Wednesday, December 16, 2009

Quote of the Week - December 16

From a column in today's WSJ:
"Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren," Senator Barack Obama said during the 2006 debt-ceiling debate. "America has a debt problem and a failure of leadership. Americans deserve better." That was $2 trillion ago, when someone else was President.
Looks like someone needs to listen to their own advice...

Friday, November 6, 2009

Won’t Get Fooled Again

One year after the election of Barack Obama and a Democratic supermajority in Congress, there couldn’t have been two more relevant gubernatorial elections to provide some insight into how voters feel about the current Democratic agenda.

It’s almost as if voters had Roger Daltrey of The Who in their head screaming the chorus to their classic “Won’t Get Fooled Again” as they approached the voting stations. These voters would not get fooled into voting for the Democratic agenda again.

While the loud far-right and the loud far-left occupy the majority of television and print media attention, it’s the wide middle that holds all the cards in elections these days and thankfully so. Instead of just ticking off their own parties candidates down the line, the voters in the middle don’t align perfectly on all issues to one party and therefore are required to prioritise their views on issues and vote for the candidate they hate the least. In doing so, they think about all the issues and most importantly, the ultimate consequences of voting for one candidate over another. As they say, elections have consequences – and there is no better example of that than right now.

This is where it’s all falling apart for the Democrats – once someone starts to actually think about the consequences of the Democratic agenda (huge tax increases, deficits as far as the eye can see, government run health care, expansion of unionized labor, economy-killing “environmental” regulation, micromanaging of compensation, etc., etc.), there’s not enough charisma in the world to compensate for the devastating impacts this agenda will have on this and future generations of Americans.

A year-ago, voters in the wide middle got caught out by four very powerful forces – Obamamania, Anti-Bushism, a very weak Republican ticket, and no other viable alternative. This created an environment where it seemed like a vote for change, and an incredibly charismatic individual seemed significant, historic and downright patriotic.

That feeling has passed.

The wide middle is clearly not happy with the Democratic spend and tax agenda, especially against the backdrop of huge unemployment and a stagnant economy. The wide middle is no longer willing to put their policy concerns to the side for the sake of “change” or for the sake of a candidate who is an international rockstar. Substance matters, and it’s about time.

Friday, October 23, 2009

Micromanagement Czars

We are currently inundated with populist outrage regarding Wall Street and their “egregious” pay packages on the false presumption that :

  1. all of these companies would have failed without the government bailouts (true in some circumstances, but not others) and/or
  2. taxpayer money is being used to pay 7 and 8 figure bonuses to “greedy” Wall Street bankers.

Goldman Sachs has been the lightning rod for this criticism in the media, in Congress and with the Obama administration. Earning $3 billion plus in profits over the last three months and setting aside $11 billion plus (so far) for 2009 compensation generates fantastic headlines and sound bites.

However, of all the entities receiving government money, Goldman Sachs is actually the least deserving of this criticism as they have repaid their government investment in full (which they never wanted or needed in the first place), and on top of that, have also paid interest, dividends and warrant settlements of over $1,000,000,000 – generating a 22% annualised profit for US Taxpayers. This Taxpayer profit does not include the additional billions Goldman Sachs will pay in income taxes ($4 billion accrued for 2009 so far), the billions its employees will pay in income taxes, the thousands of people they employ, the number of businesses supported by their presence on Wall Street and elsewhere, etc. It’s a similar story for JPMorgan, Morgan Stanley and others who have repaid their government obligations.

As a taxpayer, I’m very happy with these investments – generating a return for our country that would make any hedge fund manager jealous.

For entities like Citigroup, AIG, GM, and Chrysler, those who were truly saved by the government investments, I can understand the backlash. US Taxpayers are significant shareholders in these businesses and therefore have every right to criticize the decisions made by management, including compensation decisions, regardless of how misguided those criticisms might be.

However, we need to ensure we project our populist rage equally to everyone making big money while working for entities that receive, or have once received, government assistance.

For example, how about this one:

Dennis O’Connell, who oversees props at New York’s Carnegie Hall, made $530,044 in salary and benefits during the fiscal year that ended in June 2008. The four other members of the full-time stage crew -- two carpenters and two electricians -- had an average income of $430,543 during the same period, according to Carnegie Hall’s tax return.

Great work if you can get it, and honestly, other than the fact that these payments are due to legalized extortion by a too-powerful union against a charity, I think it’s great.

Clearly these guys are the absolute best at their trade, probably have years and years of experience, and contributed to a season of memorable shows, concerts and events at Carnegie Hall. After all, we live in a capitalist society (for now at least) and at the end of the day you are worth what someone is willing to pay you. These guys must be doing something right.

However, using the logic of the media, Congress and Obama administration, this should cause some serious populist outrage because, while largely funded by private donors, a substantial amount of Carnegie Hall's funding is also provided by taxpayers.

The Carnegie Hall annual report for the 2007-2008 fiscal year lists the 13 donors who gave more than $5,000,000 – a list that includes the City of New York, State of New York and the United States Department of Education – i.e. taxpayers.

Given this taxpayer support, should Compensation Czar Feinberg be approving the contracts of prop carpenters and electricians at Carnegie Hall as well?

Where does it stop?

I couldn’t care less about Mr. O’Connell’s paychecks, but the example highlights just how out of control the populist rage is on the topic of compensation.

Our country needs to move on and concentrate on the real issues (out of control government spending, two wars, unemployment, education, etc.), and leave the micro-managing of compensation decisions to someone else.

In fact, cutting off our nose to spite our face is the simplest way of ensuring that Taxpayers lose as much money as possible with these bailout investments. Compensation restrictions will only cripple the ability for these entities to attract and retain the talent required to dig themselves out of their holes and repay the government.

I’m just a random guy giving my own opinion, but Kenneth Langone, co-founder of Home Depot Inc. and a former New York Stock Exchange board member is more qualified to comment and according to Bloomberg, he says the pay cuts are “sheer stupidity.” He continues that “the taxpayers have an enormous financial risk in these companies, and very simply stated, I want the best person. If I needed neurosurgery, I would want the finest doctor I could get, no matter what I had to pay for it.”

Saturday, October 17, 2009

Quote of The Week - Oct 16

"This golf-cart fiasco perfectly illustrates tax policy in the age of Obama, when politicians dole out credits and loopholes for everything from plug-in cars to fuel efficient appliances, home insulation and vitamins. Democrats then insist that to pay for these absurdities they have no choice but to raise tax rates on other things—like work and investment—that aren't politically in vogue. If this keeps up, it'll soon make more sense to retire and play golf than work for living."

- WSJ Editorial

Wednesday, October 14, 2009

Leave the Kitchen Worker Alone

I almost threw my Blackberry off the Starbucks price board when I saw the following “Breaking News” email from the FT while waiting for my coffee – “Kitchen worker received AIG ‘retention bonus’”.

The two line article teaser then goes on to say that a kitchen assistant received $7,700 as part of AIGFP’s $168 million retention bonus program in March of this year. I’ve covered the issue of populist bonus bashing before and don’t intend to rehash it here, but the fact that this is front page news worthy of a “Breaking News” email is absurd.

