Economics Redux

Economics as a discipline may be on the verge of changing. Economics has long held to a belief that individual economic actors - be they individuals or corporations - are rational in there choices and actions. This assumption is not only a very strong one that has profound and fundamental impacts on all economic theories that adopt it, but it is also very convenient from a modeling and forecasting point of view. If we assume that all economic "actors" are rational that means, at its most basic level, that they evaluate all available information weighing costs and benefits and then select the action that maximizes the benefits per unit of cost. This is a very powerful assumption because it means that from a theoretical and mathematical point of view all the economist has to do is decide on what information is available and assign costs and benefits to the choices. Then arithmetic can determine the outcome or steady-state. There are obviously other issues with this approach aside from this assumption: not everyone views the costs and benefits the same, information is imperfect, and there exist time constraints on decisions just to name a few. Putting these aside there is another glaring problem with today's economic models - people are not strictly speaking rational.

The issue is that virtually every single human being is influenced to various degrees by their emotions and the emotions of those around them. It is likely true that the vast majority of us would make very rational choices when presented with simple clear cut costs and benefits - unfortunately this simply doesn't happen. Our emotions, perceptions, and attitudes greatly impact our decision making. Recognizing this one single fact shakes the foundations of virtually all mainstream economic models. Suddenly psychology and behavioral analysis become important factors in determining how someone will react to an economic choice instead of just cost/benefit analysis.

Behavioral economics is a new and growing field that attempts to work the eccentricities of the human psyche into economic models to allow us to better model the real world and predict behavior. If economics as a discipline can make this shift I believe it will go a long way to making economics more intuitive to the general public and restore economists credibility.

The Truth Behind "An Inconvenient Truth"

A recent Fox News article briefly covered the growing opposition to the showing of former Vice President Gore's film to school children as a part of science curriculum. It's about time that someone recognized this film for what is was - sensationalist and alarmist.

Health Care Debate Moves Forward

The health care debate appears to be moving forward in the Senate. It now appears that Democrats have secured the 60 votes necessary to break Republican efforts to stall the bill prior to open debate in the Senate. The bill is anything but a sure though. Many of the central leaning Democrats while supporting debate have as yet stopped short of actually stating they would vote for the bill. The debate will now center around how much the left leaning Democrats are willing to concede to the centrist Democrats to get the bill through.

The Decade in 7 Minutes

House Passes Health Care Bill

The House passed their version of a health care reform bill 220-215. The bill will cost an estimated $1.055 trillion over 10 years and it includes both an individual mandate and a public health care option. This represents perhaps the single largest intrusion of the federal government into the everyday lives of citizens and into our economy. The future of this nation and our economy now rests in the Senate.

CIT Files Bankruptcy, and Retailers Get Nervous

CIT's recent bankruptcy filing represents the 5th largest bankruptcy in US history with $71 billion in total assets on the books. CIT is a critical lender to retailers for inventory - especially around the holidays. Since CIT was only slightly smaller than GM and was larger than Chrysler it makes you wonder why it didn't warrant an Obama bailout...maybe because there are no unions working at CIT. You decide....

CIT Files Bankruptcy, and Retailers Get Nervous - Local News | News Articles | National News | US News - FOXNews.com

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The New Health Tax

Taxes are on the rise to cover your health care bill. At least that is the proposed method of paying for the new health care proposals. Congress wants to levy a 5.4% income tax on individuals making over $500,000 a year and couples over $1,000,000. This would raise the effective tax rate on these individuals by nearly 12.5% (a 32% increase) when you factor in other changes Obama wants to make. There are many reasons why taxing the heck out of the wealth is unhealthy for the economy, but this new health care tax has a much more glaring problem. It is not indexed to inflation. This means that each year as inflation slowly erodes the value of the dollar more Americans will be hit with this tax at ever lower income levels in today's dollars. This is not the first tax to suffer this fate - remember the AMT or Alternative Minimum Tax.

Eventually this new health care tax will begin to fall on middle-class Americans as inflation lifts incomes in dollar value but without adding buying power. This will end up being another thing Congress has to "fix" every year before tax time. It seems to me that given our experience with the AMT this is just a covert way to raise taxes year after year.

Unemployment Tops 10%

The official rate of unemployment is 10.2% - unofficially probably much closer to 20% or 25%. Need I say more.....

Cash For Clunkers Impact!

It was not too difficult to see how the cash for clunkers program would give people a reason to buy a new car. Apparently it was difficult to get the intended result out of the program. This was supposed to be a win-win program. Not only would it drive sales of cars, which in theory would save jobs and create economic growth, but it would also help save the environment by giving people an incentive to buy fuel efficient vehicles. What could possible go wrong?

The latest data out about the program shows that most people traded in trucks for guess what trucks not tiny hybrids. The net impact of the small improvement in fuel economy was probably out weighed by all the energy used in advertising the program. And we want the government to provide our health care because?

Inflation Nation (Coming Soon!)

The FED is intent on holding interest rates at near zero despite confidence that the economy is recovering. This dedication to easy money is perhaps the greatest single risk to our economy today. If the FED gets it's timing wrong (which it almost always does) we could easily end up with sky high inflation over the next decade that will destroy investor wealth, asset values, and retirement savings. By the time they see it coming it'll already be too late!

