The Supreme Court and Obamacare

A prediction as the Supreme Court hears arguments on the Obamacare cases.  While each case may be decided differently, my guess is a 5-4 decision upholding Obamacare.  I base this on a small, unscientific bit of reading (the briefs for the "individual mandate") and some knowledge of what the justices might base their decision on.

In terms of the briefs, I read the briefs on the individual mandate only (the total of all of the briefs submitted, including amicus briefs, totals in the tends of thousands of pages).  From these two I noticed:

1. The government seems to have thought out their strategy.  Much of their brief is on the social need for the individual mandate and phrasing it as the "right thing" to do, which is more likely to appeal to the "liberal" justices (Breyer, Ginsberg, Sotomayor, and Kagan).  The government also argues strongly for a very broad interpretation of the commerce clause of the Constitution.  When they quote previous Supreme Court decisions favoring broad commerce powers, they appear to have made a point of quoting Justice Scalia quoting some other case, thus pointing out past broad interpretations of the "conservative" justices.
2. The opponents of the individual mandate focus on the broadening of Congressional power into a new realm, emphasizing Congress's own doubts about constitutionality, the lack of a precedent for the individual mandate, and pointing out how Congress would now have the power to add new mandates (such as instead of bailing out GM, require all citizens to buy a new GM car or pay a tax penalty).  However, the opponents didn't give a convincing case for an alternative to the mandate other than listing a few alternatives Congress didn't have the will to pass, including a government run single payer system. Thus, the opponents didn't really give an argument for the "liberal" justices.
3. The swing vote in the case is likely Justice Kennedy.  From what I have seen following court decisions for many years, I don't think he will be swayed by a strict constructionist argument, more likely accepting the practical need for the mandate.
4. Another factor may be whether the court can come up with some new constitutional interpretation to allow the mandate for health insurance without obviously opening the door to Congress adding more mandates.  This implies something like the "right to privacy" which was found in sex and contraceptive cases or some variation on equal protection (that clause of the 14th amendment applies to the states, but could as easily be expanded to the Federal Government).

So I'll predict the court upholds the new health care law, perhaps striking down pieces or giving the government some hoops to jump through to make it "proper".

If, on the other hand, the government strikes down the law, what will happen?  If a few key pieces (e.g. the individual mandate) are struck down and the rest is left intact, we're likely to see a government run single payer system much faster than we would have under the current law.  There is already a good argument that Obamacare is designed to destroy the private insurance industry.  It combines a tight limit on allowed administrative costs, explicit or implicit limits on how high premiums and co-insurance payments can be, and a general vilification of profits in medicine or health insurance.  Regulations holding health insurance premiums down while costs continue to rise will result in current insurers going bankrupt or leaving the market, leaving things open for the government to take over.  The lack of an individual mandate will allow people to move in and out of health insurance as they need it, with the ban on preexisting conditions and limits on premiums ensuring that private insurance will die out all the earlier.

Unfortunately, I don't see a long term alternative to government universal health coverage.  The debate about health care has been focused on "health insurance" as the panacea which will allow everybody to get care.  It does not look at the costs of health care or the reasons for the high costs.  These costs primarily boil down to the problem of the "third party payer", meaning that the customer (the patient) does not pay directly for the product (health care).  Instead, patients rarely know what health care will cost, and are encouraged to believe that there is no way they could afford the cost without health insurance.  This is exacerbated by a system which charges the highest price to uninsured patients, while insurance companies have negotiated discounts of anywhere from 10-20% up to 80-90% depending on the procedure (I recently saw a $93,000 hospital bill, the insurance contract paid about $15,000).  Medicare pays on average less than private insurers, with Medicaid paying on average less than that.  Thus, the more it costs a doctor to be paid (in billing, forms, regulations, etc) the less the doctor is paid.

