Economic Security

 Irv Leveson's Economic Security Blog 

An Eighteen Point Program to Reshape ObamaCare  November 4, 2013

Raising the Medicare Eligibility Age Wouldn't Save so Much Money  November 4, 2013

Adjusting Social Security Benefits for Inflation  November 4, 2013

A Supercycle Decline in Commodity Prices?  November 4, 2013

Reverse Mortgages: Even Worse that I Thought  October 16, 2012

Did You Really Save $600 in the Medicare Drug Program?  October 16, 2012

More on Anemic U.S. Job Growth  October 16, 2012

Bad News Hidden In September Employment Report  October 5, 2012

Even If the Fiscal Cliff Is Delayed It Will Cost You  October 5, 2012

Why Inflation Will Increase  September 22, 2012

Economy in Peril  September 15, 2012

Rising Income Inequality: A Closer Look  May 25, 2012

Use the 2% Rule So You Don't Withdraw Too Much During Retirement  May 25, 2012

What If There Were No ObamaCare?  April 30, 2012

ObamaCare Cost Savings and Quality Improvements Will Be Harder to Come By than Hoped For  April 30, 2012

Tax Increases in 2013
  February 16, 2012

Dealing with Rising Interest Rates  February 13, 2012

2013 Scenario  February 13, 2012

Limits on Tax Deductions Can Be Dangerous to Your Financial Health  November 19, 2011

Two Tax Proposals to Help Those in Financial Difficulty  November 19, 2011

Some Good News and Some Bad News  November 19, 2011

Things Aren't What They Used to Be  June 21, 2011

The Challenge of Economic Security  July 7, 2011

Implications of an Age of Insecurity for Consumer Markets  June 27, 2011

Comparing Lifetime Social Security and Medicare Taxes and Benefits  June 23, 2011

Double Counting the Savings from Health Reform  June 16, 2011

You CAN Save in Tough Times  June 8, 2011

Still a Jobless Recovery  June 4, 2011

The U.S. Energy Department's Oil and Gasoline Price Projections through 2012  May 30, 2011

Greater Medicare Deficits  May 16, 2011

The Outlook for Housing Prices as of May 2011  May 10, 2011

It's Too Quiet  May 1, 2011

blog 32 November  4, 2013

An Eighteen Point Program to Reshape ObamaCare

ObamaCare is deeply flawed, not only in its implementation but in its basic structure.  Here are some ideas for changes and extensions which could contribute to an effective program providing access to care and quality as well as cost savings. Components that cost more could be paid for by revenue from higher ObamaCare penalties, a cap on employer tax deductions for insurance premiums, better income verification for subsidies and cost savings from tort reform, which are among the proposals.

Also see the blog: What If There Were No ObamaCare

1. Make it easier for people to keep their existing plans. For example, don't require dropping plans that were made non-compliant by plan changes in the last five years.

2. Allow the private exchanges that employers have been using as an alternative to existing plans to qualify for ObamaCare subsidies to enrollees as long as the value of benefits was not reduced from previous plans.

3. Reduce some of the added requirements for coverage that greatly add to cost. This includes ending subsidies to households above the median income as well as examining whether some requirements for added services can be modified.

4. Income verification – Make income verification for subsidies serious and more current.

5. More meaningful penalties – Raise the ObamaCare penalties for remaining uninsured to increase the pool of insured and keep premiums low. Raise them less for those under 35 that for others. The increase will reduce the numbers who go on insurance only when they need expensive care. Note that many younger people can stay on their parents' employer plans until age 26 and those with low or moderate incomes can receive large subsidies or go on Medicaid.

6. Portability – Allow workers to continue their health plans when they leave an employer. Subsequent employers could be required to pay up to as much as they pay in their own plans for employees that opt to continue their previous employer plan. An adjustment could be made for differences in costs when an employee changes to a job in another state.

7. Interstate – Allow individuals and employers that are currently limited from doing so to purchase health insurance across state lines. This will increase competition among insurance companies and allow greater choice of plans.Higher premiums could be allowed for those in states with higher health costs.

8. Cap the tax deductibility of all health insurance premiums at a lower level than under present law. By removing the subsidy for high cost plans, employees are encouraged to shop more for insurance, increasing competition. They also are more likely to purchase plans that don’t encourage obtaining the most costly treatments.

9. Rely less on Medicaid – Half of the planned expansion in coverage and possibly more of the actual expansion comes in Medicaid which offers poor access to doctors and low quality care. Expanding ObamaCare and reducing the income limits for Medicaid eligibility would result in better care for those with low and moderate incomes. This need not cost more since a large share of Medicaid expenditures is for nursing home and other  long term care. However, it would mean fewer people would be covered for long term care. With the shift, more of the cost would be borne by the federal government rather than the states.

10. A longer term commitment for federal funding of Medicaid expansion – Increasing the length of time the federal government will pay the lion’s share of the costs of Medicaid expansion will encourage more states to participate in Medicaid and result in fewer uninsured. It also could mean that in the future fewer states would drop their Medicaid expansion in response to having to pay a larger share of the cost. More people would keep their coverage, including coverage for long term care.

11. Increase the supply of physicians, including specialists to accommodate the rise in demand from ObamaCare, an aging population, and advances in medicine, including the growth of personalized medicine. Failure to do so will result in longer waits for procedures, more crowding of offices and less time with each patient, and more inadequate care. Shifting care to nurse practitioners, physician assistants, family doctors and hospitalists along with improving efficiency will not be sufficient to meet the need.

12. Increase the fee premiums for physician visits over visits to nurse practitioners and physician assistants. The narrow difference in Medicare fees discourages access of patients to physicians who are better able to deal with the whole patient and make necessary referrals to specialists. Avoid similar narrow fee differences in ObamaCare.

13. Eliminate the threat of sharp Medicare physician fee cuts – For seventeen years Congress has created a crisis and backed off from sharp physician fee cuts at the last minute. The effect has been to cause some physicians to refuse to accept Medicare patients, reduce hours or retire early. The threat of fee cuts is taken as a sign of things to come with ObamaCare. The law that imposes the formula should be replaced.

14. Introduce tort reform – Limit the ability of law suits to profit handsomely from settlements, which encourage defensive medicine and raise costs.

15. More fully fund ObamaCare – ObamaCare is hugely underfunded. If ObamaCare remains and benefits are to be retained without dangerously adding to the national debt, substantial cuts in ObamaCare or other programs or additional funding will be required.

16. Include immigration expansion only if funding is added to cover the costs – “Lawful residents” are eligible for ObamaCare. That means people who become non-citizen lawful residents under a future immigration reform bill will become eligible and will do so regardless of whether sufficient funding is provided. The definition should at least be changed so those who are added to eligibility by immigration reform but are not far along toward citizenship are eligible only if funding is added to cover their costs.
17. Make the Independent Payment Advisory Board bipartisan and accountable to the Congress – ObamaCare makes members subject only to presidential appointment and unable to be removed. It also makes their "proposals," no matter how extreme, become law unless Congress explicitly overrides them.

18. Remove the provision that limits the ability of Congress to amend ObamaCare to only a narrow window of time in 2017. It is hard to see how a law limiting the discretion of a future Congress could be constitutional. Repeal would eliminate a drawn out and disruptive court battle and prevent the President from taking actions in the meantime on the assumption that the law cannot be changed. Congress also could legislatively void Presidential actions that are contrary to the law.

House Republican depiction of the organization of ObamaCare

edited December 10, 2013
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blog 31 November  4, 2013

Raising the Medicare Eligibility Age Wouldn’t Save So Much Money

In October 2013 the nonpartisan Congressional Budget Office (CBO) examined the effects of a policy that would gradually raise the Medicare eligibility age from 65 to 67 as follows:
“…raise the age of eligibility for Medicare by two months every year, beginning with people who were born in 1951 (who will turn 65 in 2016), until the eligibility age reaches 67 for people born in 1062 (who will turn 67 in 2029). Thereafter the eligibility age would remain at 67.”1
A CBO study in January 2012 study estimated that such a change would produce budgetary savings of $113 billion over 10 years. The new estimate is $23 billion. The new estimate recognizes that new beneficiaries at ages 65 and 66 were in much better health that those who had gone on Medicare earlier because of disability or end stage renal disease. It also recognized that many 65 and 66-year-olds joining Medicare who had employment-based health insurance are less costly to Medicare.

