Are Insurance Companies the Enemy?

August 21st, 2009

Here’s an excellent Caroline Baum column about the Obama administration’s blame game regarding why the public is resisting health insurance “reform.”  I want to focus on one point she makes that is a crucial concept of basic economics.

The administration’s and Congress’ latest tactic has been to demonize insurance companies.  Health care reform suddenly became health insurance reform.  This is a clever strategy.  Although most of us are very satisfied with our health care, it’s easy to get people to trash insurance companies.  After all, they get rich by taking in premiums, but denying us care for frivolous reasons whenever possible.  But there’s a problem with this commonly held belief.  It doesn’t match the facts.

My pat response to people complaining about some company or another that “exploits” us is simple:  buy their stock.  If they’re really earning the “obscene” profits you believe, this will be reflected in earnings growth and higher share prices.  Looking at the long term charts of insurance companies, it’s hard to make the argument that they are money making machines. And if their executives were keeping all the money via inflated pay packages, believe me you would have heard about it by now.

Baum quotes compensation expert Graef Crystal, who studied five major insurers for evidence of “gouging.”  According to Baum, “’There’s no case here for undue enrichment of shareholders’ or over-compensating CEOs, Crystal finds.”  The study actually found below market execcutive pay and shareholder returns.

I understand why politicians ignore the facts.  It makes it easier to demonize insurance companies.  But next time a friend goes on a rant about greedy insurance companies (or oil companies), simply respond “Why don’t you just buy their stock?  If they’ve got such a great scam going you’re sure to be rewarded with fantastic profits!”

Is Health Care Debacle a Cleverly Executed Plan?

August 12th, 2009

My initial reaction to the Democrats’ way-over-the-top trillion dollar plus health care monstrosity was glee.  I was confident the American public, overwhelmingly happy with their personal health care,  would soundly reject this hideous government intrusion and its obscene price tag.  Most of us understand that you don’t assume massive new liabilities at a time when you’re struggling financially.  This is a time for belt tightening, both for people and governments.

It’s true Americans are no longer the rugged individualists of a bygone era.  Many enjoy forcing strangers to pay our bills.  But the Democrats seemed to forget the first rule of the Fabian socialists:  gradualness.  Don’t try to go from Adam Smith to Karl Marx overnight.  Win your little battles, and over time you can accomplish dramatic change.  The public is the proverbial frog in the pot of cold water, slowly heating over the fire.  The capitalists have won the war without even dirtying our uniforms.  Or have we?

Call me paranoid, but I’m beginning to worry the Democrats might have something else up their sleeves.  In “Influence: The Psychology of Persuasion,” psychologist Robert Cialdini discusses the contrast principle.  This principle affects the way we view things presented one after the other.  Cialdini uses the example of a man entering a trendy clothing store looking for a suit and a sweater.  The customer might balk at paying $175 for a sweater.  But if  he’s already committed to buying a $900 suit, he’s much less likely to object to the price of the sweater.  The salesman knows this, and will always show him the suits first.

Another example of the contrast principal in action was G. Gordon Liddy pitching his Watergate plans to members of Nixon’s administration.  Initially he presented a wide-ranging scheme that left his audience with gaping mouths.  At the next meeting the group agreed to let him go ahead with a significantly scaled-down plan, which is the one he eventually used.  The only person to object to the latter plan was a gentleman who missed the first meeting.  He was aghast.  The contrast principal was not in effect, since he didn’t hear the first plan.  The rest of the group was relieved they halted the first plan, and figured they’d throw Liddy a bone.

It’s clear (at least to me) that there’s no way the current House health care plan will become  law at this time.  Public opposition seems to grow every day.  Blue dog Dems from conservative districts have no intention of losing their seats after one term.  So are Democrats using the contrast principal?  Do  they understand they’ll never get this plan enacted?  Perhaps they just intend to pass a few pieces of legislation that dramatically increase government interference in medicine, but don’t yet result in a takeover.  Opponents will breathe a sigh of relief, thinking they’ve won a great victory.  I hope I’m being paranoid…but it’s not paranoia if everyone is against you.

Government Health Care Reform to Save Us Money?

July 15th, 2009

Somebody in the US Congress has a sense of humor.  I don’t mean that the Democrats’ planned “millionaire” surcharge will kick in at an income of $350,000.  That’s classic Newspeak.  I’m talking about the part of the House Democrat health care bill where in 2012 the White House budget office will estimate the savings from this plan.  If they exceed $175 billion, all tax surcharges will be canceled.  Awesome!  We all know that government reforms always save us gobs of money.

Not funny?  Laugh and the world laughs with you…

Politics is Stranger Than Fiction

June 24th, 2009

Fannie Mae and Freddie Mac lost mega-billions guaranteeing bad mortgages.  I’m guessing most people reading this are aware that US taxpayers spent a bundle bailing out the two agencies.  That would seem to put you ahead of congressmen Barney Frank and Anthony Weiner.