Where are the articles asking about the other $159.8 BILLION that has been used to prop up AIG? How about $55 BILLION union gift, er, bailout of GM/Chrysler? Where are the articles highlighting the fact that all but a handful of problem banks have repaid all of their government money, including hefty dividends and interest payments, in less than a year?

Why does the media feel the need to vilify individuals who had nothing to do with the crisis or the bailout, especially someone like a kitchen assistant? This is a new low for the populist media, and while I would expect this from the New York Post, MSNBC or Fox News, I thought the FT would be above this sort of populist baiting.

The $7,700 bonus paid to the hard working kitchen assistant, whose worst sin might have been ordering the wrong lunch on occasion, equals exactly 0.000005% (5 one millionths of one percent) of the government bailout amount provided to AIG. In fact, the total amount of “retention bonus” program is only 0.1% (one tenth of one percent) of the total bailout amount.

Lastly, this is nothing more than crying over spilt milk. All bonus amounts were agreed and in legal binding contracts, making them next to impossible to take back without destroying the sanctity of contract law.

Shouldn’t we focus our attention and scrutiny on making sure taxpayers are reimbursed as much of the $160 BILLION dollars committed to AIG as possible, without getting hung up on what amounts to a couple of leaves in the vast forest of government bailouts?

Tuesday, October 13, 2009

Representation without Taxation

While attempting my first half-marathon, I decided that listening to a podcast would sufficiently distract me from my wheezing more than my usual music playlist. So as I set off, I hit play on Bill Maher’s HBO show, Real Time.

If you’ve read this blog before, you may be surprised to hear that I would listen to Maher’s show, but I find it thought-provoking and funny, and while it is heavily slanted away from many of my views (at least fiscally), I like that Maher is usually not afraid to call “BS” on his fellow liberals when required, and he almost always has some element of balance to his guests, and treats them respectfully. I think it’s an entertaining and relevant format, and have enjoyed it ever since it was “Politically Incorrect” years ago on Comedy Central. Being on HBO gives it that extra little kick as well as nothing is out of bounds!

Anyway, five minutes into the podcast, I cringed in horror when I was told that his guests that evening would be Michael Moore, Paul Krugman and Elliot Spitzer. Maher usually does a good job of at least providing a little bit of ying to the typical Hollywood liberal yang, but I guess Fox News had a monopoly on guests that night. Despite my initial urge to turn off the podcast and go back to the new Pearl Jam album, I decided to stick with it. Like they say, keep your friends close, but your enemies closer.

Moore kicked off the show promoting his new movie that lays out the evils of capitalism. The irony of promoting a film about the evils of capitalism was apparently lost on Maher and Moore.

The conversation moved on to health care and Moore started ranting about the need for a governmental health care system punctuating it with the fact that “the New York Times said two-thirds of the American public want a public option.” Whether the NYT is capable of unbiased reporting on this poll remains to be seen, but let’s assume this was a scientific poll.

Herein lies the problem.

The results of a public poll allow Moore and more importantly, real politicians that matter, to bypass the difficult conversations around healthcare reform, and go straight to the populist view that “the American people want it, so we must give it to them!”

However, before we throw a trillion dollars at the problem just because “the people” want to, we need to take a look at who wants the government to continue spending vasts amounts of money and why.

The key to understanding any public opinion on public spending is to understand that, in 2009, 47% of Americans will pay zero or negative income taxes. Therefore, 47% of Americans have access to all the benefits of new government spending, without contributing a dime to the bill. It’s like the friend that is always at happy hour, but never buys a round.

Therefore, it’s immediately clear why at least 47% of the 67% quoted by the NYT want a public option, or more broadly, anything that is funded by the government. Who doesn't like free stuff? The poll question might as well been, if the government is willing to buy you a new car, would you want it? I couldn’t find the equivalent numbers for those who only pay a small % of income tax, but I’m sure that would get the 47% much closer to 67%.

Therefore, the sneaky trick of politicians is to get as few people as possible paying taxes. That way, when politicians want to expand government programs that will provide them with more job security, a huge segment of the population will automatically be in favor of those proposal because they stand to get something from the government for nothing. Once this free-riding-off-the-government merry-go-round starts, it’s very difficult, if not impossible to stop it or even slow it down, just ask Europe.

We’ll get to fixing the tax code another time…

In the meantime, if we rely on polls to draft legislation, shouldn’t the next House bill declare that every other Friday is free pizza day - all you can eat pizza, paid for by your local pizzeria owners. We could call it Populist Pizza Day. Hey, I’m sure a NYT poll would show that at least 75% of Americans would want that!

Our politicians need to start passing government spending bills only if they make sense and are fiscally sound, not just because they are popular. Unfortunately, they don’t have the guts to buck the populist sentiment because it’s much easier to run a popularity contest than it is to run the United States of America.

Tuesday, September 29, 2009

Banker Bonus Bashing Continues...

Based on the attention on banker bonuses at the G20 meetings, you would have thought banker bonuses were the root cause of all our global problems - financial meltdowns, expensive oil, global warming, poverty, nuclear proliferation, Kanye West’s behaviour and the Wiggles.

The G20, a collection of the most powerful men and women on the planet, have spent a huge amount of time and conjuring up bonus restrictions to curb the “fat cat bonus” culture.

As usual, these “leaders” are way behind the curve as most banks have already changed their compensation structures, including limiting the use of guaranteed bonuses, increasing the proportion of compensation received in stock, etc. So, this work serves no purpose other than to generate hollow headlines that will resonate with the general public.

In fact, the only real impact on these restrictions is to make government investments in financial institutions worth less, and therefore, yet another drain on taxpayer resources. Restricting compensation at companies still under the government umbrella eliminates the last tool they have to attract the best talent in order to make the most money. If you can’t pay the good bankers/traders who are very successful and profitable, they will leave as there is no shortage of competitors who will be more than willing to pay them what you are not permitted to pay them.

Ask any economist, or anybody that knows anything about the financial system, what they believed caused the financial crises, and I doubt the banker bonus issue would be in anyone's top 5 causes. It’s even debatable whether bonuses had any material role in the crisis at all – a point highlighted in a good op-ed here.

Governments have a vested interest in ignoring the real causes because if they did even a cursory review of the causes of the crisis, they would end up looking in the mirror more often than not (Congress requiring loose standards for low-income mortgages via Freddie/Fannie, very low interest rates, tax credits for mortgage interest, etc.). Governmental policies had just as big or an even bigger role in the crisis than any group of bankers, traders, homeowners, mortgage brokers, etc..

Typical populist politics - why would governments criticize themselves when smashing bankers for working hard and making a good living works so well at the polls?

Thursday, September 17, 2009

You Made Your Bed, Now Sleep In It

I have no particular interest in Massachusetts politics, but a recent story coming out of the Massachusetts legislative bodies highlights why the general public perception of elected representatives is at an all-time low.

Democratic Senator Edward Kennedy passed away recently (R.I.P.), vacating one of Massachusetts’ seats in the US Senate. Given the slim super-majority held by the Democrats in the US Senate, the vote attached to this seat is hugely important in the success or failure of various proposals before the Senate (health care, energy, card check, etc.). As such, Democrats are eager to fill that seat with one of their own as soon as humanly possible.

However, current Massachusetts law requires a special election to be held before the seat can be filled (undoubtedly by a Democrat – this is Massachusetts after all), and the earliest that election could be held is in January 2010.