The new study also noted that: “Those savings would be substantially offset by increases in federal spending for Medicaid and for subsidies to purchase health insurance through the new [Obamacare] exchanges and by the decreases in revenues.” The study estimated that by 2038 when most of the age increase would be phased in, spending on Medicare would be about 3% less than under current law, and that roughly two-thirds of the long term savings would be offset by the other effects.
The one-third net savings doesn't subtract the cost of medicaid to the states. Considering all aspects it is doubtful there would be any savings to taxpayers.

The age increase also would adversely impact insurance coverage and medical care. About 15% of the 5.5 million people affected by 2023 would go into the ObamaCare exchanges or the small group market which, unlike traditional Medicare, tend to have very high deductibles and limited provider networks. About one half million would become uninsured. Another half million would wind up on Medicaid which can be expected to continue to provide inferior access to physicians and care than Medicare.
1. Congressional Budget Office, “Raising the Age of Eligibility of Medicare to 67: An Updated Estimate of the Budgetary Effects,” October 2013.

edited December 10, 2013

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blog 30 November  4, 2013

Adjusting Social Security Benefits for Inflation

The Congress and the President have been considering changing the way in which Social Security and other benefits are adjusted to keep up with changes in the price level. The current method, using an index called CPI-U, has been criticized for overstating inflation because it doesn’t take into account the ability to substitute other goods when the prices of some goods rise. An experimental index called the chain-weighted CPI has been developed to correct for this bias.

Over the last decade the chain-weighted CPI has increased on average about .3% per year less rapidly than the regular CPI. Differences compound over time, so a difference of .3% per year would amount to lower benefits at the tenth year by more than 3% and at the 20th year by more than 6%.
In adjusting Social Security benefits for inflation it would be more appropriate to use an index that reflects what older people buy and the rates at which prices of those goods and services have been rising. Another experimental index called CPI-E does that. It recognizes that older people spend a larger share of their incomes on housing and medical care. Since December 1982 the CPI-E rose an average of .2% per year faster than the regular CPI. That puts it growing at a half percent per year faster than the chain-weighted CPI.

If instead one calculated a chain-weighted version of CPI-E it would presumably differ little from the CPI-U Index currently being used and would grow faster than the proposed chain-weighted CPI-U by about .2% per year.

The greatest impact of a change in the method of inflation adjustment would be on those who have recently retired because they will be subject to the adjustment for longer. That includes many people who retired early because they were hard hit by the Great Recession and the slow recovery. Moreover, since the benefit reductions become larger over time, they would impact them most when they become very old.

Why would politicians consider reducing the inflation adjustment of benefits for seniors when their inflation has been higher than inflation generally? The answer is that, in spite of promises of cutting Social Security benefits only for those who retire in a decade or more, in a difficult budget environment what they are seeking is a method of getting those that are already retired to share in the cuts. The chain-weighted CPI is very likely to be legislated and will be described as a technical adjustment rather than the benefit cut which it is.

edited December 10, 2013

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blog 29   November 4, 2013

A Supercycle Decline in Commodity Prices?

The decades-long upswing in many commodity prices and the sharp reversals after long term commodity price booms which have recurred over centuries have led some observers to warn of an impending commodity supercycle decline. Arguments include market reactions to the high prices, including induced technological change, most notably the impacts on energy production of hydraulic fracturing and horizontal drilling and advances in agriculture that raise productivity. Other major factors cited are the slowdown in world growth and the effects of a future return of interest rates to more usual levels after years of loose money policies of central banks.
Others argue that rising population, together with world economic growth and especially growth in Asia will cause prices to continue to escalate. Factors cited for a rise include the loose money policies of central banks, the concentration of oil, rare earths and other resources in politically dangerous parts of the world and the effects of environmental regulation, including actions out of concern about climate change. So which is it?

Some critical points emerge from the accompanying graph due to David Jacks of Simon Frazer University whose cycle measurements and observations helped to inform this article:1

  • The main cycle is in resources in the ground and less so in commodities that are grown.
  • Prices appear to be at or near a historical top.
  • Jacks notes there also is an upward trend at least since 1950 in both energy and non-energy prices as well as a supercycle.Commodity prices greatly overshoot the trend on the upside or downside.

The timing of reversals in commodity trends is highly unpredictable. A cycle peak can exceed a previous peak, especially when cycles are superimposed on a rising trend. Also, while prices can move quickly, nothing goes straight up or straight down. Different commodities can have different trends and there can be large moves in the opposite direction within an overall cycle’s rise or fall. These patterns can mislead about the underlying direction.

People who warned that the world is running out of resources in past cycle peaks have proved to be quite wrong. At the same time observers have failed to quickly see the strength of emerging developments that produced great changes in commodity prices. Examples include the perfection of hydraulic fracturing at Mitchell Energy in 1998 after twenty years of unsuccessfully trying and the shift of China to rapid growth after 1976.

The world seems to be close to or already in a commodity supercycle decline, but that is uncertain and the timing is hard to pin down. It may be just a business cycle move, albeit a significant one, following recession and slow recovery, or it may be because the world has moved onto a slower growth path. It also may be limited to a few commodities.

Once the world emerges from its current period of financial deleveraging it might see renewed growth, and the greatly expanded money supply could return to more usual rates of turnover and generate higher inflation. Alternatively, there could be a new global recession or regional financial crisis that hammers commodity prices. At some point in the future, in the present cycle phase or a later one, extensive country debt and demographic problems could create disruptions that induce widespread supercycle commodity price declines. Look out for how these develop as you form your own view.

1. David S. Jacks “From Boom to Bust: A Typology of Real Commodity Prices in the Long Run,” Working Paper 18874, National Bureau of Economic Research, March 2013.

edited December 10, 2013

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 blog 28 October 16, 2012

Reverse Mortgages: Even Worse than I Thought

Reverse mortgages let you take equity out of your house, either through a line of credit, a regular monthly payment or a lump sum. In exchange, the ownership of the house transfers to the holder of the mortgage when you move or die.

I have long been opposed to reverse mortgages for most people because often those who are unable to afford living in their home without the mortgage will need the equity even more later on. For them it is better to take the difficult step of living on less, even if it means selling the home. (Economic Security p.92)

For people who take a monthly payment, the payment doesn’t rise with inflation so their finances continue to fall behind. In effect, they are taking out equity too fast.

Also, the mortgage holder gets the benefit of the appreciation when home prices rise. The homeowner may need that equity even more in the future when the cost of living is higher or medical bills rise. It is no accident that ads for reverse mortgages are so frequent now that housing prices are low.

But it’s even worse. It turns out that 70% of reverse mortgages are taken as lump sums, up from 3% in 2008. Many people may be spending that money much too quickly and setting themselves up for serious problems later on. Some are even being encouraged to put the home in the name of only one spouse, which means the other spouse loses the house when that spouse dies.*

The Hollywood stars that are lending their reputations to prominent TV ads: Robert Wagner, Fred Thompson and Henry Winkler, ought to apologize to their fans. They may not know how many lives they are helping to ruin or they may not care.

*Jessica Silver-Greenberg, “A Risky Lifeline for the Elderly Is Costing Some their Homes,” The New York Times (October 14, 2012)

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 blog 27 October 16, 2012

Did You Really Save $600 in the Medicare Drug Program?

The Obama Administration frequently states that ObamaCare saved more than $600 for each person in the Medicare Part D drug program in 2012 by shortening the coverage gap (doughnut hole). However, for many people, this is not the case because the drug companies simultaneously took actions that reduced benefits. To determine whether your costs declined or increased you need to look at:

  • Whether and how much your Part D premiums increased more than usual.
  • How much more than 2011 you were charged for drugs in each tier, both before the doughnut hole and, if you go over, for purchases above the doughnut hole.
  • Whether any drugs that were previously covered are no longer covered.
  • Whether any drugs you take were moved into a higher, more expensive tier (check the formularies for the two years).
  • Whether quantity limits or other restrictions were added and how that affects you.
  • Whether any drugs you take no longer require a prescription, which means you now pay all of the over-the-counter cost.

Check for changes in 2013. Make sure changes aren’t being postponed until after the election. (My most expensive drug is no longer covered in my plan in 2013.) If your costs are going up, you might shop plans during the open enrollment period from October 15-December 7, 2012 to see if you can do better. See Medicare & You 2013 for details.

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 blog 26 October 16, 2012

More on Anemic U.S. Job Growth

Between March and September 2013, total employment rose by 940,000 and part time employment rose by 941,000. That means the rise in full time equivalent jobs was perhaps half as great and new jobs didn’t create strong income growth or benefit coverage.