Government funding for politics

I just found the US House Oversight committee.  I saw a comment about a minority (Democratic party) report about ATF's Fast and Furious investigation which the Republicans have been complaining about.  After finding the report, I looked at the other things the oversight committee does.  The list of committee reports shows a bunch of partisan bickering, primarily House Republicans (in particular Rep. Issa of California) producing one sided reports showing the evils of the Obama Administration.

The politics goes both ways.  The Democratic report on Fast and Furious attempts to show that this is just the latest of a series of ATF investigations which allowed guns to "walk" into Mexico (search for Fast and Furious for more details, I don't feel like trying too give the details at the moment).  But the Democratic report ignores the fact that the pre-Fast and Furious investigations all attempted to confiscate the guns once they reached Mexico.  If anything, it seems to show the degree of corruption in Mexican law enforcement (I haven't finished reading the report, but the pre-Obama administration investigations are definitely presented in a biased manner).

On the other side, the Republican majority produced a report about "Government Motors" and the Chevy Volt, questioning whether the National Highway Traffic Safety Administration (NHTSA) delayed investigating and announcing problems in the Volt's battery to protect government supported GM.  However, the report doesn't compare NHTSA's response to the Volt with NHTSA's response to other automotive safety issues.  Instead it just complains about the amount of time it took to respond.  Perhaps NHTSA was slow investigating the Volt.  On the other hand, announcing a possible safety issue before it's properly investigated can seriously damage a company's reputation.

What really bothers me about the Republican "report" on the Volt is the comparison of NHTSA's reponse to responses by the Consumer Product Safety Commission (CPSC) to battery problems.  They do not look at how NHTSA responds to problems with other automobiles (which would show whether the Chevy Volt got special treatment compared with other car makers), instead they compare how a different agency deals with different types of products.

So what does this show?  Through the House Oversight committee politicians of both parties get the government (in the form of Congressional staff salaries) to publish partisan attacks on the other side.

I am Obamacare! But not for the reason you think.

A photograph has recently appeared on Facebook and other web sites.  Using the format popularized during the Occupy movement, a woman reports how her life was saved by Obamacare:

Oddly enough, this woman truly is a poster child for Obamacare.  It turns out she has written a blog for many years, so it's possible to expand beyond this hand written poster to see the real situation.  See the blog at http://giveneyestosee.com/blog/.

Let's look at her situation prior to her illness based on her blog:

• She is a 34 year old individual who does not have health insurance through her employer.
• She never purchased health insurance as an individual.
• She lives with her boyfriend (now fiance), who has health insurance but did not add her to his coverage (most companies will allow an unmarried partner to be on health insurance, I even know one person who has her sister on her company insurance).
• She has a number of health issues, but it isn't if / when she last went to a doctor.
• From her own descriptions of various activities and expenses, she is not high income, but not poor.  She willingly takes her cat to the vet, and probably pays for auto insurance.
• From her description of looking for insurance, I'd guess she never tried to purchase health insurance.

So here is an individual without insurance.  For around $200 a month she could have had health insurance (most cheaply through her boyfriend's employer), but she did not choose to do so.

So in May, 2011 she goes to the emergency room in pain and is diagnosed with tumors requiring surgery.  Suddenly she's looking for health insurance.  She finds it in the PCIP (preexisting condition insurance program) that the government has setup.  Interestingly, in her blog post when she's gotten the insurance she details her pre-insurance bills and computes the cost of her surgery including an assumption of 4 months of insurance premiums.

So here is an individual who will not purchase health insurance, can probably afford it (with difficulty, but it's a matter of proirity).  When she has high medical bills she finds a way to get insurance (so somebody else pays most of her costs) and apparently plans to drop the insurance after a few months when she's recovered.

How is this Obamacare?  Over the last 50 years people have been told to do things for their own good, not done the smart thing, and then had the government force them to do so.  Thus automobile insurance is mandatory in (almost?) all states because people would drive without insurance, hoping they won't be in an accident.  People have been told for years they need health insurance, however many people won't purchase health insurance, assuming they will be healthy.