Health Care Proposals In A Nutshell

The table below shows the highlights of the various health care reform bills or click this link for the full web-page:

Features	Senate bill	House Democratic bill	House Republican outline
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Who is covered	The Senate Finance version covered an estimated 94% of Americans. Illegal immigrants would not receive government benefits.	Around 97% of non-elderly residents (those not covered by Medicare, which kicks in at age 65) would be covered. Nearly half the 17 million non-elderly residents who remain uninsured would be illegal immigrants.	Aims to make insurance affordable and accessible to all. There aren't estimates about how many additional people would be covered.
Cost	Senate leaders aim to keep it under $900 billion over 10 years.	The Congressional Budget Office estimates the net cost of the proposal (less payments from employers and uninsured individuals) to be $1.042 trillion over 10 years.	Unknown.
How it's paid for	Fees on insurance companies, drug makers, medical device manufacturers. Tax levied on insurance companies, equal to 40% of total premiums paid on insurance plans costing more than $8,000 annually for individuals and $21,000 for families (that number may rise to $23,000); retirees over age 55 and people in high-risk professions may be allowed to have somewhat more valuable plans before they're taxed. Cuts to Medicare and Medicaid. A fee on employers whose workers receive government subsidies to help them pay premiums. Fines on people who fail to purchase coverage.	Approximately half of the cost of the plan is financed through about $500 billion in cuts to Medicare and Medicaid. The remaining costs are financed through new income taxes on single people making more than $280,000 a year, families making more than $350,000; penalties paid by individuals and employers who don't obtain coverage.	No new taxes are proposed, but Republicans say they want to reduce Medicare and Medicaid fraud.
Requirements for individuals	Almost everyone must get coverage through an employer, on their own or through a government plan. Exemptions for economic hardship. The Senate Finance Committee version required individuals and families to buy coverage as long as it cost no more than 8 percent of their income. Those who are obligated to buy coverage and refuse would face a fine of perhaps $100 in the first year of the program, likely increasing over time.	Individuals must have "acceptable health coverage" requirement enforced through tax penalty with hardship waivers.	No mandates.
Requirements for employers	Not required to offer coverage, but companies with more than 50 full-time workers would pay a fee as high as $750 multiplied by the total size of the work force if the government ends up subsidizing employees' coverage.	Employers must provide insurance to their employees or pay a penalty of up to 8% of payroll. Companies with annual payroll under $500,000 annually are exempt.	No mandates; small business tax credits are offered. Employers are encouraged to move to "opt-out" rather than "opt-in" rules for offering health coverage.
Subsidies	Tax credits for individuals and families likely making up to 400% of the federal poverty level, which computes to $88,200 for a family of four. Tax credits for small employers.	Individuals and families with annual income up to 400% of poverty level ($88,200 for a family of four) would get sliding-scale subsidies to help them buy coverage. The subsidies would begin in 2013.	Tax credits are offered to "low- and modest-income" Americans. People who aren't covered through their employers but buy their own insurance are allowed to take a tax deduction. Low-income retirees younger than 65 (the eligibility age for Medicare) would be offered assistance. Subsidies will not be available for illegal immigrants.
Benefits package	All plans sold to individuals and small businesses would have to cover basic benefits. The government would set four levels of coverage: Under legislation passed by the Senate Finance Committee the least generous would pay an estimated 65% of health care costs per year; the most generous would cover an estimated 90%. Those numbers could change.	Through a new Health Insurance Exchange open to individuals and, initially, small employers; it could be expanded to large employers over time. States could opt to operate their own exchanges in place of the national exchange if they follow federal rules.	Insurers would have to allow children to stay on their parents' plan through age 25.
Government-run plan	Reid proposed a new federal insurance plan this week with payment rates to providers negotiated by the Health and Human Services secretary. Unlike the House bill, states could opt out of the plan. It's not clear the proposal commands enough votes to survive, so it could be replaced by a less sweeping version of a public plan. The bill also would create nonprofit, member-owned co-ops to compete with private insurers.	A committee would recommend an "essential benefits package" including preventive services, mental health services, oral heath and vision for children; out-of pocket costs would be capped. The new benefit package would be the basic benefit package offered in the exchange and over time would become the minimum quality standard for employer plans. The bill is likely to include a compromise version of the public insurance option with rates negotiated with health-care providers, instead of based on Medicare rates.	No public plan.
How you choose your plan	Self-employed people and small businesses could pick a plan offered through new state-based purchasing pools. Employees would be generally allowed to keep their work-provided coverage.	A new public plan available through the insurance exchanges would be set up and run by the secretary of Health and Human Services. Democrats originally designed the plan to pay Medicare rates plus 5% to doctors, but the version that passed the Energy and Commerce Committee instead would let the HHS secretary negotiate rates with providers.	No new purchasing exchange or marketplace is proposed. Health savings accounts and flexible spending plans would be strengthened.
Changes to Medicaid	Income eligibility levels likely to be standardized to 133% of poverty ($30,000 a year for a family of four) for all parents, children and pregnant women. States could negotiate with insurers to arrange coverage for people with incomes slightly higher than the cutoff for Medicaid.	The federal-state insurance program for the poor would be expanded starting in 2013 to cover all non-elderly individuals with incomes up to 133% of federal poverty line.	People eligible for Medicaid would be allowed to use the value of their benefit to purchase a private plan.

Republicans Win New Jersey and Virgina

Republicans won gubernatorial races in Virgina and New Jersey yesterday! The loss of New Jersey, a typically blue state, is perhaps the most telling and damaging to Obama's political capital since he threw personal support behind the democratic incumbent. The media will undoubtedly begin drawing all sorts of conclusions from these victories - some bad, some good. These wins almost certainly do indicate rising voter concern with the direction of this nation and the current administration. They are by no means a guarantee of upcoming republican landslides though and the GOP needs to continue to hold true its founding principles of conservatism, small government, and respect for individual liberties if it hopes to gain momentum. All I can say is be careful what you wish for because republican victories mean the new republican officials have to deliver on promises - and that may turn out to be a tall order.