The proportion of people in the labor force – either working or looking for work – has declined because many have been discouraged from looking when jobs are scarce. Some argue that a major factor in the decline in the labor force participation rate was the retirement of baby boomers. However, more people retire early when jobs aren’t available. Moreover, the proportion of older people in the labor force has been trending upward over the last decade as recognition of the need to prepare for long years in retirement increases.

Furthermore, at this stage in the business cycle one would expect many immigrants who left because of declining opportunities to return. Some of those are counted in the household survey that is used to measure unemployment and labor force participation. The combination of a weak labor market and greater immigration enforcement has limited that. Otherwise, even more people would be counted as looking for work.

The proportion of the population that is working has remained relatively flat and at a low level. This means that by and large, jobs are being created only at a rate that accommodates labor force growth and not in sufficient quantity to make a large dent in the unemployment rate. The September 2012 change was greater. We’ll see if subsequent months indicate more of a positive change and whether improvement continues or is reversed at some point by adverse tax incentives, budget austerity and developments in other countries.

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 blog 25 October 5, 2012

Bad News Hidden in September Employment Report

The rise of 873,000 jobs in the Bureau of Labor Statistics’ Household Survey produced a
decline in the unemployment rate from 8.1% to 7.8%. However, this was accompanied by a rise of 582,000 in the seasonally adjusted number of people working part time for economic reasons. These may largely be temporary jobs for the holiday season. Moreover, the number of job losers and people who completed temporary jobs declined by 468,000. This suggests more people were retained for the holiday season. A rise in part time and temporary seasonal jobs is not a lot to get excited about.

Some of that may have come about because more unemployed workers were willing to take lo
w wage, part time and/or temporary jobs when their unemployment insurance was running out. (The Federal Emergency Unemployment Compensation Program has been phasing out in states with relatively low unemployment rates.

In its October 6-7 lead editorial, the Wall Street Journal suggested: "One suspect in this shift to part-time work is the cost of providing health insurance, especially with ObamaCare looming."

It will take changes in policies to get more sustained growth in full time jobs.

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  •  blog 24 October 5, 2012

Even if the Fiscal Cliff is Delayed It Will Cost You

The increases in taxes and cuts in spending that were scheduled for January 1, 2013 could be delayed, to allow time for revision. Nevertheless, important changes could take place on the first of the year.
  • The employee Social Security payroll tax rate will return to 6.2% from 4.2%.
  • An individual earning $200,000 of more or a married couple earning $250,000 or more will have to pay:
  • An extra 0.9% in Medicare payroll taxes.
  • A new 3.8% tax on “unearned income” such as investment interest, capital gains, annuities and rents.
  • The Emergency Unemployment Compensation Program (EUC) which extended unemployment benefits for long term unemployed will end. It is being phased out sooner in states with lower unemployment rates.
Of these, the rise in the payroll tax and the end of the EUC are most certain.

The full reinstatement of the payroll tax will take $115 billion out of the private economy while the health care tax will take out $24 billion. These estimates are according to the Tax Policy Center of the Urban Institute and Brookings Institution. In addition, Congress has frozen spending from October 2012 through March 2013. Of these, the rise in the payroll tax and the end of the EUC are the most certain.

The increased taxes and reduced spending will slow the economy and could move it into recession even without the main fiscal cliff provisions.  Uncertainty during drawn out negotiations over the larger tax and spending decisions could contribute to the slowing. Under these conditions earnings would do more poorly and a renewed rise in  unemployment would result.

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 blog 23, September 22, 2012

Why Inflation Will Increase

It was far from a consensus when I stated in Economic Security that:

“Inflation can be expected to return over the next several years….it is necessary to plan on high and rising inflation, and that could happen sooner than many people think.”
Inflation has been under 2% according to the measure which the Federal Reserve Board prefers. The Fed argues that inflation will remain low because there is a lot of slack in the economy (high unemployment, low labor force participation, low capacity utilization of factories and stores) and growth is slow. However, reasons to believe that inflation will increase are stronger than they have been in a long time.  These include:

  • The flood of liquidity put into the U.S. and world economy by actions of the Fed, Europe other countries
  • High energy prices that will be passed through to consumer prices, with the possibility that much of the increase that has already occurred will be more than temporary and more will come
  • Rising food prices, with large increases in wholesale food prices about to move to retail products
  • A weakened dollar after the Fed announced a third round of quantitative easing, which results in higher prices for imports and higher prices for domestically-produced goods that compete with imports
  • Slower productivity growth at advanced stages of recovery even though the recovery is weak and incomplete
  • Businesses passing along a lot of the costs of tax increases that are scheduled for January 1, whenever they go into effect
  • The Affordable Care Act (ObamaCare), if allowed to stand, adding inflationary pressures as millions of people become newly eligible for health benefits and put pressure on a medical system that has not been provided with a corresponding increase in supply
  • The prospect of a flood of new regulations that add costs and impede expansion of capacity and competition
Once inflation expectations become ingrained they are hard to remove and can easily increase. Some economists argue that the U.S. can’t have much inflation unless wage increases are strong but that is not necessary with everything else going on. While the greatest inflation is most likely to come whenever the economy is strong and banks have built up further reserves, inflation can be high even in a weak economy – witness the 1970s “stagflation.”

Inflation will heavily hit bondholders and pensioners on fixed incomes, as well as workers whose wages lag behind price increases and businesses that have difficulty in passing along cost increases. It also will add to the interest that has to be paid on the skyrocketing national debt.

The Bank for International Settlements reported that:

"Total assets held by central banks have roughly quadrupled over the last decade and stood at approximately $18 trillion at the beginning of 2012."

No wonder gold has been going up.

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 blog 22, September 15, 2012

Economy in Peril

The U.S. economy faces the prospect of renewed recession next year as a result of the “fiscal cliff” on January 1 that consists of the expiration of the Bush era tax cuts and the trillion dollar ten-year government budget cuts (the sequester) that will reduce spending by $109 billion between January and September 2013. The sequester also will cut $11 billion per year from payments to Medicare providers. In addition the Social Security payroll tax cut will expire on January 1, raising the rate back from 4.2% to 6.2% at an annual cost of $120 billion. The alternative minimum tax “patch” will expire, causing millions of people to pay higher taxes. The Affordable Care Act will impose an additional 0.9% Medicare payroll tax and place a 3.8% “unearned income” tax on interest, capital gains, annuities and rents of individuals with gross income of $200,000 or more and couples with gross income of $250,000 or more.

The European recession which is getting deeper will make a U.S. recession more severe.

Some of the U.S. tax and spending changes are likely to be modified and/or postponed; a bill extending current spending levels through March 2013 is expected to be enacted before the end of September. However, the effects of the remaining changes are likely to be large. There may be some new fiscal stimulus and the Fed’s September 13 quantitative easing will have some positive effects. Nevertheless, the net result is likely to be recession, if not in 2013, then by 2014.

I recently set out some scenarios for the U.S. and the world economy in the next 2-3 years, not including some extreme or more long term possibilities. The article: “GNSS in the Global Economy” is in the September issue of GPS World at  
(GNSS stands for the Global Navigation System of Systems which includes the U.S. GPS system of satellites and supporting ground stations and navigation satellite systems that are operating or under development by Europe, Russia, China and India.)  

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 blog 21, May 25, 2012

Rising Income Inequality: A Closer Look

One cannot get a true picture of changes in income inequality without taking into account changes in taxes, government payments and demographic composition of the work force. When this is done, the picture that emerges is quite different from the degree of inequality and the rapid rise in income inequality that has been proclaimed.

Higher income households as a whole pay a larger share of income in taxes as well as a higher absolute amount of tax. This is in spite of taking advantage of various tax preferences. This should be evident considering that nearly half of the population pays no federal income taxes and that state income taxes, where they exist, tend to be highly progressive.

Some reports include Social Security payroll taxes in their calculations of income distribution. But Social Security provides benefits that are far greater than tax payments for with low incomes. Looking only at the taxes gives a distorted view.

When both taxes and benefits of programs including public assistance, the Earned Income Tax Credit, Medicaid, food stamps, Medicare and Social Security are taken into account, the distribution of resources is much less unequal than in numbers that only look at income.  The differences that remain are the result of many factors, including whether households have more than one earner, the growth in out-of-wedlock births and broken families, effects of growing international competition on blue collar wages, and differences in ability, skill and motivation. Of course they also reflect educational and job opportunities, health and other factors that contribute to society’s desire to have some government redistribution of income and services.