So here is the real reason for Obamacare -- to force the people who won't buy insurance to do so.

Yes, I know there are lot of things messed up in the US health care system and that the new health law does a lot of other things, but the essential change boils down to the government deciding that all people need health insurance and forcing them to buy it.

And while the woman in the picture above might be thinking of dropping her health insurance again, we can rest assured that in a couple years she will be forced to buy insurance again whether she wants to or not.

Tax Increase? What Tax Increase? Or, the No Accountant Left Behind act

Congress reached a compromise over extending the Social Security tax reduction and unemployment insurance.  In the process, Republicans did the thing they vowed never to do (raise taxes on the rich), President Obama broke his promise (raised taxes on those making under $250,00 per year), and it appears to have been done it in one of the worst ways possible.

Included in the two month extension of the reduced Social Security payroll tax is a tax increase.  For those making more than the Social Security limit ($110,100 in 2012), all income over that limit is subject to a 2% surtax.  This surtax is on the gross income, not reduced by deductions, exemptions, etc.  As written, it is on income over $18,350 received in January and February.

I'm writing this over a week after the bill passed.  I thought that by this time the tax increase would be all over the news, yet I've heard very little about it.  This is unfortunate, because the surtax is likely to have a much more significant effect than the other provisions of the law.

As far as I can tell, this bill raises the marginal tax rate of high earners between two and four percent for earnings above $18,350 over two months (those making over the social Security limit averaged over the year).  After all of the Republican rhetoric about the harm of higher tax rates, we have a higher tax rate.  After all of President Obama's rhetoric about only increasing taxes on those making over $250,000 per year, we have a tax increase for which also affects those making between $110,100 and $250,000.

What are the problems with this tax increase?

1. The change isn't clear.  The IRS notice, IR-2011-124, was confusing when I received it.  I looked at the bill itself, and the IRS notice doesn't accurately reflect the new law.  I think the IRS is going to need some time to digest the implications of this law, then the rest of us get to figure it out.
2. The tax reduction is only for income up to $18,350.  As best I can tell (the IRS gets to try to figure out for sure), Social Security tax is 4.2% up to $18,350 in January and February, then 6.2% for any income above that.  Companies will have to track income for the first two months of the year, something they don't do today.
3. The 2% surtax is for income over $18,350 in January and February.
4. As written, employers will have to provide employees with income over $18,350 in January and February with a report of income received during those months in addition to the usual W-2 statement of income for the year (so they can compute the 2% surtax).
5. If the lower, 4.2% Social Security payroll tax is extended for the full year, will those making over $18,350 for the first two months will have paid at a 6.2% rate for part of their income.  Will companies have to reduce Social Security withholding later in the year so it balances out to 4.2% overall, will taxpayers have to figure out a couple new lines on their tax form, or will the extra withholding just be left as-is?
6. Because the surtax is on "wages and compensation", it will be computed based on raw W-2 income.  I can think of several ways this might be interpreted (does it include income normally not subject to Social Security tax or not?), and it will be assessed on at best a line of the tax form which is currently not used in tax computations (W-2 income) and at worst on only part of the income on that line (since it can include various miscellaneous income).  Thus, the tax form will become more complex.

I will state up front, my concerns above may be completely unfounded.  The actual law will depend on how the IRS interprets it, and I am probably wrong.  But I think this shows the confusion and complexity around this simple provision (a few paragraphs in total).

The complexities of this law is why it might be better named the "no accountant left behind act".  Tax accountants, payroll providers, and computer programmers dealing with payroll are going to be in big demand to sort this mess out.

At this point, the question is what Congress does next.  If they extend this bill for the full year, it will eliminate some of the complexities I mention above (though introduce a few others for very highly paid persons).  If (could well happen) they extend the bill in units of a couple months through the year, things could become even more complex.