In order to immediately fill this vacancy, the Massachusetts legislative bodies are in the midst of proposing legislation that would change the states succession law to permit the Governor to name an interim Senator to fill the vacancy until the special election is completed.

Sounds reasonable, right? What state wouldn’t want to make sure it has its full representation in the US Senate? That’s what Illinois did when Senator Obama became President Obama, so what’s the problem?

Prior to 2004, the Massachusetts Governor had the ability to name a temporary replacement, but in the run up to the 2004 Presidential Election, when Massachusetts Senator John Kerry was up against President Bush, the Massachusetts House and Senate (currently 90% and 88% Democrat, respectively) passed a bill that removed the Governor’s ability to immediately appoint a temporary replacement.

Why did they do that?

In 2004, Mitt Romney, a Republican, was Governor of Massachusetts and the Massachusetts legislature (again, mainly Democrats) was concerned that if Senator Kerry won the Presidential Election, his vacated US Senate seat would be filled by Romney with a fellow Republican. To alleviate that concern, they simply changed the law, removing the Governor’s power to appoint a temporary replacement, and requiring the seat to remain vacant until filled by the winner of a special election, which would unquestionably be won by a Democrat.

Fast forward to today. Deval Patrick, a Democrat, is now Governor of Massachusetts and the Massachusetts legislature has changed their tune.

Both bills remind me of the scene in Big Daddy when the 5-year old, Julian, is playing poker with the delivery guy and just changes the rules on each had so he always wins:

Julian – “I got a 2, a 4, a 10, an 8, and a 6. I WIN!!!”
Delivery guy – “WHAT??”
Julian – “I WIN!!!”
Delivery guy – “HEY I got the same hand as that last time and I didn't
Julian – “WELL I WIN!!!”

The Massachusetts Democrats are doing the same thing as 5-year old Julian – changing the rules on the fly to suit their current needs. What’s next, changing the law to say that only Kennedy’s or heirs to enormous ketchup fortunes can be elected to the US Senate in Massachusetts?

Unfortunately, this is just business as usual - politics for politics sake - and is a complete waste of government time and taxpayers money.

Wednesday, September 16, 2009

Kanye West IS a “jackass”

In this age of instant information dissemination by Twitter and Facebook, there is nowhere to hide for those in the public spotlight, and no such thing as an “off-the-record” comment. Nobody is more susceptible to this than the most powerful man in the world – The President.

Apparently someone overheard President Obama calling Kanye West a “jackass” when asked, off-the-record, about how his daughters reacted to the recent events on the MTV Music Awards. As is the case so often today, this information was immediately passed on to the world via Twitter.

I haven’t said, or even thought, this very often lately, but President Obama’s assessment is absolutely, 100% spot on. In fact, I wish he had gone further. What would have a bigger impact on Mr. West, and the legions of kids who idolize Mr. West, than the President calling him out for his disrespectful and egomaniacal behavior?

Should the President be concerned with such things? Probably not, but clearly he was aware of the situation, and a one-liner aimed directly across Mr. West’s bow could send the powerful message to young American’s that this type of behavior is unacceptable, and cannot be forgotten simply because he apologised on Jay Leno’s new show.

A quick comment like the following could be very powerful and would likely get the attention of young Americans – and probably in a more efficient and effective manner than his recent speech broadcast to schools across the nation:

“Kanye West’s actions at the MTV Music Awards were, once again, inappropriate and disappointing. He has embarrassed himself, his family, his fans and as a world-wide superstar, our great country. I’m glad he’s apologised to Ms. Swift, but apologies cannot erase the permanent damage he’s done to himself and his fans.

On the positive side, shout out to my girl, Beyonce, for stepping up and giving Ms. Swift the stage she rightfully deserved, this is the real story of that evening, not the ridiculous behaviour of Mr. West.”

Maybe the “shout out to my girl” part is a bit much, but you get my drift. It may sound like he’s acting as Mr. West’s Father-in-Chief, but you couldn’t dream up a better “teachable moment” for young Americans.

Back to the issue of President Obama using the term “jackass”. I love it. I have absolutely no problems with his choice of words. I want a real person in the White House who occasionally drops an f-bomb here and there when needed (in private settings), not a politically correct robot that is only capable of spouting off stump speeches or, as James Brown said, someone who is “talking loud but ain’t sayin’ nothin.” I want a President who has a beer after a long day, or as a peace offering to bring people together. I want a President who takes vacations, spends time with his family and suffers through a terrible round of golf. These things are important to keep the most powerful man on the planet fresh and grounded in what makes real people tick.

Now, if he could just change his destructive policies on health care, foreign affairs, taxes, energy, trade, labor and the financial industry, he might just be my kind of President!

Tuesday, September 15, 2009

Potential Short-Term Gain vs. Certain Long-Term Pain

With the re-emergence of bashing Wall Street employees for their “short-term” compensation practices, I wonder why legislators don’t heed their own advice.

A member of Congress is at most two (House) or six (Senate) years away from their next election, therefore, short-term gains help them keep their job, and long-term consequences are largely ignored. Unlike Wall Street, there is no governing body examining the long term consequences of legislation like a Board of Directors, or Senior Management team (in theory this should be the President, but he is only, at most, four years away from losing his job).

Unfortunately this short term view is present in almost all legislative initiatives in front of Congress.

Typically, these short-term gains consist of immediately giving away something for nothing - cash for clunkers is the perfect example. The long-term consequences take an extra layer of thought that the voting public, and frankly, their elected representatives, are generally uninterested in discussing much less understanding.

Sticking with the cash for clunkers example, what are the long-term consequences of this relatively modest program? While they cannot be determined with certainty today, it doesn’t take a PhD in economics to understand at least two impacts:

  1. US Deficit will be increased by at least $3 billion – $3 billion out the door and into the pockets of those fortunate enough to have an old car sitting around and in a position to fund the remaining purchase of a new car (i.e. not the poor , unemployed, or otherwise underprivileged), with zero offset in revenue.
  2. Short term auto sales will be up but long-term sales trends will be unaffected by the program – why would a one time subsidy on cars create future demand?

This leaves taxpayers with a bill that makes Congress look great in the short term (“Thanks guys, I just got a $4,500 discount on my new Lexus SUV!”), but will ultimately be forgotten in the long term, except by those who will need to pay for this piece of legislation when our debt comes due – our children.

Cash for clunkers is one vivid example, but there is no shortage of other examples:

Sarbanes-Oxley Act – As an accountant this one was near and dear to my heart – and one of the main reasons for getting out of the field of public accountancy. Enron was bad, so Congress put in place onerous regulations that have soaked our job creating businesses of resources and money for little to no benefit to the investing public. This is not a case of increasing the deficit by spending, but it’s an equally dangerous, but less obvious, increase in the deficit by reducing tax receipts (i.e. expensive compliance efforts reduced corporate profits, which in turn reduce income tax revenues).

Consumer Product Safety Improvement Act – Lead in children’s toys is bad! Nobody could argue with that, which is why this terrible piece of legislation passed with flying colors off the back of the Chinese toy lead scare. However, Congress decided to explode a nuclear bomb on the issue rather than make some surgical strikes that would have had a much lower amount of casualties while accomplishing the same objective. Again, Congress can grasp the immediate effect of the ban on lead in children’s toys (Yea!), but fail to grasp the effect the nuclear bomb would have on the millions of small business/libraries/schools/thrift stores, etc. that would be disproportionately disadvantaged by the bill. The WSJ has done a good job of chronicling this mess - its latest op-ed is here.