Up-to-date data on changes in income distribution that take proper account of taxes and benefits are not readily available. Since income primarily represents spending power, we can get an idea of changes in income inequality by examining inequality in how spending is distributed. This was done in a recent Manhattan Institute study by Diana Furchtgott-Roth. Examining changes between 1985 and 2010, she found that: “…inequality as measured by per capita spending is no greater today than it was in the 1980s.”

 Ratio of Spending per Person in Top 20% of Income to Spending Per Person in Bottom 20%
 1985          2.5
 1990          2.4
 1995          2.5
 2000          2.4
 2005          2.5
 2010          2.4

Those with higher incomes save a larger proportion of their income than those with lower incomes. This means that rising income inequality could lead to greater inequality in assets even if shares of spending of those with high and low consumption remained the same. This appears to have been the case over recent decades.

Some have focused on absolute differences in income between groups. If all incomes rise proportionally, absolute differences increase. However, society’s definition of a poverty income has tended to rise less rapidly than average income. Even more attention has gone to incomes at the very top. These have become especially unequal. This is exemplified by the amount of press about levels of CEO compensation and its relationship to performance.

Recent views appear to be heavily influenced by the experience of the 2008 Great Recession and the slow recovery that has followed. Greed is seen as a major contributor to the boom and bust. Slow recovery has been associated with persistent high unemployment, and lackluster or declining real (above inflation) wages for average workers and especially for recent labor force entrants. While high income groups were also affected by the recession, those with lower incomes were affected disproportionally and have recovered less rapidly.

Inequality is high, but when taxes and benefits are considered it is not as high as some claim, and it has always been high. Inequality has increased, in part because of more multiple earner families among the middle class and declines in the prevalence of multiple earners among blue collar workers. Demand for high skills has had a large influence. Inequality of income and wealth has increased most at the very top and that raises important issues.

A fundamental question is what has happened to equality of opportunity. Scott Winship, a fellow at the Brookings Institution, notes that while some of the richest Americans have increased their share of income, there aren’t signs of weaker movement of people from the poor to the middle class over the past 50 years. That may be changing, but how much change is because of government intrusion into the economy that makes it less flexible and distorts personal and work incentives? How much can mobility be increased by better preparing people for the skills needed in a modern society, imposing less overbearing regulation and bureaucracy, and giving market incentives more room to work?

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 blog 20, May 25, 2012

Use the 2% Rule So You Don’t Withdraw Too Much During Retirement

With interest rates low and returns on most other investments low or uncertain, it’s easy to withdraw too much from your retirement nest egg and not have enough later on. The rule of thumb that many investment advisors have used of withdrawing 4% each year is no longer appropriate. While it takes into account longer and rising life expectancy, it does not reflect today’s low interest rates. Moreover, a rule needs to be flexible so it can adjust when investment returns and inflation change.


A useful rule is to: 1) estimate what the average annual percentage gain on your portfolio will be over the next few years. Include interest, dividends, capital gains and any other type of investment income. 2) Subtract what you think the rate of inflation will be to obtain the rate of return over inflation. 3) Then add 2%.
For example, with investment gains of 5% and inflation of 2%, you could withdraw 5-3+2 or 4% of your nest egg each year. However, with a 3% return and 2% inflation, you could only withdraw 3-2+2 or 3% per year. With a 2% return and 2% inflation you could only withdraw 2-2+2 or 2% per year. On the other hand, with gains of 6% and inflation of 3% you could withdraw 6-3+2 or 5% per year.

Some of your withdrawals may be determined by regular Social Security, pension or other payments. You can calculate withdrawals you choose from your 401K, IRA and other investments according to the 2% rule of thumb and add that to your regular payments. You also need to keep a reserve for emergencies that is not part of the calculation.

These numbers are not conservative since the cost of living may go up more rapidly for retirees than general inflation, tax rates can be expected to increase, most traditional pensions are not indexed for inflation, and health and long term care costs may be less fully covered by private insurance and government programs in the future. If you make greater withdrawals than the 2% rule determines, for example because you expect investment returns to be greater later on, recognize that doing so will leave you less money to make money when returns are higher.

Staying within the 2% guideline is not easy. However, withdrawing too much can leave you vulnerable when you are much older and have fewer ways to adjust spending and avoid becoming dependent on others. If you have to change the way you live it is better to do it sooner rather than later.

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blog 19 , April 30, 2012

What If There Were No ObamaCare?

Also see the blog: An Eighteen Point Program to Reshape ObamaCare

The repeal of the Affordable Care Act would open the door to a host of proposals, many designed to provide incentives for the private sector or reduce the role of government in health insurance and delivery of care. These have various pros and cons.

The obvious answer to expanding coverage, if the ObamaCare requirement to purchase insurance or pay a penalty is not found legal or isn’t acceptable, is to much more heavily subsidize the purchase of health insurance for low and moderate income people. This would be extremely costly for taxpayers at a time existing entitlement programs already are greatly underfunded. Moreover, costs could skyrocket if employers widely dropped coverage and states reduced Medicaid eligibility to pass costs on to the federal government.

Another insurance approach is to allow insurers to sell policies across state lines. This could hold down costs by increasing competition. Insurers would avoid costs of dealing with diverse requirements and bureaucracies of 50 state insurance departments. Choice and competition could be facilitated by a national exchange. Some are concerned that competition would cause the services covered by insurance to gravitate to the least encompassing, but that could be addressed by uniform national standards in a national exchange.

Public plans that potentially could be subsidized or operate under different rules compete with private plans. By crowding out private plans they could result in less rather than more competition. ObamaCare includes a so-called “hidden public option” to be offered by the U.S. Office of Personnel Management that operates under different rules than plans in state exchanges.

Economists have long advocated reducing or eliminating the tax deductibility of health insurance premiums by employers. Capping the deductible amount of insurance premiums at the cost of a basic policy would, it is argued, cause employees or their employers to shop for insurance that was less likely to cover unnecessary or excessively costly care. Some employers would pay most or all the difference over the basic cost, but in other cases the employees would be responsible for additional costs and would have an incentive to choose other than the most expensive policies.

Fully removing the tax deductibility of employer-paid premiums, which also has been suggested as part of efforts to reduce the deficit, could cause many employers to cut back on the number of workers covered or drop insurance completely. Some have suggested going in the opposite direction – giving people who purchase individual policies the same tax exemption as employers rather than limiting the deduction to the amount of medical expenses over 10% of income. Those who are self-employed already have that ability.

The Ryan plan and others have proposed premium support (e.g. for Medicare), which involves the government giving each eligible person or family a fixed amount of money to buy health insurance. There are two problems with this approach. The first is adverse selection. If applied in a voluntary program, people with the greatest anticipation of medical expenses are most likely to sign up.To allow for this, insurance companies set the rates very high. Many people, including many with high medical costs, are priced out of the market. The second problem is that, given the ongoing severity of government financial pressures, the amount of premium support could fall far behind medical inflation, leaving a growing share of the costs to fall on patients, especially those with high medical expenses. This impact would be mitigated to the extent simultaneous extensive cost-cutting measures were successful.

Another approach, health savings accounts, would allow employees to save money up to a limit in tax deductible accounts that could be used for medical care. This, however, would give much of the tax benefits to people with low or moderate medical expenses. Those with high expenses would be least able to save to take advantage of the tax benefits. 

Tort reform also could potentially help to control costs. Limits on fees or settlements could reduce litigation and help to hold down the high costs of defensive medicine - medical personnel performing additional procedures to avoid high malpractice claims and malpractice insurance costs. However, practices are ingrained and it would take a long time before really large costs savings could occur.

Ultimately, more will have to be done to determine when particular treatments should be widely used. Such decisions are highly contentious in the scientific community as well as the public because they reflect not only what we are willing to spend but also how we value risks and the quality of life. While developing consensus on coverage of individual treatments is messy, such decisions cannot be made solely by independent panels, overall budget formulas or insurance interests.

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blog 18, April 30, 2012

ObamaCare Cost Savings and Quality Improvements Will Be Harder to Come By than Hoped For

Cost savings are critical not only because of strains being created by the rapid rise in health costs, but also because of the massive underfunding in the “Affordable” Care Act (ObamaCare), Medicare and Medicaid. Spending can be held down by setting arbitrary spending limits or by administrative actions and decisions of panels that are dominated by concerns about costs. Preoccupation with cost can reduce quality and thwart innovation, which has been a real concern.