Regardless, I think a strong buy on companies like ADP (payroll services) and Intuit (Quickbooks software) might be appropriate.  I can see a lot of payroll outsourcing to deal with this latest morass.

The problem with economics -- ideology over science

I was struck by the following video from Prof. Greg Mankiw's blog.  Prof. Mankiw links to the following video by Prof. Stephen Marglin who discusses his alternative introductory economics course.

What I noticed within the first few minutes of the talk was the way Prof. Marglin treats economics.  Economics is not about describing how economies work.  Instead, economics appears to be about promoting ideology.  Prof Marglin describes his course as first outlining traditional (market based) economics, then providing critiques and alternative economic theories.  His real concern appears to be political results -- income redistribution, environmental concerns, "justice", etc.

Economics has long attempted to become a "science".  But to be a "science", economics must focus on how economies react to various events by trying to explain past events in the economy, then moving to predicting future events.  Introductory chemistry classes describe and explain chemical reactions.  They don't discuss which chemical reactions are good or bad.  Economics, and in particular Prof. Marglin's economics, focuses not on how economies reaction to actions but instead on the desired results.

I'm afraid I would suggest that Prof. Marglin might be more at home in a political science department.  To the extent his view exists predominates (and I got the Marxist professor for one semester of introductory economics back when I was in college) perhaps the economics department should be merged with political science.

Did the government cause the Financial Crisis?

A recent blog post by Cato Institute Senior Fellow Dan Mitchell describes a recent article by Peter Wallison, a member of the Financial Crisis Inquiry Commission (FCIC) as "superb".  In this article Mr. Wallison repeats his frequent claim that government affordable housing goals caused the financial crisis by forcing banks to lower mortgage standards.

What disturbs me most about articles of this sort is that they harm the cause of private enterprise.  By trying to excuse private failings while creating a government problem, they look like they are in the pay of big business (as the left has claimed, sorry I don't have a reference handy). Free market solutions are thus discredited as help for big business rather than being evaluated on their merits.  It is better to admit when markets fail and look at why they fail (and I mention a couple reasons near the end of this piece which can be laid at the government's doorstep).

Having read the full FCIC report, including Peter Wallson's dissent, along with other research into the financial crisis, I've become tired of reading Mr. Wallison's repeated claims of government culpability.  He's been giving essentially the same argument for the last two years regardless of the actual evidence, and even regardless of his own numbers.  In no way would I term any of his articles on this subject "superb" in terms of a factual analysis, though they are "superb" for those would would blindly take the view "government is always wrong and the private sector is flawless".

What follows is a critique of Mr. Wallison's FCIC dissent, followed by a few of my own comments on government culpability in the financial crisis.

Peter Wallison's FCIC dissent is a very one sided treatment of the crisis, excusing every possible flaw in the financial industry while magnifying every government flaw.  The short form of Mr. Wallison’s one sided treatment can be seen where he discounts “Failures in Risk Management” as a cause for the crisis, terming these a “hindsight narrative” (FCIC dissent, p. 446).  Yet blaming the government for relaxed lending standards, which at the time were not seen as risky and were adopted for purely private mortgage lending, is apparently not a “hindsight narrative”.  It appears that the government, which Mr. Wallison would most likely characterize as not qualified to set lending standards, is expected to have better foresight into the consequences of its actions than “expert” bankers, who are blameless for using subprime loans as collateral for AAA bonds.

Mr. Wallison’s selective reading of history is apparent in his repeated claim that there has been no significant deregulation of the banking industry in the last 30 years, instead stating that regulation has increased (FCIC dissent p. 445-6).  This must depend on one’s definition of regulation, I’d consider the removal of interest rate caps, forced elimination of branch banking restrictions, removing the separation of commercial and investment banking, and prohibitions on the regulation of new risky financial products traded in opaque markets to be deregulation.  I would hope that nobody denies that the financial industry of 2008 was (and still is) much different from the industry 30 years earlier.