The Stimulus – the bill was sold on short-term benefits, despite only a fraction of the expenditures expected to hit in the short-term (and even fewer actually hit in the short term). However, any short-term gains will be dwarfed by the negative burden this will place on future generations. Additionally, this bill also features a huge issue that is often overlooked – providing needy parties with food instead of teaching them how to farm or hunt. Throwing money at a problem only masks the underlying weakness, and without addressing the underlying weakness, the money is wasted. This leads perfectly to my next example.

Using TARP funds on the US Auto Industry – The short-term benefits were clear – auto union members would continue to receive their bloated pay checks and benefit packages (as a kickback for their votes), funded by the taxpayers, and our auto industry will have yet another chance to try and reorganise into something that resembles competitive car manufacturers. To continue with the metaphors, our government is acting like a problem gambler who just lost big in the Sunday football games and is about try and make it up with huge bets on the Monday Night game – throwing good money after bad. Without significantly renegotiating union contracts and fundamentally changing the operating model which has produced losses for years and years, Detroit has no chance of becoming profitable enough to repay the US taxpayer.

Medicare/ Medicaid / Social Security – Even these hugely popular programs are nothing more than enormous Ponzi schemes that make Bernie Madoff look like a small time purse thief. And we’ve only seen the beginning. These programs will become even more insolvent (if that is even possible) once all the baby boomers hit the Medicare books and start collecting Social Security. Of all the elephants sitting in the hallowed halls of Congress, this is by far the largest, and instead of addressing our current entitlement issues, we’re looking to create more.

Aside from my last example, these bills all have one thing in common – they were all short-term knee-jerk reactions to a crisis, written in a panic and insufficiently debated (and in some cases, not even read before a vote). Therefore, it’s no surprise that these have all backfired. Looking back, these examples have, at best, solved a short term problem while creating bigger long term problems, or, at worse, failed to solve the short term problems, created bigger long term problems all while adding huge amounts to the federal deficits.

After all of this, the President and Congress are at it again with the proposed Health Insurers are Evil Bill, er, the proposed health insurance reform bill. Our children and grandchildren deserve a full and complete debate on the issue, with logical and incremental reform that makes sense - not hurried proposals, backroom dealing and procedural shortcuts to jam through radical, ill-conceived change overnight.

Friday, September 4, 2009

My Health Care Czar Nomination - David Goldhill

A brilliant article that highlights the issues with the US health care system with an eloquence and insight than this site could never match. Solutions based on facts and free market principles, not on politics. Enjoy.

Wednesday, August 19, 2009

Tax on the Healthy, or Single Payer Trojan Horse?

President Obama documented the framework and key themes of his health insurance reforms in an OpEd piece in this weekends NYT, and its a very interesting read.

After citing the need for a public option and some vague claims that we can save money by becoming more efficient and cutting waste in Medicare and Medicaid, President Obama turns to the insurance companies with guns blazing claiming they take advantage of their policyholders, make too much money and their profits are the root cause of health care’s escalating costs:

“Lastly, reform will provide every American with some basic consumer protections that will finally hold insurance companies accountable. A 2007 national survey actually shows that insurance companies discriminated against more than 12 million Americans in the previous three years because they had a pre-existing illness or condition. The companies either refused to cover the person, refused to cover a specific illness or condition or charged a higher premium.

We will put an end to these practices. Our reform will prohibit insurance companies from denying coverage because of your medical history. Nor will they be allowed to drop your coverage if you get sick. They will not be able to water down your coverage when you need it most. They will no longer be able to place some arbitrary cap on the amount of coverage you can receive in a given year or in a lifetime. And we will place a limit on how much you can be charged for out-of-pocket expenses. No one in America should go broke because they get sick.”

If the above restrictions are placed on the insurance companies, it’s clear one of two things will happen:
  1. Insurance companies will either give up on their health insurance business, or go bankrupt trying to comply with a set of restrictions that make it impossible to remain profitable. It is not possible to make money covering those with pre-existing conditions at the same premium levels currently paid by those without pre-existing conditions. These restrictions are nothing more than a blatant Trojan Horse for government run health insurance – forcing insurers (both for profit and non-profit) to either give up, or go bankrupt - leading the way for government to save the day.
  2. Insurance premiums will rise significantly to capture the increased risk of accepting patients with pre-existing conditions at the same premium level as one without a pre-existing condition. As the overall risk in the pool of insured individuals increases due to the forced inclusion of those with pre-existing conditions, premiums must also increase to cover that extra risk. Therefore, if the insurance company cannot charge a higher premium to the individuals with pre-existing conditions, the premiums of those without pre-existing conditions will increase. All Obama has done is removed the “w” from his usual income redistribution mechanism, and replaced it with an “h”. Instead of taxing the wealthy through the tax code, he will tax the healthy through insurance regulations.

The arguments against a public option are well known and have already been covered in this space. I’d like to focus on the less obvious, but more likely, impact of the tax on the healthy.

Under Obama’s proposal, an insurance company would be required to charge Moe - a 40-year old, 350lbs diabetic smoker with a family history of heart disease and a soft spot for super-sized value meals at McDonalds - the same amount as it does Larry – a marathon running, 40-year old organic vegetarian with four grandparents alive and well at 95.

The insurance company’s sophisticated risk model (based on projections of future health care expenditures) suggests Moe and Larry, based on their individual health profile, should pay premiums of $25,000 and $5,000/year, respectively. If the Obama plan does not permit the insurance company to differentiate between these two individuals, in order to remain profitable and stay in business, the insurance company must charge each person $15,000/year to cover the combined required premiums of $30,000.

Therefore, Larry, who works hard and eats well to keep his body in top shape is subsidising Moe, who’s most strenuous activity is getting up from the couch to get another Twinkie and a 2 liter of Coke, to the tune of $10,000 per year.

There is a better solution.

The key that will unlock health care reform is to make private insurance portable so people can buy and keep health insurance for life, regardless of where they live, or where they work.

The first step is to remove the state-by-state regulatory structure around health insurance, permitting individuals to shop around for the best plan, regardless of where that plan resides.

The next step is to remove the linkage between employer and insurer and let people buy health insurance directly in a free and open market – just as they would buy car insurance. This would also remove the numerous governmental subsidies provided to employers through the tax code, saving the taxpayer a fortune.

The bottom line is that it’s important for individuals to be in control of their health care, and to pay premiums directly (as opposed to just being taken out of a paycheck) as this is the only way in which costs can truly be controlled.

After these changes, once a young adult drops off of their parents insurance plan, they would shop around for the best deal and have the ability to purchase a life-long health insurance contract (a new product that the insurance companies would be more than happy to provide).

Buying insurance for life at an early age will effectively make the pre-existing issue immaterial. When insurance is purchased at such a young age, the narrow gap between high risk individuals and low risk individuals, and the premiums collected during the younger years, will be reflected in a more narrow range of premiums. Instead of the $25,000-$5,000 cost in the example above, it might be something more like $12,000 – $8,000. Therefore, it’s much less likely to have one portion of the population substantially subsidising the other as they are all relatively equal risks early in life. This type of coverage would likely be slightly more expensive than current plans, but it’s a small price to pay for guaranteed coverage for the rest of your life.