What about efforts in the “Affordable” Care Act or consequences of it that affect the structure of medical care? An early look is not promising.

ObamaCare covers 30 million people who do not presently have insurance. It does hardly anything to increase the supply of doctors and other medical personnel. Doctors experiencing a flood of new patients will spend less time with each one. Many patients will be shunted to nurse practitioners and physician assistants who are less able to deal with the complexities of today’s and tomorrow’s medicine. More doctors will retire earlier because they don’t like to work under the new regulations. These problems will be exacerbated if physicians’ fees are cut.

The Act increases Medicaid enrollment by 15 million. Most doctors don’t accept Medicaid now because the fees are so low. Many people who did not get care before will go to emergency rooms which are required by federal law to treat them and are more costly and already overcrowded.

The “Affordable” Care Act requires or encourages a number of measures to contain costs and/or improve quality. One such effort is Accountable Care Organizations. By virtually requiring that hospitals and doctor groups merge in an effort to control costs, the Act has already led to substantial decreases in competition in some markets that add significantly to costs.

Substantial hope was placed in the notion that improvements in quality would lead to lower costs. Some efforts have demonstrated that the result is often increases in costs.

A new coding system known as ICD-10 was intended to produce much more detailed information in billing by medical providers, reducing “upcoding” and providing a wealth of data that can be used to control costs. However, while medicine is changing, the coding system is already 14 years old and more than 5 years behind in its latest planned implementation. The increase in the number of codes to 68,000 from the 13,000 codes in ICD-9 which is in use today will impose considerable costs, both directly and in initial disruption of care and billing, and the necessity of some of the information has been questioned. ICD-10 requires detailed data on the location in the body of a procedure (e.g. left or right foot) and the order in which procedures were performed, and 60% of its codes refer to injuries vs. 15% for ICD-9.

Another initiative involves public reporting of providers’ performance. Public reporting is supposed to cause providers to improve their quality of care. The evidence on whether providers adopted better procedures or health outcomes improved is mixed.

The extent to which positive impacts are limited is evident in the titles of some articles in the March and April 2012 issues of the prominent research and policy journal Health Affairs, which is an avid supporter of ObamaCare:

“'Shoe-In' Strategies Bump Up Against Reality”

“Giving Office-Based Physicians Electronic Access to Patients’ Prior Imaging and Lab Results Did Not Deter Ordering of Tests” [It significantly increased it.]

“Medicare’s Public Reporting Initiative on Hospital Quality Had Modest or No Impact on Mortality from Three Key Conditions”

“There Are Important Reasons for Delaying Implementation of the New ICD-10 Coding System”

“Medicare’s Flagship Test of Pay-for-Performance Did Not Spur More Rapid Quality Improvements among Low-Performing Hospitals”

“High Profile Investigations into Hospital Safety Problems in England Did Not Prompt Patients to Switch Providers”   

“Lower Mortality Rates at Cardiac Specialty Hospitals Traceable to Healthier Patients and to Doctors Performing More Procedures.”

No wonder some people are proposing different models based on more competition and less government regulation.

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 blog 17 February 16, 2012

Tax Increases in 2013

Huge tax increases will take effects on January 1, 2013 unless major changes are made in existing laws.  These are in addition to whatever is kept of the part of the mandated budget cuts that takes effect at the same time.  More budget cuts will take effect in each subsequent year.  High debt and budget imbalances will mean additional cuts and tax increases in later years.  Most individuals and financial markets have not yet come to grips with the extent of these changes and their consequences (see 2013 Scenario).

The tax increases taking effect in 2013 include:

  • Personal income tax rates will increase in every bracket.
  • The capital gains tax rate will rise from 15% to 20%.
  • The tax on dividends will rise from 15% to 36%.
  • There will be an additional tax of 3.8% on “unearned income” for married people with incomes above $250,000 and singles above $200,000.  The surcharge affects interest, capital gains, dividends, annuities, rents and royalties, as a result of the Affordable Care Act (ObamaCare).
  • The “patch” for the Alternative Minimum Tax that prevents millions of additional people from being hit by it will expire.
  • The standard deduction will no longer be doubled for married couples relative to the level for singles.
  • The phase outs of the personal exemptions and itemized deductions for high income taxpayers will be reinstated.
  • The child tax credit will be reduced from $1,000 to $500.
  • The dependent care and adoption tax credits will be cut.
  • Inheritance taxes will increase.
  • Medical expenses will only be deductible if they exceed 10% of income instead of 7.5%.
  • There will be an additional 0.9 percentage point Medicare tax on earnings over $250,000 for married couples and $200,000 for singles affects both workers and self-employed but not the employer portion of the tax (per ObamaCare).
  • Businesses will no longer be able to depreciate 100% of investment expenditures during the year the investment is made.

This is not a complete list and laws are changing, so please check with your tax advisor.

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 Blog 16 February 13, 2012

Dealing with Rising Interest Rates

This might seem like a strange topic when the Federal Reserve has committed to keeping interest rates low into 2014.  However, with interest rates at historic lows, even a partial return to more normal levels could have major consequences.  That will happen sooner or later, and some pundits expect substantial rate increases some time in 2014.  It is not too early to think about how to prepare and to take some steps.

Don’t act as if there is plenty of time to refinance a mortgage or to make a home purchase that is made possible by low interest rates.  If you wait too long, that window can start to close.

Recognize that the value of bonds falls when interest rates rise.  That means you may want to have more of the money that you expect to stay invested for a few years in a CD or bank money market account where the principal doesn’t decline.  Of course, how far you go in that direction depends on the interest rates you can earn in those accounts vs. elsewhere.   If bond rates are high enough that may compensate for the possible loss of bond value.  Also, if you have a bond that is close to maturity, there is less risk that it will lose value when rates increase.

It matters what the reason is for interest rates increasing.  If rates rise because the Federal Reserve unwinds its holdings of bonds, the rise can adversely affect stock prices.  If rates increase because inflation moves higher and corporate profits are able to keep up, stocks may be the way to keep up your purchasing power if you can handle the risk.  If they rise both because the economy strengthens and inflation increases, stocks may be an even better bet.

Commodities can offer an inflation hedge, but not without risk.  Gold can stagnate for years before surging, and some increase in inflation may already be built in to the price.  Silver prices depend on demand for jewelry and industrial applications that are tied to economic growth, as well as for its role as an inflation hedge.  If inflation is accompanied by a weak global economy it may not do well.  Oil is a hedge against inflation arising from geopolitical developments and other supply problems and against inflation from increasing global economic growth.  Oil prices can have sharp and sustained swings in either direction.  People tend to forget that high oil prices induce investment in production that can greatly lower prices a couple of years later.

The good old days of the 1980’s when interest rates were falling and people who bought bonds when rates were high made out very well are long gone.  Now we may transition to a new long term inflation cycle from all the liquidity that governments in the U.S. and Europe are adding and from pressure on commodity prices and rising wage and other costs in developing countries.  While a rise in inflation and return to more usual interest rates may be delayed or tempered for a while, riding interest rates up is a lot less fun.  

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 blog 15, February 13, 2012

2013 Scenario

The Legacy

Great economic uncertainty will continue through this year and next. While employment has been picking up, a rise is expected during recovery after employers stretch work forces thin to meet rising demand and have to step up hiring.  Typically, that process doesn’t last for too long as the seeds of the next recession begin to bloom.  In the current climate, those seeds do not consist of the development of new economic excesses.  Those excesses are already there in the extreme with unsustainable debt at all levels of government.  Tax increases and cutbacks in spending that will have to follow.  Moreover, the legacy of the 2008-2009 recession includes undercapitalized banks that will have to increase reserves, with the increases continuing to retard lending.  Housing problems still restrain consumer lending.  They will continue to adversely affect banks, as will excess capacity in commercial office and retail space.  Consumer spending cannot rise quickly as long as personal debt remains high.  And insurance companies are being weakened by low interest rates, adding a threat of an additional crisis.  Then there is the possibility of geopolitical crisis or military developments involving Iran and other trouble spots and the effects of of geopolitical developments on oil prices.  These risks to the economic downside are what led Ben Bernanke to promise low interest rates for the next two years.