In his latest article, Mr. Wallison again brings out Edward Pinto’s analysis of the mortgage market, claiming that the FCIC ignored this data showing government (HUD) caused the crisis by lowering lending standards.  Yet the FCIC report does discuss Mr. Pinto’s analysis (p. 219), and explains why it was not considered a valid analysis.  Mr Pinto’s analysis uses a very broad definition of “subprime” and “alt-A” mortgages, classifying many more loans in these categories than others.  Using the numbers from the Pinto analysis which Mr. Wallison presents in his own FCIC dissent it is clear why this analysis is not valid.  These figures show that the bulk of bad mortgages, both by percentage and absolute numbers, were in privately financed mortgages, not those backed by Fannie, Freddie, or government agencies like HUD.  From the FCIC dissent, Table 3 on p. 462, about 3.9 million out of 10.2 million private nonprime mortgages (38%) were delinquent as opposed to 2.4 million out of 15.5 million GSE nonprime loans (15%).  By comparison prime loan default rates were under 5%.  Thus, it appears there’s a significant difference between the GSE loans which only Mr. Pinto considers subprime and private market nonprime loans (which everybody considers subprime).

Using mortgage industry delinquency numbers (Mortgage Bankers Association 2Q 2009 delinquency report), two factors identify bad loans.  The first is subprime loans (using the MBA’s narrower definition of subprime, not Mr. Pinto’s very broad definition) and the second is adjustable rate mortgages.  Oddly, loans which are directly part of government housing policy (e.g. FHA) had relatively low default rates.  If government mandated lower lending standards caused the crisis, one would expect government held loans such as FHA loans to have the highest default rates.  From this and other data I conclude that the biggest failure in mortgage underwriting was in purely private loans, not those acquired by the government.

There is still the claim that government housing policy somehow forced these lower lending standards on the private sector and thus caused the bulk of bad mortgages.  There has certainly been pressure to increase low income mortgage lending, and at least modifying (some would say lowering) standards, both from HUD and from Community Reinvestment Act (CRA) agreements.  Yet two factors argue against this as a cause for the bulk of bad loans.

1. According to Mr. Wallison's own numbers, about 30% of the GSE (Fannie and Freddie) backed loans were affordable before the new goals (and reduced lending standards) began.  The GSE goals were around 50% affordable loans.  Thus GSEs only had to add 20% more affordable loans.  While banks had CRA agreements they needed to meet, most of these loans could be sold to the GSEs. It is not clear how this extra 20% or so of affordable loans could "force" Mr. Wallison's claim that 50% of all loans were subprime.
2. Mr. Wallison equates "subprime" or "alt-A" with "affordable housing loan".  Not in a specific statement, but it is quite clear throughout his dissent that in his view subprime mortgages only exist in large numbers to meet government goals.  This goes against the evidence that large numbers of these loans were for high end properties.  While apparently being forced to lower lending standards for affordable housing goals, banks also lowered standards for high end loans.  If these "subprime" loans were so risky, why did the banks make them?  If banks didn't think they were risky (as Mr. Wallison claims) then why was it so bad for the government to promote them?
3. Lending standards have dropped across the board.  Commercial real estate loans, home equity loans, automobile loans and credit cards are all much more easily obtained today than 30 years ago, yet I’m not aware of government programs or quotas which forced banks to reduce their lending standards in these areas.  Personally, I averaged roughly one credit card offer per day in the mail in early 2008 and close to that number of mortgage refinance offers.  It was easy to maintain an overall credit card limit of over 2 times annual income and still have banks knocking down the door to lend even more.  I expected a credit crisis, though in credit cards rather than mortgages.  It was clear banks were not interested in safe, quality lending but instead encouraged high levels of consumer indebtedness.