With no trace of irony, these two are calling on Fannie and Freddie to relax new, tougher lending standards.  Previously the agencies would guarantee mortgages on condos in new buildings where at least 51% of units were sold.  In March Fannie raised the minimum to 70%, and Freddie is set to follow suit in July.

In a letter to Fannie’s and Freddie’s CEOs, the two professional politicians argue that the tougher standards will keep buyers away from new developments.  The mortgage giants did not comment immediately, but safe to say they didn’t adopt this new rule arbitrarily.  They see a building with heavy vacancies as having unacceptable risk.  Considering it’s my money at risk, I applaud them.  I just wish they took more actions like this over the past 30 years.

Can China’s Growth Bail Out the World?

June 23rd, 2009

Global stock markets have turned south this week following their spectacular recovery from the March lows.  Analysts blame the World Bank’s pessimistic read on economic activity for putting a damper on things.  Yesterday the body revised its estimate for this year’s global GDP contraction from 1.7% to 2.9%.  That’s quite a difference.  But was the earlier estimate reasonable?  And is the new one?

Most of the recent optimism about a global recovery centers on developing countries, particularly China.  Exports to the west and Japan are crucial to the world’s second largest economy.  Optimists hope China will make up for weakness in exports by expanding their domestic markets.

China has been the most exciting investment story of the last decade due to its spectacular growth and giant population.  So it’s easy to lose sight of the fact that China is still a relatively poor country. According to Xinhua News, the official news agency, per capita income of urban Chinese was the equivalent of less than $4300 per year in 2008.  Other sources put the figure closer to $2300.  Rural residents likely took in less than a third of that.  China became the world’s second largest economy not via wealth, but by the sheer size of its population.  Most Chinese still can’t afford many of the goodies the nation exports to the rest of the world.  So dramatically expanding domestic markets in the short term seems a tall order.

Many economies have fallen off a cliff:  year over year plunges in industrial production of 20% or more have been commonplace worldwide.  Countries have dramatically cut their imports due to lack of demand.  As the most prominent exporter, China must be absorbing a lot of the pain.  The government did produce a stimulus package to encourage consumer spending earlier this year.  But as we’ve already seen, it’s hard to imagine China’s domestic demand rising enough to compensate for the slowing exports.

Official numbers show China’s economy hasn’t emerged the global meltdown unscathed, as 1st quarter GDP growth came in at a 6.1%.  Although most countries would kill for this growth, it’s a considerable slowdown for the People’s Republic.  But China exercises heavy control over the dissemination of information.  Why on earth should we take their economic reports at face value?  Anecdotal evidence shows those who do business in China certainly don’t.

According to the Zero Hedge blog, Societe Generale strategist Albert Edwards thinks China may prove to be a huge disappointment to economists and investors.  Others have noted China’s energy use is down more than 3% over the past year.  This and other data (including a 30% drop in corporate profits) paint the 6.1% growth figure as extremely dubious (I’d argue darn near impossible, as electricity and business activity are heavily correlated).  Note:  Edwards is the guy who invited much derision by exposing the 1997 Asian asset and currency bubble.

I agree with Soc Gen’s prognosis that stock markets are in for a rough ride later in the year when the Chinese growth story begins to unravel.  If politicians worldwide are expecting China to bail them out, they will be bitterly disappointed.  Get your own house in order, and don’t look for a helping hand from Beijing.  Alas, I doubt many will take this advice.

U.S. Trade “Deficit” Plunges–Can We Bury This Myth?

June 17th, 2009

Today the Commerce Department reported the 1st quarter Current Account deficit (aka Trade Deficit) plunged by 34.5% from the previous quarter.  It’s the lowest level since 2001, which happens to be the last time the nation was in recession.

See the core article “When Bad News Is Good: Exploring the Trade Deficit Myth” for an explantion of why we shouldn’t worry about the trade “deficit.”  It’s not a deficit at all, and is nearly always larger when the economy is strong.  On the other hand, maybe the US can swing to “surplus” if the economy tanks further.  Given the choice, I’d prefer a huge trade “deficit” with a vibrant economy any time.

Oil Rising? Scapegoat the Speculators!

June 15th, 2009

Here we go again.  Crude oil futures are rising after their 2008 price collapse.  In the search for a politically incorrect bogeyman, pundits are pointing at those evil speculators.

Few of these pundits know the first thing about trading a physical commodity like crude oil.  If they did, they’d understand that speculators can’t manipulate the price of oil for an extended period without leaving obvious fingerprints in the form of expanded inventories.  For an explanation, see this piece I wrote last year “Defending the Rogues: Why Speculators Aren’t to Blame for High Oil Prices.”

Or we can all just blame “speculators.”  After all, they’re evil rich guys looking to profit off the misfortunes of others.