The Prospect

To the extent they are not watered down or deferred, the tax increases from the expiration of the Bush tax cuts and the trillion dollar budget cuts will kick in in 2013. Tax increases from ObamaCare will occur at the same time.  If the partial tax holiday in Social Security tax collection and end of extension of unemployment insurance benefits are deferred from the end of February until the end of 2012, they will hit along with the other tax increases and spending cuts.  These measures will shock the economy.  The approach of these actions could tank the stock market, further hurting confidence and spending.  On top of that, after a year of election uncertainty will come a new round of political battles and gridlock.  The next president will try to make many changes administratively and face heightened court challenges.

The recession and possible further crises in Europe and the slowdown in China and other countries will hurt the U.S. economy.  Problems from slow growth abroad and from crises can spill over into the U.S. through the financial markets and difficulties of financial firms as well as through weakened demand for goods and services.

The Bottom Line

What all this adds up to is continuing slow growth in the United States in spite of recent signs of a pickup, and the possibility of a serious recession in 2013.  Even if much of the tax increases are forestalled, government cutbacks are modest or largely phony, and some additional monetary and fiscal stimulus is introduced, the forces holding back the economy will remain strong and growth will be threatened. 

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 Blog 14, November 19, 2011

Limits on Tax Deductions Can Be Dangerous to Your Financial Health

Among the proposals being considered for raising revenue to deal with the federal budget deficit is to limit personal tax deductions to a percent of income – for people who itemize deductions instead of taking the standard deduction.  Economist Martin Feldstein proposed in a widely-cited New York Times OpEd piece on May 4 that the reduction in taxes from the deductions be limited to 2% of income.  There are serious problems with this proposal.

Large deductions are taken for local property taxes and medical costs.  If local property taxes were not deductible, people would be paying taxes on the taxes, not on the income they retain.  Medical expenses are already limited to 10% of income.  Only expenses above that are deductible now.  Adding a further limit would hurt those with high medical costs and/or low incomes.  A limit as low as 2% would be particularly harmful to people under financial stress.

Both limits on the property tax deduction and on the medical deduction would especially impact seniors, who pay a large share of income in both.

A better approach would be to remove or limit specific deductions.  This has been done in the past. Individuals can either deduct sales taxes or state and local income taxes.  After 2012 they can no longer deduct sales taxes.  Some years ago the amount of a mortgage or home equity line on which interest could be deducted was limited for those who took out loans after already owning their homes.  If Congress wanted to it could further limit the mortgage interest deduction after the housing market recovered.

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 blog 13, November 19, 2011

Two Tax Proposals to Help Those in Financial Difficulty

The tax system adds costs and creates difficulties for those in financial stress in a number of ways.  Changes in some provisions can be included in a tax reform or budget package to help. Here are two suggestions that could make an important difference in the lives of millions of people who are being adversely affected by persistent harsh economic times.

Eliminate the Social Security Earnings Test

People who retire on Social Security and continue to earn income before their full retirement age, which is age 66 for those born between 1943 and 1954, are potentially subject to a large penalty on their earnings called the earnings test. The earnings test discourages work among the elderly.  For 2012, there is no penalty for those with earnings under $14,660.  However, there is a penalty of one dollar for every two dollars earned between $14,660 and $38,880.  The penalty is one dollar for every three dollars earned at $38,880 and above.  The penalty combines with the regular income tax and Social Security and Medicare taxes to produce a very high tax rate on retirees seeking to earn additional income.

Many people find they need to work after taking Social Security because expenses are higher than expected, medical costs rise, investment returns are low, or it takes time to adjust expenses to a retirement income.  A substantial number of Social Security retirees have experienced significant recent unemployment or losses in value on homes or investments and need to make up the income.  While people who work can suspend taking retirement benefits until they reach the normal retirement age to avoid the earnings test, many need the combined income from Social Security and working to make ends meet.

The argument given for the earnings test is that it encourages people to retire later.  However, a growing number of people do not have a choice about retirement because of health or unemployment and many who are already retired need additional income.  Eliminating the Social Security earnings test would allow them to supplement their income and retain a reasonable portion of what they earn.

Reinstate Income Averaging for Those Age 50-62

At one time the tax system allowed people to average incomes over several years.  Those whose incomes fluctuated widely would not be subject to very high tax rates during good times and a higher rate over several years from a progressive tax system.  Despite support from the great majority of economists, this provision wound up being eliminated because it gave a bonus to new entrants to the labor force who could average in years before they were working and retirees who could average in years after they were no longer working. Also, it was reasoned that if tax rates were lowered, there would be less need for income averaging.

With today's high unemployment and underemployment and the prospect of rising and more progressive tax rates, income averaging becomes important once again.  There still is a need to avoid giving a windfall to those at the beginning and the end of their careers. One way to do that is to allow income averaging only for persons age 50-62. That would help a group that is especially affected by difficulties in finding work, and yet be small enough to limit the impact on tax collections.

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 blog 12, November 19, 2011

Some Good News and Bad News

The news is mixed, but the downside risks outweigh the upside potential for a while.

Good News

Inflation will be subdued, at least for a while, with a weak economy and fall in commodity prices.  This will be especially helpful to seniors and workers whose wages are stagnant.

Interest rates are low for those who can refinance a mortgage or need and can get a new one.

Many larger U.S. non-financial businesses are in good enough financial shape to weather any storm without large cutbacks.

State government finances are improving.

Cutbacks in federal spending and tax increases will largely come after 2012 and most cuts will come much later.

Efforts to deal with federal budget deficits and unfunded liabilities in entitlement and other programs are positive for the long run health of the economy.

Technological change is providing a strong underpinning for economic growth.

Bad News

Threats to economic growth, jobs and financial markets will continue from developments including the European debt crisis and European recession, the continuing U.S. housing and government financial crises, excessive and increasing regulation in the U.S., and the slowdown in China and other parts of Asia.

Taxes will go up as a result of the expiration of the Bush tax cuts and the tax increases in ObamaCare, with the greatest increases coming in 2013.

Budget cuts and revenue increases as part of efforts to rebalance federal finances will weaken the economic recovery, hurt consumer finances, and slow progress in adding jobs.

Many small businesses, the main job creators, continue to face weak demand and difficulty in obtaining financing.

Local government finances are in poor condition.

Health costs are rising rapidly as insurance companies and providers seek to cushion the higher taxes and restrictions on reimbursement from ObamaCare.

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 blog 11, July 21, 2011

Things Aren't What They Used to Be

Someone once wrote to the editor of the British humor magazine Punch saying: "Things aren't what they used to be." to which the editor replied: "They never were." We are always warned to beware of people who say: "This time it's different," especially during booms that could quickly turn into busts. But what about warnings when things are not good? Is the economy really so self-correcting that bad times will likely be followed by good times? The economy was sluggish in the 1970s, and that was succeeded by good times in the 1980s, even though things took a long time to turnaround. So is it really different this time? Unfortunately, the answer is yes.

People benefited for many years from rising incomes and spent even more by increasing debt faster than income. Now incomes grow little if at all above inflation as a result of powerful economic forces and government policies, and many people are saturated with debt.

Over recent decades, the economy was stimulated by baby boomers forming households, buying homes and spending to raise families. Now they are moving into retirement with lower incomes and often less spending. Before, they were contributing heavily to funding Social Security. Now more and more of them are collecting benefits.

The stock market gained for decades with price-earnings ratios increasing, but it is not possible for the ratio of stock prices to their earnings to keep going up forever. That alone makes the future outlook different than past. But in addition, increasing numbers of boomers are now withdrawing funds to live on rather than investing for retirement.

The nation has been through periods of declining and low inflation. The risk is now that inflation will rise as the government tries to stimulate the economy through monetary policy and runs large deficits, and as a result of slow productivity growth and a declining dollar.

Economics tells us that over long periods of time, corporate bond yields reflect productivity growth. If productivity growth is low, returns to corporate bondholders will be low relative to inflation. Yields on federal government bonds will have to rise in the face of rising debt. Rising government bond yields will reduce the value of outstanding bonds and rising inflation will reduce the value of all outstanding fixed interest rate bonds. 

The economy has always had ups and downs, and there have always been financial crises, but now government debt is so high that there are limited opportunities to spend to encourage growth or overcome any new crisis. The great economist John Maynard Keynes prescribed government spending to help get out of the Great Depression. However, he envisioned government spending coming from surpluses that accumulated during good times, not from borrowing.

The result is that income growth and investment opportunities are far more limited than they have been and are likely to remain so for a long time, and crises can continue to be deep. We will all have to find ways to prepare for and live through that.