Mr. Wallison also claims that past housing bubbles, such as 1979 and 1989, did not result in a financial crisis.  This is quite true, yet the financial markets were much different during those earlier housing bubbles.  Mr. Wallison dismisses any role for securitization in the crisis by stating that securitization has been used for decades to finance lending (FCIC dissent, p. 447).  This may be true, but as far as I know it is only in the last 10 years or so that multi-tranche loan pools have become common.  CDOs are a relatively recent invention, as are credit default swaps (CDSs) and other more complex derivatives.  Giving a AAA rating to 90% or so of the value of a pool of subprime mortgages (see the FCIC report’s sample mortgage pool) also only became common in the last few years.

It is true that the financial crisis was triggered by problems in the mortgage market, yet the reason it was so serious (shutting down the full banking system overnight) could not have been due to a few bonds defaulting or getting lower ratings.  Rather, it was the amplifying effect of relatively new financial products which caused the system to collapse like a house of cards.  This presents the dilemma of unregulated banking today.  While people and businesses might sometimes lose money, that wasn’t the problem in Sept. 2008.  The problem was that most if not all of the major sources of credit dried up, leaving businesses having nothing to do with housing on the brink of collapse.  The philosophical issue is how to deal with the collateral damage when extremely large players in the economy get into trouble.

I would argue:

1. The Financial Crisis could not have happened in 1980 or even 1990, even if mortgage standards were lowered to the pre-crisis levels.  Mortgage debt was either kept by banks (which had to account for the risk), sold to GSEs (which had higher standards), or had to be securitized as traditional bonds, which would have garnered relatively low ratings.
2. The Financial Crisis was inevitable.  The industry was packaging many forms of consumer debt into high yielding AAA rated bonds.  The lower rated portions were being repackaged as CDOs with a high percentage of AAA ratings.  But the fact is that consumer debt is not as safe as government or high quality corporate debt.  ANY credit reversal would have triggered a similar crisis.  That it was mortgages reflected the higher dollar total of mortgage debt and spiraling housing prices.

This is not to say that government doesn’t share in the blame.  Some areas include:

Mark to Market:  From what I’ve read, Mark to Market rules left firms open to wide swings in the price of mortgage backed securities and other bonds.  Many of these securities being thinly traded outside public exchanges, their values were largely a matter of opinion and guesswork.  While, from what I understand, Mark to Market was adopted to prevent firms from valuing worthless assets or liabilities at face value on their books for extended periods of time, the downside of Mark to Market is to leave firms open to day to day panic swings in markets, when prices reflect immediate fear rather than an honest market value.

Bank Capital Rules:  AAA rated mortgage backed securities were given preferred treatment as capital over other AAA securities.  This increased the demand for AAA mortgage backed securities and made banks highly susceptible to ratings downgrades.

The Bear Stearns, Fannie, and Freddie bailouts:  Up until the Lehman Brothers bankruptcy the government had not allowed any big firms to fail.  The Lehman failure led in rapid order to the financial system shutting down in fear of the next failure.  We could likely have gone through a much smaller crisis if Bear Stearns had not been propped up in early 2008.  Alternately the TARP bailouts, etc. might have been smaller if the government had supported Lehman, reducing or avoiding the immediate panic.

Thus, looking at the facts, I can’t see the logic in blaming government housing policy for the Financial Crisis.  As with the failure of any complex system, there are numerous factors involved in the crisis.  And as with failures of other complex systems, the way in which the various factors combined to cause the collapse of the financial markets was unexpected and difficult if not impossible to foresee.  Mortgages may have triggered the crisis, but many other factors had to be in place to cause the disaster which resulted.

What next?

Now that President Obama released his birth certificate, what will happen next with the "birthers" and Donald Trump?

1. The birthers will say "we were wrong" and go away?
2. They will claim it's a forgery (as they have with the previously disclosed short form)?
3. They will move on to different claims such as that he's still not a real American (having spent part of his childhood in Indonesia), his school records haven't been released, Arabs paid for his college education, etc?
4. Create a new conspiracy over why he didn't do this three years ago?

Personally, I'm guessing #1 will not be the response.