The REAL Problem With Healthcare

June 10th, 2009

I was just inspired by John Stossel’s piece “Competition Would Save Medicine, Too.” The debate over healthcare reform throws around terms like single payer and HMOs.  We can avoid socialized medicine with managed care.  But these solutions ignore a basic economic reality that dooms them to poor performance:  the people benefiting from the service are not paying for it directly.  Let’s touch on some motivations that drive all of us:

When I spend my money on myself, I care about price and quality.

When I spend my money on others, I care much more about price than quality.

When someone else spends his money on me, I care much more about quality than price.

When someone else spends her money on others, I don’t care too much about price or quality.

If I pay directly for my medical care, I want to ensure I get quality treatment at a reasonable price.  If my insurance company is picking up the tab, I still want quality treatment, but why should I care about the cost?  The company, on the other hand, is very concerned about the cost, but less interested in how well I’m treated.

I understand that certain medical treatments are beyond the cost of most people absent insurance.  But it’s the nature of medical insurance that needs fixing.  Insurance is supposed to protect us against large, unanticipated expenses.  Auto insurance helps you deal with the bill for an engine overhaul, but not the normal maintenance of oil changes.  Homeowners insurance will help you rebuild after a fire, but won’t repaint your kitchen if your kid takes a marker to the walls.  In the same way, health insurance should cover the expenses related to serious illness and injury.  It should not pay for every doctor visit and prescription related to your summer cold, or your child’s sore throat.

If our policies didn’t cover every little thing, their cost would plunge.  Then most of us could afford to insure against the really costly stuff.  What about the others?  Before the age of Medicare and managed care, many doctors volunteered to treat poor people, and were very flexible regarding payment for those of modest means.  (I hope to touch on the history of medicine pre-1965 in a future blog post).

So what’s the best answer right now?  In late 2003, the US government established the Health Savings Account (HSA) program.  To participate, you must buy a high-deductible insurance policy.  Accompanying the policy (which costs much less than most traditional policies), you fund your own savings account with tax deductible money each year.  It’s essentially a IRA that you can withdraw for medical expenses at any time without tax penalties.

Unlike earlier plans, the HSA is not “use it or lose it.”  You keep any money left over at the end of the year.  If you’re fairly healthy, your HSA can turn into a nice retirement fund.  Since you pay for most expenses with your own money, there’s an incentive to shop around for both doctors and pharmacies.  This competition should be beneficial down the road if more people utilize HSAs.

Whether we embrace socialized medicine or managed care, we ignore the basic human motivations that prevent us from getting what we need at an affordable price.  As Stossel says, competition provides us with the food and cars that we want and need.  There’s no reason it can’t give us medical care as well.

At Ford, Shunning the Government is Job One

June 9th, 2009

Most of the recent talk concerning the US auto industry centers around bankrupt General Motors and Chrysler, now owned by the US government and their proxy, the United Auto Workers union.

When GM and Chrysler chose to take taxpayer bailout funds last fall, they bought more time for business as usual.  They avoided making the tough restructuring decisions necessary for their survival.  No politician would want to see these companies fold months after wasting billions of dollars of taxpayer money.  Once the initial bailout was approved, the companies understood the government would eventually guide them through the restructuring process, whether inside or outside of bankruptcy.  But what’s going on at Ford, Detroit’s perennial number 2?

While the media focuses on the failures, there’s a phoenix gradually emerging from Detroit’s ashes.  Quietly, Ford Motor is outperforming domestic and foreign rivals, both in the showroom and the stock market.  The company became number one in US vehicle sales in May, easily besting Toyota.  And amid a severe global contraction and stock market slide, Ford shares have been flat over the past year.  Even their healthy Japanese rivals have slid in price.

Many analysts worry that Ford will face tremendous competitive disadvantages to GM and Chrysler.  After all, those two have shed most of their debt through bankruptcy.  But they are also beholden to their government and union masters.  Denials to the contrary, the government and the UAW will exert significant influence over GM and Chrysler’s strategic and operating decisions.  Which company do you believe is most likely to build cars people want?  Which company is most likely to attract investor capital?  A recent poll suggested many Americans would refuse to buy a car from a government-ruled company.

The only government-controlled entities that prove wise investments are monopolies.  GM and Chrysler must divest themselves of government influence quickly if they are to avoid becoming permanent wards of the state (think Amtrak).  Ford is certainly not out of the woods.  But turning down bailout bucks has earned them tremendous goodwill among potential customers.  And they can execute their business plans without pressure from Washington, DC.

Will the Stimulus Come Too Late?

June 4th, 2009

Interesting analysis from former presidential economic advisor Keith Hennessey on his blog.  Little of the “stimulus” money will be spent this year.  The purpose of stimulus is to inject money into the economy quickly, not years down the road.  This law was more about growing government.