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 blog 10, July 7, 2011

The Challenge of Economic Security

Americans face an unprecedented set of challenges to their economic security. These include declines in real incomes, an overhang of high unemployment, pending cuts in Social Security, Medicare and other programs and services at the federal, state and local levels, rising tax rates, erosion of company benefits, risks of another recession and/or financial crisis, high levels of personal debt, poor returns on investments, increases in food and energy prices and risks of greater inflation.

With less government help and eroding company benefits, people will have to do more for themselves. Many kinds of efforts can help.

  • It is imperative to save more, even when it hurts. Additional saving is necessary to reduce excessive debt that was built up in the past and to create a cushion for future contingencies (such as unemployment, involuntary early retirement, poor investment performance and income that lags behind inflation).

  • Working as much as possible can help maintain and restore finances. That includes putting in extra hours when there are opportunities for compensation and taking second jobs when feasible. It also means later retirement. Since post-retirement jobs often pay little and may be hard to find, it is important to stay as long as possible on one's main job.

  • Finally, it is necessary to support government policies that facilitate greater long-run economic growth through private sector. A strategy to rejuvenate growth in the economy and jobs encompasses overhauling the tax system, rationalizing regulation and promoting competition and innovation. It requires more growth-sensitive approaches to restructuring health care and it's financing and policies that facilitate rather than impede energy capital investment.

Fundamental to a successful effort to energize the private sector is a serious program of major initiatives for controlling government debt and unfunded liabilities at all levels of government. Failure to do so will let government finances crowd out private activity and cause financial crises.

Individuals and governments have a long way to go in securing our future. It is late, but it is never too late to generate resolve and act decisively.

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 blog 9, June 27, 2011

Implications of an Age of Insecurity for Consumer Markets

The extensive changes taking place in the economy and personal lives have numerous implications for markets and marketing. Here are just a few:

  •  Those at the upper end of the income distribution have done relatively well as many asset prices have recovered and tax increases have been postponed. This has shown up in stronger than expected demand for luxury goods

  •  Slow income growth and declines for many workers, together with effects of extremely low interest rates on incomes of seniors, have spurred sales at thrift stores.

  • Spending is being held back by efforts of both consumers and lenders to control debt, as well as by weak incomes, job insecurity and high energy prices.

  •  High energy prices have cut into driving and caused some people to vacation closer to home.

  • Used car prices, reflecting demand, are unusually high compared to new car prices because they are cheaper (even though they are less energy efficient).
  • The sun belt population shift has slowed because retirees and others can’t sell their houses.

  • Some companies have cut back on quality of service by laying off more experienced workers that are more expensive.

  • People are making the most of having less. There is a trend toward buying less expensive bicycles and decorating them more.
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 blog 8, June 23, 2011

Comparing Lifetime Social Security and Medicare Benefits and Taxes

Revealing data both on how individuals fare and on the health of the benefit systems is provided in a January 2011 research report by C. Eugene Steuerle and Stephanie Rennane at the Urban Institute entitled "Social Security and Medicare Taxes and Benefits over a Lifetime."

Social Security

The authors calculated benefits and taxes for six household types in which the primary earner earned the average wage of $43,100. Data are for 2010 in dollars of 2010 purchasing power. The first figure shows the results for Social Security. A one-earner couple in which the earner turned 65 in 2010 could expect to receive lifetime benefits of $435,000 while paying $290,000 in Social Security taxes. A two-earner couple with the spouse earning $19,400 still expects to receive more in benefits than paid in taxes, $457,000 vs. $421,000.

A two-earner couple, each earning $43,100 could expect to pay more in taxes, $784,000 vs. $666,000. Two earners in which one earned $68,900 could expect to pay $741,000 in taxes vs. $645,000 in lifetime benefits. A single man earning the average wage could expect to pay somewhat more than they pay in taxes and a single woman almost the same.

The point is that lifetime Social Security benefits exceed taxes for most household types.

The study included estimates for 1960, 1980 and 2030. What the figure does not show and the study did, is that benefits far exceeded taxes for those turning 65 in 1960 and 1980. Much of the unfunded liability in Social Security is a result of the payment of benefits greatly in excess of taxes in previous years. An immediate result is that for the two higher earning categories, taxes will greatly exceed benefits for those turning 65 in 2030 (and many preceding years) even without further changes to the system.

What the study doesn't show is the great extent to which workers below the average wage receive benefits well in excess of their tax payments. The large redistribution of income within the Social Security system is another reason for its serious problems in financing future benefits. So is the huge deficit in the Social Security disability part of the program.


Even more striking, lifetime Medicare benefits far exceed lifetime Medicare taxes paid in every household type, not only for those turning 65 in 2010, but for all of the past and future years that were calculated. The next figure presents the results by household type for those turning 65 in 2010. This makes it clear why the unfunded future liabilities of the Medicare system rival those of Social Security and will come to a head even sooner. Major changes will have to be made and they will be difficult, but the later they come the more onerous they will be.

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 blog 7, June 16, 2011

Double Counting the Savings from Health Reform

It is well-recognized that the estimates of cost savings from ObamaCare depend on large cuts in provider fees that Congress has consistently stopped from going into effect.  What is less well-recognized is that the cost reduction may be greatly overstated because of changes that would have occurred anyway.

The estimates of cost savings for ObamaCare (The Affordable Care Act) rely heavily on assumptions about the effects of efforts to control medical spending through restrictions on utilization. Those restrictions are enforced through a variety of administrative and financial means. However, in the absence of Obama care, the pressures of rising medical costs would cause many new cost reduction measures to be implemented, both as a direct result of private actions and in response to government initiatives.

Major government initiatives that are not part of the Affordable Care Act are already underway.

The economic stimulus program (American Recovery and Reinvestment Act of 2009) allocates $17.7 billion to providers over five years who successfully begin deploying certified electronic health records in 2011. It provides for $12.4 billion over six years for electronic health records in Medicaid. These efforts will affect practices throughout the health system.

A new coding system for medical procedures in doctors’ offices and hospitals – ICD-10 is required to replace the present system – ICD-9 on October 1, 2013. The new codes will be used for insurance billing and payment incentives. The number of diagnostic codes will jump from about 14,000 to 69,000 and the number of codes for hospital procedures will increase from about 3,800 to 72,000. Greater specificity will facilitate improvements in quality and cost savings since appropriateness of procedures and billing can more easily be identified.

The cost savings from ObamaCare should be calculated by fully recognizing how much cost reduction would have occurred without the program from public and private efforts to respond to medical costs and improve quality of care.

Greater overstatement of savings in ObamaCare will mean even more severe cutbacks in services and increases in premiums and taxes as the program tries to find financial balance.

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 blog 6, June 8, 2011

You CAN Save in Tough Times

I recently did an interview with New Jersey radio host legend Pinky Kravitz in which he asked me one question that was especially tough. That question was: "How can you expect people to save when conditions are so bad?" There are several answers. One, of course, is that it's not what I expect, but rather what people need to do. There will be more financial challenges in the future.  Another answer is that many people have found ways to do it, as the decline in credit card debt (revolving credit) suggests. The national savings rate has rebounded substantially from the depths of recession.

Saving more is only possible if you and any involved family members make up your minds to take it seriously. That is the most difficult part because there are great social pressures, both within the family and outside, and a steady stream of products and advertising offering temptations. However, once you decide to save more, there are many ways to go about it.

You obviously want to figure out where you can cut spending and stick to the plan. Pay cash for things you would normally buy on credit. Try to pay down as much debt as possible by adding a little to each monthly payment. Put some money away from each paycheck in a savings account, certificate of deposit or other investment.

It is especially useful to take advantage of forced savings opportunities where the money is deducted before you get it and in arrangements that are harder to tap. Contribute regularly to employer pension plan, 401(k) or 403(b). Contribute as much as possible, and if the employer offers pension matching contributions, take advantage of them to the fullest extent. Also, try to put money in an IRA where you won't as easily be tempted to touch it. 

Life insurance also offers a form of savings, even if it doesn't have a built-in savings feature (e.g. term life) because money is being put away today, that can be available to your beneficiaries tomorrow. And you treat is as a bill that has to be paid.

If possible, delay taking Social Security benefits until your "normal retirement age." That will both give you higher benefits when you to retire and allow you to earn more in your early and mid-60s without being subject to the Social Security earnings test.

The book Economic Security has many ideas on how to save money and how to increase savings. The point is that there is a lot you can do if you make up your mind to do it. As hard as it is, saving more can make a big difference in how well you come out in future tough times and in your later years.

