critical listening on this subject:

The Marginalist Revolution:

Download

Cash For Clunkers: A Classic Broken Window

Dave — Mon, 10 Aug 2009 23:29:00 +0000

This “Cash for Clunkers” program has got to be the most classic example of the broken window fallacy I’ve ever seen. If you don’t know what the broken window fallacy is, I’ll explain it. It’s the faulty logic that would lead one to believe that intentionally braking something is actually an economic good, because it drives spending to fix the repaired object. It was first put into this wording by the great free-market philosopher Frederic Bastiat. Here’s how he layed it out:

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade – that it encourages that trade to the amount of six francs – I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.

If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

Now let us consider James B. himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.

In the second, where we suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.

Now, as James B. forms a part of society, we must come to the conclusion, that, taking it altogether, and making an estimate of its enjoyments and its labours, it has lost the value of the broken window.

When we arrive at this unexpected conclusion: “Society loses the value of things which are uselessly destroyed;” and we must assent to a maxim which will make the hair of protectionists stand on end – To break, to spoil, to waste, is not to encourage national labour; or, more briefly, “destruction is not profit.”

–Bastiat, That Which is Seen and That Which Is Not Seen

What he’s saying here is plain. Intentionally rendering something useless, or wasting money on useless things, does not in any way profit the economy. As David Gordon puts it, it doesn’t create a new revenue stream. It diverts a portion of existing revenue to cover the replacement cost. Thus it robs a person the use of that money for the thing he intended it to go to. That’s why damaging someone’s property requires restitution. On a moral level, it’s wrong to deny the person the use of their property. That also includes the preclusion of that person’s property in the form of money that was intended to be spent on something else, but now can’t be.

On an economic level, it’s just simply illogical to waste money on something that carries no value. It may benefit one sector of the economy, but it does so by robbing from another sector in kind. This simple moving of capital from one market to another is not investment. It has no hope of a return, and it wasn’t produced by market guidance, such as rewarding good investment. It’s purely a matter of expense with no return. What’s done with the money that is spent, after it gets into the hands of others is a crapshoot. They may do good things with it. They may not. Who knows.

So with all that said, I give you “Cash for Clunkers”:

My blood boiled as I watched this video. This is the insanity of government. Destroying, not just a perfectly good car, but a really nice car. Now, nobody will get the use of this car ever again. What an absolute waste of resources. How many people out there driving around in cars that can barely run would have killed for a car like that at a cheap price. Crap, they could’ve given it away. But no. Here we go again with this insane notion that keeping prices high, and destroying perfectly useable resources is going to somehow “stimulate” the economy. Whatever that means anymore.

Critical listening on this subject:

Economic Reasoning: The Most Common Fallacies:

Download

Critical reading on this subject:

That Which Is Seen, and That Which Is Not Seen

Surprise! Wall Street In Bed With the Fed

Dave — Mon, 03 Aug 2009 19:42:00 +0000

Hold on to your seats now. This is going to come as a major shocker. Wall Street investment firms are colluding with the Federal Reserve to profit their own businesses:

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Feds balance sheet, detailing the share of the market in particular securities held by the Fed.

You can make big money trading with the government, said an executive at one leading investment management firm. The government is a huge buyer and seller and Wall Street has all the pricing power.

–Henny Sender, FT.com

Wow! What a surprise! Well, I guess it’s a surprise if you’re from a different planet or something. I mean, come on. This has been standard operating procedure for the Federal Reserve for 90 years now. Are we supposed to think that J.P. Morgan’s people started the Federal Reserve out of the kindness of their heart? Of course not. They created the Fed to be a personal ATM for investment bankers.

Again, everyone knows this:

The growing Fed activity has coincided with a general widening of market spreads – the difference between bid and offer prices – as the number of market participants declines. Wider spreads enable banks, in their capacity as market-makers, to make more profit.

Larry Fink, chief executive of money manager BlackRock, has described Wall Street’s trading profits as “luxurious”, reflecting the banks’ ability to take advantage of diminished competition.

Brad Hintz, an analyst at AllianceBernstein, said he doubted that spreads would ever return to those levels, a development that could be pleasing to the Fed.

“They want to help Wall Street make money,” he said.

–Henny Sender, FT.com

Of course they want to help them make money. But, I’d be more specific and say they want to help Goldman Sachs and one or two others make money. Goldman Sach’s competitors such as Lehman Brothers didn’t get much help if you recall. What they got was the cold shoulder.

Critical listening on this subject:

The Founding of the Federal Reserve:

The Fed: Case Closed

Dave — Mon, 27 Jul 2009 19:14:00 +0000

A friend sent me this video clip. This one five minute video clip will tell you everything you need to know about the Federal Reserve, and why Ron Paul’s Federal Reserve audit bill not has almost 300 cosponsors in the house. Just watch the entire clip and get ready to retrieve your jaw off of your keyboard. It’s not the amount of money alone that is so shocking. It’s the amount of money combined with the complete ignorance of the Fed chairman about where the money went or who has it.

Goldman Sachs Earnings Defies Logic

Dave — Wed, 15 Jul 2009 10:03:00 +0000

I have two obvious questions about today’s earnings hoopla. How in the world is it possible for a company to go from getting multiple bailouts just to survive to all of the sudden raking in record profits in a mere 9 months? And, secondly, why are the regular talking heads so oblivious to this glaring question? It makes no sense. Everybody in the financial media is doing backflips because of the wonderful Goldman Sachs earnings announcement. Um… hey guys. Goldman wouldn’t even exist right now if they had not been pumped full of billions of Federal aid. But, somehow, we’re now supposed to just accept without skepticism, that they made 1.5 billion more in profits in 2009 than they did last year. Nobody finds this odd? SeekingAlpha.com quoted Jim Kunstler on this topic:

The cat coming out of the bag this week — a frazzled, flaming, rabid, death-dealing cat — is the news that Goldman Sachs will announce impressive second-quarter profits, and set aside $18 billion or so for employee bonuses averaging $600,000 per head (though, of course, not evenly distributed among them). There probably are not fifty-three people in the USA who can explain how this development figures in with last fall’s bailout gift from the US treasury, or the $13 billion GS received on the backside of US gift payments to the failed AIG insurance company, plus the reams of necrotic securitized debt paper rotting in the back of the GS vaults. This is a company playing with the fire of world history.

–Kunstler, via SeekingAlpha

I can understand Intel’s earnings. They are currently ripping large chunks of market share away from AMD, and the technology sector was already pretty lean. But, I can’t get rid of this uneasy feeling that a much worse economic scenario is building behind the scenes while all the talking heads are desperately trying to paint a picture of things returning to normal. Too much in our economy doesn’t make sense any more. I have a feeling that what’s going on in a lot of companies, like Goldman, right now are just accounting tricks. Lots of debt-to-equity conversions and such:

…Goldman is basically marking its loans to the value of the underlying real estate; it’s assuming that all of them will default, and is counting only on recovery value rather than mortgage payments.

…all that debt has been converted to equity. The problem of course is that Goldman doesn’t particularly want to own lots of commercial real-estate. It’s going to end up selling those assets, and when it does, the buyers will have financing — debt will come back. Indeed, there’s a good chance that Goldman itself will finance the sales. That’s the problem with debt-to-equity conversions: they tend to be temporary things, and get followed in due course by the raising of new debt to replace the old.

–Felix Salmon, SeekingAlpha

This just kicks the can down the road. At some point the real value of these companies’ assets will have to be reconciled in the clear. This creation of debt to pay for debt is a secondary bust just waiting to blow. Man, I hope I’m wrong. But I don’t like what I’m seeing.