Insurance companies will love this as they gain access to customers across the country and for life. Consumers will love this as it guarantees them insurance for life, regardless of where they live, their job, or future health conditions. Lastly the government should love this because it will reduce the burden on Medicare/Medicaid and there will be fewer uninsured.

Reforming something as large as health care should be done with incremental, logical changes over time, not with drastic, half-baked reform that is rushed through Congress before it can be read, much less analysed, by the voting public.

Monday, August 10, 2009

Too Loud to Be Heard

Screaming and angrily pointing fingers at your local Congressmen is a great way get the camera rolling, but it’s not an effective approach to criticizing the proposed health care reform, even if the content is relevant. Using this approach focuses all the attention to the delivery of the content – the screaming, the yelling, the pushing - not the content itself.

Our country's prosperity is directly attributable to vocal protests of the people towards their government, a fundamental right guaranteed by the Constitution. To dismiss the protests as “manufactured” or “un-American” is far more destructive to our democracy than the protests themselves. What’s worse is that these comments did not come from the talking heads in the network media; it came directly from the House Majority Leader, in a written statement. Are members of Congress so caught up in their own greatness that they dismiss any criticism of their ideas as “manufactured” and “un-American”, as if real citizens could never think critical for themselves?

I'm not even going to get into the hypocrisy of this claim given the use of various "community organisers" employed by the Democratic Party (and in fact now employed by the US Government after the stimulus bill funnelled money their way). These groups are the purest definition of “manufactured” thought. Daily emails are sent to their followers, dictating views and thoughts on specific issues. Do Americans on either side of the asile really need a daily email to tell them what to think about a subject?

I thought Democrats were the champions of free speech? To demonise something so fundamental to our democracy is unbelievable and inexcusable.

Healthy Competition in Drivel

The last few posts have been pretty tough on the Democrats in Congress, rightfully so in my opinion, but by no means do they hold a monopoly over populist drivel.

Republicans are back at their favourite pastime of fear-mongering. In an effort to scare people into opposing the current health “insurance” reform proposals, some Republicans, most notably Sarah Palin (who for some reason that I can't yet comprehend, people listen to), are claiming that the current proposals will withhold treatment to old or less productive citizens, leaving them to die because they are not worth treating.

Its obvious that the health care reforms being proposed are not pro-euthanasia (nor are they pro-abortion for that matter), and there is no "death panel" that will determine your fate. However, if you were to listen to Sarah Palin, or worse yet, your average Fox News commentator, you would think that Obama wants to pull health care out from under the old and less productive citizens.

With a plan so full of holes, terrible assumptions, unintended consequences, outrageous costs, and ridiculous new taxes - why even bother with this quasi-euthanasia issue? It should be insulting to every American that their representatives don’t think they can comprehend the more complex reasons why the plans are terrible for our country, so the representatives scare them by over-exaggerating a non-issue, ignoring all of the other more pressing issues along the way. Or worse yet, the representatives themselves cannot comprehend the more complex reasons why the plans are terrible for our country.

All the current proposals provide is a free consultation on end-of-life options and an independent board to develop guidelines on what procedures are required and which are not effective enough to justify the costs. Does this equate to euthanasia? Does this mean lesser care? I’m very opposed to more government involvement in health care, but these specific proposals actually make sense. If the stated goal is to reduce the cost of health care, there is no better place to look that at the last year of life, where the costs are huge (27% of Medicare costs). Some might call this rationing, but if we need to reduce costs, we need to be smarter about the care that is given – particularly in our last years. Remember, efficient care is also more effective care.

Instead of pandering to the elderly (who are most likely Republican already), shouldn't the Republicans be courting the young independents who are out there in droves and ripe for the picking? The same young independents who are sitting at home and wondering which party they want to hitch their wagon to in the next election cycle? Those who oppose the current legislation need to regroup and focus on the major issues with the new health care proposals (increased government involvement, huge costs & taxes, etc.), instead of contributing even more populist drivel to the debate.

Monday, August 3, 2009

Congress is the Clunker

From the Congress majority that believes in the Robin Hood theory of taxation comes one of the most inequitable programs ever created by Congress – CARS (Car Allowance Rebate System) – affectionately known as Cash for Clunkers.

Instead of stealing from the rich and giving to the poor, CARS steals from the taxpayer and gives not to the poor or the unemployed, or the sick or the elderly – but to car dealerships and the guy down the street who just bought a brand new, fully-loaded $60,000 Lexus SUV for $55,500 thanks to a $4,500 contribution from Uncle Sam (CARS program caps new cars at $45,000 before features, options, taxes or destination charges – the Lexus can be tricked out with over $15,000 in extras). Democrats and the Obama Administration are praising the Cash for Clunkers program, despite running out of money after one week, and are so giddy with its success, they have asked to triple its funding levels so two more of your neighbors can go get their subsidised Lexus SUV.

Apparently Congress is surprised that Americans like government handouts - imagine that.

Shouldn't a "successful" stimulus package reduce subsequent government spending, not triple it? Under this theory, if our economy emerges from the recession next quarter and Government takes credit for it (which they will, regardless of whether they deserve it or not), will they praise its successes and suggest that Congress approve $2 trillion more in stimulus funding to keep the party going?

Congress and the Administration have crushed Wall Street for compensation based on short term results – but is Congress really any different? Clearly, Congress has no problem preserving their seat in Washington by capitalising on the Populist rage du jour, mortgaging our future in the process.

Thursday, July 30, 2009

Let’s tax destructive consumption not economic production

The current proposals to slap a surtax on the nations top earners to fund a massive increase in government health care spending leads to an interesting question. Why do we insist on penalising economic production, while destructive consumption remains relatively penalty-free?

Consider the following examples based on quick searches:

Cigarettes: Various sources note that 20-30 billion packs of cigarettes are sold each year in the United States.

Gasoline: Americans use approximately 140 billion gallons of gas each year.

Beer: Americans drink approximately 5 billion gallons of beer each year.

Wine: Americans drink approximately 750 million gallons of wine each year.

Fast Food Meals: Americans eat approximately 70 billion fast food meals each year.

Instead of placing a 5% tax surcharge on the most economically productive members of our society (i.e. those that create jobs, buy goods and services, while already paying the majority of taxes), why don’t we just tax counter-productive activities instead?

Admittedly, some of the items above are already some of the most heavily taxed items for sale at the moment, but there is no evidence this level of taxation has materially impacted consumption of these items.

If we slapped an additional $2/pack surcharge on cigarettes, a $1/gallon surcharge on gas, a $4/gallon surcharge on beer ($0.50/pint), a $2/meal surcharge on fast food meals, and a $10/gallon surcharge on wine ($2/bottle), using the conservative numbers above, this would generate approx. $250 billion in revenue, per year. This is 2.5x the White House estimates for the cost of the new health care proposals ($1 trillion over 10 years), so it should just about cover the actual costs.