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 blog 5, June 4, 2011                 

Still a Jobless Recovery

Press reports before the latest employment report and the Obama Administration even after, have focused on the rise of 200,000-300,000 jobs per month for several months through April 2011, which was a marked improvement over 2010. Growth at that rate would be enough to gradually reduce the unemployment rate. The June 3 report of a rise of only 54,000 payroll jobs in May and weak economic indicators released the same week raised concerns that the jobs picture may not be so strong. Yet viewed another way it was weaker than it looked all along. The fact is, there haven’t been any jobs created for recovery from the Great Recession, only enough to cover population growth. 

The unemployment rate, which is the number of unemployed as a percent of the labor force (people working or looking for work), counts only those actively looking for work. There are millions more who would like to work but have become discouraged. A better measure of success in creating enough jobs is the employment rate: employment as a percent of the population. While the unemployment rate has declined somewhat, the employment rate is still at recession lows because employment has not risen faster than population. The employment rate peaked at 63.4% in December 2006 and was still at 58.4% in May 2011. The difference is 7.7 million fewer people working.

Even if there is stronger demand growth, the employment rate will at best rise slowly since the economy is under-performing, which means many people will be left without jobs for a long time.

When times were good, many people worried about labor shortages because of the large number of baby boomers who would be retiring. Now the question is whether more retirements will mean additional opportunities for those without jobs when employment growth is weak. The numbers suggest that there will be some gains, but these will be moderate, especially since there have been significant productivity increases and outsourcing so some jobs will never come back.

The number of 65-69 year-olds grew by 2.3 million between 2000 and 2009 while the number of 60-64 year-olds increased by 4.9 million. The difference of 2.6 million is the added size of the cohort that has been retiring. Several million more will follow them in the next few years. However, these numbers represent only a half million people per year. Only 59% of men and 48% of women age 60-64 were working in 2008 so less than 300,000 jobs a year are being vacated by retirees and some of those jobs will not be filled. Over a million jobs per year are needed to keep pace with population growth and two or three million to make progress on unemployment. 

A possible positive factor for availability of jobs for American residents is the slowdown in immigration. Some immigrants return home when unemployment is high, and immigration increases as jobs become available. Increased efforts at enforcement may mean that growth of immigration will be smaller than in other recoveries. Since the typical cyclical increase is largely in illegal immigration, slowing will primarily benefit relatively low skilled workers.

The best hope for job creation is policies that are more supportive of private sector economic growth, including those dealing with taxation, regulation, health, energy, and government debt.

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 blog 4, May 30, 2011

The U.S. Energy Department's Oil and Gasoline Price Projections through 2012

The U.S. Energy Information Agency (EIA) provides projections of the price of crude oil and regular retail gasoline through the end of 2012. The latest forecasts at the time of this writing were published in May 2011. Data since 2007 and the projections are shown in the chart below. Note that in the chart crude oil prices are in dollars per gallon rather than dollars per barrel.

There was a big spike in prices in 2008. The recent rise is not quite as high but is expected to be longer lasting.

Crude oil and retail regular gasoline prices have moved very closely together. Gasoline prices were high relative to crude oil prices during the first few months of 2011 but were projected to fall back somewhat. The EIA projects slightly higher prices in 2012.

The crude oil forecast is an average of about $103 per barrel in 2011 and $107 in 2012 compared to $79 in 2010. The forecast for regular gasoline is an average of $3.63 per gallon in 2011 and $3.66 in 2012 compared with $2.78 in 2010.

Some private forecasters predict much higher prices. Even if the EIA forecasts proved correct, oil and gasoline prices would continue to hold back the economy and people’s spending and finances.

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 blog 3, May 16, 2011


Greater Medicare Deficits


Medicare deficits mean great pressure to cut costs in the future, and even greater deficits will mean even greater cuts. The result will be more rationing, greater out-of-pocket costs, and potentially more frequent adverse impacts on the quality of care.


In Economic Security we noted, based on the 2010 Medicare Trustees Report:


“If the Administration’s estimates of the effects of the Affordable Care Act were not taken into account[the way the Trustees did], the trust fund would have been exhausted in 2017, 12 years earlier [than the official date of 2029]. It is necessary to recognize that health reform may cost much more and reduce expenses much less than promised, especially when public reaction to cuts sets in.”

“Medicare Part B Supplementary Medical Insurance (SMI), which covers doctors’ office visits and other services, and the Medicare Part D drug program are projected by the Social Security Trustees to be adequately financed, only because current law provides that their shortfalls will automatically be made up by general tax revenues.”


The 2011 Trustees Report now indicates an even greater deficit in the Hospital Insurance Trust Fund. The report is now explicit in noting that projected Medicare costs over 75 years are about 25% lower because of provisions in the Affordable Care Act. It further states that: "… an almost 30% reduction in Medicare payment rates for physician services is assumed to be implemented in 2012, notwithstanding experience to the contrary."


A further effort toward more honest reporting is underway as the public trustees, Charles P. Blahous, III and Robert D. Reischauer reexamine the assumptions behind the accounting. While their participation  came too late to fully affect the 2011 report, they clearly state that the Medicare cost projections depend greatly on uncertainties about the rate of increase in health costs as a result of private efforts and the Affordable Care Act (ObamaCare). They state:


"If the legislation's cost reducing innovations in the delivery of and payment for health services were not successful, or of healthcare providers could not accommodate the slow growth Medicare payment rates mandated by the new law, Medicare costs would be significantly higher than shown in the trustees report."


More efforts at honest and realistic projections are needed so personal and program adjustments can be made in a more orderly and rational way rather than in response to crises.

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 blog 2, May 10, 2011

The Outlook for Housing Prices as of May 2011

The Case-Shiller home price index for February 2011 showed a further decline from the previous month. However, the rate of decline has been decreasing, signaling a bottoming out. The risk is that residential real estate prices will fall further, either in absolute terms or by failing to keep up with inflation. Nevertheless, there may be a temporary respite.

Prices of new and previously owned homes for sale have to compete in a market with an unusually large 3½ million existing homes for sale, millions of homes ready to come on the market if conditions improve, several million foreclosures that often are selling at distress prices, and millions of highly delinquent properties.

Sales of foreclosed homes have slowed as a result of the mortgage paperwork mess. Millions of mortgages that were sold and packaged into mortgage-backed securities were found to have improper documentation, preventing foreclosures from moving forward. The result has been less competition with existing homes for a while. However, banks are under regulatory orders to straighten out the problems by the fall. While many banks will take longer, the regulatory pressure will cause increased supplies of foreclosed homes to come onto the market this year. That could depress prices even more. So could high gasoline, heating oil and electricity prices.

addendum: May 31 2011

The Case-Shiller index is the most accurate measure of home prices because it is based on repeat sales of the same houses. However, it can be misleading. The index reported today that was labeled March is a three month average of January, February and March. Since it is centered on mid-February, it is essentially 3-1/2 months old. Price changes since then may have been different. Moreover, some leading press reports emphasized the changes over the last year, but recent declines have been smaller. For example, the seasonally adjusted 20-city average fell 4.5% between what is labeled March 2010 and March 2011, but only at a 3% annual rate in the two most recent months. 

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blog 1, May 1, 2011

It’s Too Quiet

A number of financial indicators have become relatively calm, indicating that investors do not perceive high risk. The spread in yields between more and less highly rated bonds has narrowed considerably. The VIX or stock market volatility index is relatively low. The Federal Reserve Bank of St. Louis Financial Stress Index (KCFSI) declined dramatically through March 2011. Despite these signals there is a feeling of unease and there are many good reasons for it.


The list of problems that could create economic distress is uncomfortably long:


  • Huge federal deficits and unfunded liabilities for entitlements and other programs.
  •  The large number of home foreclosures, mortgage delinquencies, and people whose houses are worth less than their mortgages.
  • The lingering high rate of unemployment, and especially the high proportion of those who have been unemployed for more than six months.
  • High energy and commodity prices and indications of rising inflation.
  • The precarious condition of state and local government finances.
  • The high debt and massive financial problems of several countries in Europe and the risks those pose for the more stable countries and for banking systems.
  • Risk of a Japanese debt crisis after the country’s huge debt is expanded to deal with economic disruption from the earthquake and tsunami.
  • Instability in the Middle East and North Africa and its implications for prices of energy and other commodities.
  • Uncertainty about U.S. military commitments.


With all of these risks, one cannot be complacent about the economic outlook. It is necessary to save for contingencies and to keep a significant share of assets in investments that are safe and liquid even if the returns are currently very low.

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