Worst case from a revenue perspective, which is actually a best case from a cost perspective, is that sales of these items are reduced substantially due to the excess taxes imposed. The revenue would start to dry up, but this reduction in revenue is directly correlated to a reduction in risk and collateral costs. Would it be beneficial to reduce the number of smokers, reduce the number of drunk driving fatalities or incidences of alcohol abuse, reduce the amount of fast food meals consumed? I consider this a win/win situation. If consumption is not impacted by the higher price, at least the government has the appropriate level of funding to treat the after effects of such behaviour. If the consumption is impacted, the country will by definition get healthier, lowering the burden of costly heart attacks, lung cancer treatments, liver transplants, high blood pressure medicines, etc.

The analysis above is really just a starting point. You could significantly increase that number through various other measures (e.g. legalise and tax marijuana, additional fines on minor illegal activities such as speeding or parking tickets, taxes on sugary drinks/snacks or salty foods, etc., etc.). If we can’t morally persuade people to change (or at least reduce) their bad habits, let’s use economics to persuade this change. The key to this is that everyone still has a choice to do whatever they want, but that choice comes with economic consequences. You could even flip this approach around and reward productive behaviours by providing tax breaks (such as the ability to buy with pre-tax dollars) on things such as public transportation, gym memberships, basic annual check ups, fruits and vegetables, charitable donations, etc.

Ideally, the government would control spending by making substantial cuts to governmental programs, eliminating the need for additional tax revenues, however, I don't see that happening in Washington in the near future. Therefore, if they are going to raise taxes, I hope they do it a sensible manner.

Now, I’m no fan of taxes or government influence in my life, but if the alternative is a straight property grab (i.e. taking upwards of 45% of hard earned income, just because it is there for the taking), I could live with uncomfortable taxes on consumption if the unintended consequences of the tax policy result in positive, productive results. This is the win/win situation mentioned above – either tax revenues go up (win), or Americans are healthier (win - economically as well). Unfortunately, Washington is currently attached to it’s lose/lose/lose situation - higher taxes lead to less economic activity (lose) which leads to fewer jobs (lose) which leads to lower tax revenue (lose) - because it provides them with the best job security.

Will this ever work? Probably not. The reason? Populism. Why make the entire population upset with tax increases when you think you can get the same revenue from 5% (or less) of the voting public?

Unfortunately, our elected representatives are too worried about securing that extra campaign contribution or winning the next election to make the hard choices required to make this country better.

Sunday, July 19, 2009

Another Reason to Love the Australians

In a recent article in on ESPN, the US is looking to start a world class cricket league in hopes of raising the profile of the sport in the US. The traditional 5 day test matches would never fly with an American audience, but they are looking to adopt the Twenty20 version of the sport that lasts only three hours or so. After living in the UK and being exposed, and even playing some cricket, I wish them good luck, but I would urge investors to consider other options.

If this league comes to pass, it would be a great example of Americans adopting a version of a great Australian pastime.

On a much more relevant and important subject (sorry cricketers) - health care - American should also look to Australia for inspiration.

It looks as though the US will be passing a health care reform bill in the near future, and a public option is almost certainly going to be part of that reform. The primary concern about this type of reform is of course, cost, but another key consideration is the impact the private health insurance industry. There are hundreds of other issues with the current plan, but I’ll let the experts debate the finer points.

Australia has a public health care option, but it also has a thriving and relevant private health care system to help defray the costs of a public option. In other words, the government provides for emergency care and subsidises other types of care, and private health insurance can be purchased to cover the balance. This approach appeals to both concerns highlighted above – the cost will be high but will not be astronomical, and the private insurance providers will still be relevant and in fact a key player in the health care industry.

Australias health care system (called Medicare – even the name would make sense here!) ensures free universal access to hospital treatment and subsidised out-of-hospital medical treatment. The Federal Government pays a large percentage of the cost of services in public hospitals. This percentage is calculated based on the treatment required. Typically, the Government is on the hook for 100% of in-hospital costs, and 75-85% of General Practitioner and specialist services. These figures can be increase for patients who cannot pay or are receving other benefits. Additionally, if a patient has crossed the threshold of total health expenditure for the year, the care may be further subsidised.

Where the Government pays the large subsidy, the patient pays the remainder out of pocket (co-payment), unless the provider of the service chooses to charge only the scheduled fee, leaving the patient with no extra costs.

Where a particular service is not covered, such as Dentistry, Optometry, and Ambulance transport, the Patient must pay the full amount (unless they hold a Low Income Earner card, which may entitle them to subsidised access).

However, to make up the difference in total costs and costs covered by the government, individuals can choose to take out Private Health Insurance to cover these costs, with plans that covers just selected services (cheaper), or plans with full coverage (more expensive). In practice, a person using private insurance may still be left with out of pocket payments, as services in private hospitals often cost more than the insurance payment.

The government actively promotes the purchase of private health insurance through the following programs:

  • Private Health Insurance Rebate: the government subsidises the premiums for all private health insurance cover, including hospital and ancillary (extras), by 30%, 35% or 40%. Recently the Australian Labour Government under Kevin Rudd announced that as of June 2010, the Rebate would become means-tested and offered on a sliding scale.
  • Lifetime Health Cover: If a person has not taken out private hospital cover by the 1st July after their 30th birthday, then when (and if) they do so after this time, their premiums must include a loading of 2% per annum. Thus, a person taking out private cover for the first time at age 40 will pay a 20 per cent loading. The loading continues for 10 years. The loading applies only to premiums for hospital cover, not to ancillary (extras) cover.
  • Medicare Levy Surcharge: People whose taxable income is greater than a specified amount (currently AU$70,000 for singles and AU$140,000 for couples) and who do not have an adequate level of private hospital cover must pay a 1% surcharge on top of the standard 1.5% Medicare Levy. The rationale is that if the people in this income group are forced to pay more money one way or another, most would choose to purchase hospital insurance with it, with the possibility of a benefit in the event that they need private hospital treatment - rather than pay it in the form of extra tax as well as having to meet their own private hospital costs.

How does the Australian government pay for all of this? Australian Medicare is funded partly by a 1.5% income tax levy on everyone except some low-income earners (i.e. less than approx. AU$17k), but mostly out of general revenue. After 5 minutes of research, it looks like Aussie income tax rates (not including the 1.5% levy for Medicare) are broadly in line with current US rates, except that everyone with incomes above AU$6,000 pays tax on a graduated basis starting at 15% and up to roughly 42% if you earn AU$1M.

In 2006, Australia spent 8.7% of GDP on health care (15.3% in US), or US$3,122 per capita (US$6,714 in US). Of that, approximately 67% was government expenditure (46% in US). Another interesting stat is that the US government spent US$3,074 per capita in health care while Australia only spent US$2,097 per capita. (Figures were obtained from the World Health Organisations Statistical Information System – which, by the way, is a remarkable resourse of information -

On paper at least (I haven’t spoken to any Aussies on this in years) it seems like a very sensible plan, both from a coverage point of view as well as a cost point of view.

The likely result from the current rushed proposals coming from Congress will effectively create a national health care service that will provide full coverage to everyone. All of the sound bites from everyone including the President say this is not the intention and they want private insurers to remain part of the game, but I think its like an unintentional-intentional walk in baseball. To the casual observer, the pitcher is still trying to get the batter out (i.e. politicians claiming they don't want to push private insurers out of the market), but in reality the pitcher has every intention of walking the batter (i.e. bypassing private insurers straight to a single payer system). To some this sounds great, but the costs will be astronomical (see previous post), and the current proposals to fund this partially with whopping tax rate increases on the higher tax payers won’t even come close to funding this program, leading to enormous defecits (or larger taxes on everyone else – VAT, etc.) down to road.

So let’s get Congress out on the Capital lawn for some cricket, throw a couple of shrimp on the barbi and start considering a reasonable approach to health care that will not further stifle our economy or burden our children with even larger mountains of debt. The Australian model would be a great place to start.

Note: Because I have a full time job, and cannot fully research the Australian health care system or tax code independantly, the information above is based on the Wikipedia entry for Health Care in Australia and their IRS equivalent website.

Tuesday, June 30, 2009

Hypocrite of the Day: American Federation of State, County and Municipal Employees

Clearly the head of the American Federation of State, County and Municipal Employees (“AFSCM”) union has no sense of irony, and perhaps no sense at all.

In a letter to the Chairman of the Board of Citigroup, the head of AFSCM dutifully exerts his unions influence as a significant shareholder (3% ownership by union pension funds) and urges Citigroup to change its compensation structure at its investment bank. All shareholders should have their views heard, and I applaud the AFSCM for taking an active role as a shareholder – a vital piece to restoring appropriate corporate governance in this environment.

However, the suggestions in the letter, coming from a union leader, takes the concept of unintentional comedy to a new level. Two phrases from the letter (can bee seen here: made me laugh out loud considering the author was a union boss:

1) “a great deal more pay that has no tie to performance.”
2) “reward executives for long-term value creation, not just showing up for work”

First of all, there is no industry where the compensation is more directly linked to performance than the investment banking industry. If you produce profits, you are rewarded with your share of those profits, if you produce losses, you are likely to be fired, or at best, you can expect bonus day to pass you by. Citigroup will not be increasing the salary of traders who have lost millions (if they are even still around to collect a salary). What Citigroup and the rest of the industry is trying to do is insulate its best talent from the insane legislation spouting from Congress relating to compensation, because if they don’t, that talent, and all of its revenue producing ability (remember, many traders/bankers have continued to generate significant profits through the crisis) will leave to foreign competitors or hedge funds, both of which are not subject to Congress’ insanity. Defections like this will only hurt AFSCM’s investment in Citigroup.

The negative consequences of the historic concentration on short term profits is a valid critique, however, all banks have taken steps to start to address this (less cash, much more restricted stock, longer vesting periods).

Maybe the AFSCM is not directly responsible for the financial crisis resulting from the extortionate demands of unions at companies across the country (the bankrupt Auto and Airline industries are first to mind), but I’m sure its union contracts have contributed significantly to the fiscal crisis’ of states, counties and municipalities across the country. Isn’t the main tenant of any employee unions that compensation and benefits are explicitly linked to seniority rather than performance? Based on his logic, perhaps he should do the right thing and re-negotiate his union contracts to ensure the compensation of his membership is directly linked to the employees performance and the surplus(yea, right) or deficit their employers run.

There is a lot of hypocrisy floating around these days, but I’ve yet to see anything this blatant and comedic. The unions detachment from reality never ceases to amaze me.

Tuesday, June 16, 2009

Obama’s Accountants Have Some Explaining To Do

What if I said I could buy a brand new Ferrari for $10,000. Would you believe me?

President Obama sat in front of the nations doctors yesterday, and with a straight face, claimed his far-reaching Ferrari of a health care reform plan would cost around $1 trillion over the next 10 years. While it was acknowledged that it could go higher, quoting $1 trillion over 10 years seems to be unrealistic, and borderline fraudulent.

If a publicly traded company made this claim and it turned out to be understated, the executives of that company could be thrown in jail. Shouldn’t we hold our elected officials to the same standard – or an even higher standard - after all, it’s our money they are throwing around. If they were required to be held to this standard, they might be more careful about the numbers they throw around when trying to push an agenda.

Without getting into detail or the merits of this plan (dubious) or the unintended (er, ignored) consequences on patient care, doctor recruitment, taxes, private health insurance industry, economic growth, etc. (disasterous), I would really like to focus on how preposterous it is to claim that this will only cost $1 trillion over the next ten years. $1 trillion per year, maybe, but over 10 years, not a chance.

As we all know, if a true reflection of the costs were known, the American people, and Congress, would balk at the proposal as being too expensive. Therefore, the $1 trillion quote is just politics as usual – lie to the American public because they don’t know any better.

For example, part of Obama’s plan includes coverage for the 50 million Americans that are currently without insurance coverage. An admirable goal of any health care reform, but we need to be realistic about the cost of this coverage, and forthcoming on how it will be paid for.

I’m no health care professional or expert, but I am an accountant and a minimal amount of research and some common sense shows that there is no way this amount is possible.

Let’s assume that only the 50 million American’s without health insurance coverage are the beneficiaries of this new reform (a very conservative assessment).

In 2009, Medicare covered approximately 45 million people at a cost of $425 billion. If we assume 0% increase in medical care over the next 10 years (when actually it has increased at an average rate of approx 8% per year), and a 0% increase in the amount of people insured over 10 years, this equals $4.25 trillion dollars over the next 10 years. Even if we present value those future costs to today, and apply a discount rate of 4% (Treasury just issued 10yr notes at 3.99%), the US would have to borrow $3.4 trillion today to pay for the next ten years of health care reform – 3.4 times the amount quoted by Obama.

I admit there are some clear shortcomings to the analysis above, but I believe they are offset by some very conservative assumption (i.e. zero cost inflation over 10 years, only based on 44.8 million participants, etc.). These shortcomings include the exclusion of the cost savings plans envisaged by the Obama Administration ($200 billion cut from hospitals and $313 cut from Medicare and Medicaid over the next 10 years – neither of which would put a material dent in the analysis above - if they turn out to work), and the fact that generally, patients covered under Medicare are older and in need of more healthcare than younger citizen. I have no way of guessing what this amount is, but I doubt it would reduce this amount down from $3.4 trillion to the $1 trillion quoted by the Obama Administration.

To overcome the fact that Medicare’s patients are older and in need of more care, let’s look at an example of national health care (i.e. care for all). I live in the UK and have been exposed to the National Health Service, and while it is competent in emergency situations, it is dangerously inefficient in all other health care situations. Again, the pluses and minues of national health care is a debate for another time, but let’s focus on the costs.

The 2009 budget for the mediocre-at-best NHS in England is approximately £100 billion. The population of England is around 50 million, so again it roughly matches the population of Americans without coverage that would benefit from a new plan. Again, I highlight this as a conservative assumption because the Obama plan is not just for those currently without coverage, many more will end up under this option, and the numbers will increase as the governments influence will eventually price out private insurance companies – but again, this is for another debate.

Using a similar approach to above, applying the current exchange rate of approx. 1.60 USD/GBP, the present value of the UK’s budget, in dollars, over the next 10 years is $1.3 trillion.

Before we compare this to Obama’s $1 trillion number (after all, what’s $300 million between taxpayers?), consider these facts that make this number an extremely conservative calculation to apply to any new government run and funded health care scheme:

  1. This assumes the US health care costs are the same as the UK’s (they are not, the US costs are much higher. To illustrate this point, I have worldwide private health insurance, excluding the US. If I include the US, my premium would triple!)
  2. This also assumes no growth in costs or people covered over a 10 year period (again, extremely unlikely)
  3. This assumes the US can implement this system with the same efficiency as a system and infrastructure that has been in place for 60 years
  4. The NHS is a pure single payers system, it owns its own hospitals, and directly employs its own doctors and staff – a cost benefit that could not be matched by any US plan in the short term.
  5. Even with this budget, the NHS is seriously underfunded and is running a huge deficit, so its costs are even higher than the budgeted amount.

Therefore, even an unrealistically conservative cost analysis shows a larger number, 30% larger, than the cost quoted by the Obama Administration.

In summary, two simple calculations and a bit of common sense is all it takes to put some very large holes in the Obama administrations cost projections, I just wonder why nobody has challenged the Obama Administration’s math?

Friday, June 12, 2009

An Anti-Populist, but Real Life Response to the 90% Bonus Tax

Note: I originally wrote this on Facebook on March 20th, and it spurred my interested in starting a blog, so I'm posting it here as my first real blog.

I’m not a blogger [or wasn't when I wrote this!], and don’t usually don’t feel the need to vent on paper like this, but it’s down right frightening what’s happening in Washington these days, so I’m making an exception. My preference would have been to link to a story making these points, but I’ve yet to see these points properly illustrated in the press, so allow me to write it below.

The tipping point that turned my frustration into fear is the bill passed that will “levy a 90 percent tax on bonuses paid to employees with family incomes above $250,000 at companies that have received at least $5 billion in government bailout money.” (AP article)[Disclaimer: I work for an investment bank – I’m not a fancy credit trader, but an accountant. If you’ve stopped laughing, it’s also worth noting that this legislation doesn’t impact me so the following is not sour grapes, it’s a very real concern.]

Let’s assume for a minute that this law is constitutional (doubtful) and turns into law - does this make anyone else nervous? Are we happy with a government that can retroactively and selectively tax hard working American’s at a 90% rate? Do they even know who they are punishing, and in many cases ruining financially? Do they really think everyone caught by this proposal are directly responsible for the losses racked up at these companies?

For every CDS trader who lost his shirt on bad trades, there are 100’s of other bank employees who get hit with this tax, despite having absolutely nothing to do with the losses, and in some cases were a major reason why the losses weren’t even bigger (for example a commodities or FX trader who’s earned the Bank millions and millions in profits during 2008).

Should traders who bet the house and lost it deserve big bonuses? No, and they were shown the door a long time ago. Some senior management at these firms remains but they are already under voluntary and TARP restricted pay packages. Therefore, the vast majority of the people left to clean up the mess had little or no influence over the losses that occurred.

If the main culprits of the losses are already gone, who will this impact? Who is left to absorb the full force of this “message” from Congress?

The target of this misguided and theatrical outrage will end up being a large number of hard working individuals who had no direct involvement or control in the losses that caused the bailouts and were just unlucky enough to work for a company that made some bad decisions and was bailed out by TARP (and in the case of GS and MS, involuntarily bailed out).

I’m all for going after the bad guys, but despite the public perception of Wall Street driven home by the pandering, egomaniacal, small-minded individuals in Congress and the Obama Administration (including the President himself), not everyone that works for an investment bank is evil, greedy or rich. There are no doubt exceptions to this point, but we shouldn’t regulate based on the exceptions at the expense of everyone else.

There are two huge consequences to this decision that apparently eludes the idiocracy in Washington:

1) Impact on those taxed
2) Results of affected employees leaving to go work at a Bank/Hedge Fund that has not taken TARP funds.

Let’s illustrate the first point with a little story – Mr. Bent Dover is a manager in Goldman’s finance department. He’s studied hard at school, worked very hard at every job, and paid all his taxes. Based on this experience and knowledge he could expect to earn about $200,000/year working as a manager in the finance department. Since Bent works for an investment bank, that income is split between salary and bonus – about 50/50, so he has a documented salary of $100,000, and expects a bonus in the neighborhood of $100,000.

Mrs. Dover works part time while taking care of the kids in their rented Hoboken apartment. She earns $50,000/year in her job. A family of four living off of $250,000 in New York is comfortable, but that family does not have a mansion with staff, does not drive Italian sports cars, does not fly first class – it doesn’t afford an extravagant lifestyle in the NYC area.

The Dover family relies on Bent’s bonus for everyday expenses, day-care providers, etc. not for Rolexes or trips to Monaco. So how does this proposal impact the Dover family? Ignoring the extremely complex tax code, let’s assume that the Dover’s meet the $250,000 bogey set by Congress, and by the stroke of Obama’s pen, Bent’s after tax bonus payment goes from $65,000 ($100,000 taxed at 35% - remember the government is already taking at least 35% of his income) to $10,000 ($100,000 taxed at 90%). That’s an after tax difference of $55,000, roughly reducing Bent’s take home pay by 50% for the year, and his families living expenses by 34%. The Dover’s new effective tax rate is now 57% (that’s before factoring in state taxes, sales taxes, etc.).

Does Bent deserve this type of treatment from his government? His responsibility was financial reporting, and not risk management, yet he is being vilified financially for performing that role at Goldman instead of HSBC or an unregulated Hedge Fund.

Which brings me to the second important point – if you are threatened with a 90% tax rate what is the most likely plan of action? Leave the US Bank and go work for a foreign bank or a hedge fund.

Jobs are tight now, but there will always be room for profitable employees at these institutions, and they will jump ship – it probably won’t take a month from when this legislation is passed.

Once the economy picks up again and markets are functioning, and this tax remains in place, I anticipate that the foreign banks and hedge funds will sweep through the Goldmans, MS, Citi’s, BofA’s of the world and easily walk away with their best talent (assuming they haven’t paid the TARP money back yet). The American banks will be left to rebuild their depleted talent pool while their foreign and unregulated competitors gain significant market share and profit the most from the eventual rebound in the economy.

What’s the impact of this?

Without the right people, it’s

1) billions more will be lost through ineffective management/hedging/exit of these complex instruments still on the books – potentially losses would dwarf these bonus amounts, and
2) their ability to repay the bailout loans will come into question.

To risk the overall health and future of the American financial services industry over these bonuses is shortsighted and dangerous. Let’s not forget, the government is getting a very nice return on the TARP investments, and to my knowledge, nobody has defaulted on those obligations. TARP was not a hand out (unlike the pork in the stimulus bill or the auto bailouts) it was a loan that will in all likelihood be paid back, with interest, in the near future.

Hopefully the Senate has a more reasonable approach to this issue that both panders to the ill-informed populist sediment, but doesn’t burden American workers or companies with excessive taxes out of spite.

If these companies were fraudulent, take them to court and try and prove fraud or other illegalities, but don’t punish them without a trial through the tax code. All Americans should be wary of a Congress that is ready and willing to selectively drop a 90% tax on American workers where it sees fit

Welcome to blog!

With politicians on both sides of the asile rushing through proposals that pander to the current headlines and cable news blowhards, without regard to the future unintended consequences, I've decided to start a blog highlighting my views on these proposals.

I've never tried anything like this before, so I hope to keep it interesting and build up some interest in these debates.