Entitlement vs. Safety Net: It’s not a matter of degree!

Well, let me start with this disclaimer! I am not anti-social security, anti-Medicare or anti-Medicaid…  I am saying this in advance of the e-mails I know I will get from the people who will not read the article clearly and will stop thinking just as soon as they believe one of their special programs might be threatened.  I believe very strongly that we need a safety net—it’s just the current system we have is no longer a safety net.

The headline in my local paper says Brown seeking Medi-Cal cuts: Governor requests flexibility from the White House.  For those not in California, Brown is our Governor Jerry Brown and Medi-Cal is California’s implementation of Medicaid.

I am going to keep this short and sweet, if I can.  We should comment Governor Brown for taking the initiative to address the overwhelming costs of Medi-Cal (Medicaid) that is bankrupting our state.  California is in a much worse position than most of the other states because, as the Governor found out when he took office, California is in the top one or two of any state in any measure of the amount of entitlements we are providing to our population per capita. In his first budget, Gov. Brown took on this issue and began the effort of reducing these most generous programs, which may have made sense when we were one of the richest economies in the nation, to the median benefits offer of all the national state programs.  I think this is a very pragmatic, and still generous, approach considering we are now the top state in the national measure when you look at fiscal insolvency.

We need to address this issue now as the time has run out as our deficit build and we become one of the most cost ineffective places for business in a national economy that is one of the most cost ineffective locations to do business on the planet.  Kudos to Governor Brown for taking these very hard steps directly in the hard face of his own parties’ public ideology and attempting to get to a solution to this massive problem.

But overall the problem is not one of just Medi-Cal in California. It is a much larger problem, a systemic one. It is a problem that traverses all the programs including Medicare and Social Security. Beginning with the Social Security, conceived as a temporary safety net program to help the aged who had their savings and investments devastated by the one-two punch of the collapse of the stock market followed quickly by the depression as a result of the great drought induced dust bowl in the mid-west. In turn, Social Security and the myriad programs that have followed have evolved from that of a simple safety net. Originally, first seniors, and then others, could look to these safety nets as a small aid to what they could earn and save for themselves to tide them through a short difficult time that may occur beyond their real ability to plan. Now with the extension of Social Security to include Medicare and Medicaid, these programs are not viewed as a safety measure but as a replacement.

If we look to Medicare as an example, it can be argued that it is a vital insurance program to support the healthcare needs of our aging population and our disabled. And for some this is clearly the case. But it can also be argued that for many, even though the checks are being written to providers covering their health care needs in later years, if this is really supposed to be a safety net, the government is not paying for their health care; it is paying for the purchase of that flat panel TV when I was forty-five, or the vacations I took, or the new car I purchased every four years, or some other expense I would not have made if I had not had the expectation of the government picking up the tab for my potential catastrophic healthcare needs in my last five years of life.

I know the former discussion is not a pleasant one to have as it brings us back to the point that our actions today have ramifications for tomorrow. In the generation prior to mine, they had the belief that they needed to save much of their excess money for a rainy day. We have come to believe that the rain is now offset by our wonderful and blatantly generous Uncle Sam. So, we are empowered by the change from the safety net to that of an entitlement, to believe we are OK to purchase that vacation home, instead of saving the money because when, not if, we get sick, Medicare will take care of it. I remember my father preaching to me siblings and I in the 1960s that we should never count on these programs because a.) It was our responsibility to plan and pay for ourselves and family—not our neighbors responsibility, and b.) The government will probably not have the money when we need it as this system just won’t work.

Well thanks for the advice Dad, I took it to heart and have followed your example. But, despite my savings we, the citizens of the U.S. and of California are at the point you so correctly predicted and poor California’s Governor Jerry Brown now has to be the first state leader to start to take away all the things we have been trained to be dependent on. You see much of these expenses are no longer about emergencies and simply providing for a base existence, they are now becoming more about quality of life. It is not enough to provide basic services for the poor; we need to also give them cell phones.

I don’t want to see people suffer, and I don’t want to deprive people of some form of basic existence. But with the coffers bleeding cash at a pace that is now in excess of what we can produce on an annual basis we need to start to make distinctions between, emergency necessary for life services and those services that provide more for the quality of life! I commend Governor Brown, for taking these steps. I know they are not easy for him because of his strong humanitarian heart. I am glad he was not just imbued by our creator with that humanitarian heart but also received the gift of a great mind that recognizes we need to find pragmatic adjustment and exceptional courage to take the unpopular steps to find a solution. With this accolade also comes caution. We need to remember that even Governor Brown is human, and is in a system that will require him to make some decisions that he and the rest of us will not like, simply to get part of this done. We can expect all the purists to take shots at every single deficiency and change from all sides with no recognition as to the realty of a public and political governmental process.

Regardless, I will say I appreciate what he is trying to do, and will attempt, even when he make decisions, like High Speed Rail, that I fundamentally disagree with, that he is doing this based on his befief that it will contribute overall to the solution of this complicated equation for the viability of California and its citizens.

Rising Gas Prices: Welcome to the global economy

Like most things in which our federal government has inserted itself, the issue over the rise in U.S. gasoline prices has become a very complicated one.  Like almost everything else in history, the more that the government inserts itself, the perceived benefits are overwhelmed by the unintended consequences.  Here is yet another cautionary tale.  

(Note: I am analyzing from a California perspective in order to understand the combined effects at the highest level and since this is where I live at the moment, I experience the issue in this way every day—your state’s fees may vary but I would guess your personal experience will be the same!)

Source: GasBuddy.com

In 2004, then California Attorney General, Bill Lockyer, updated his 2000 report on Gasoline Prices in California.  Looking back this is an interesting read as we watch gas prices rise beyond $4.00 on their way to, as some are predicting, to as high as $6.00, if not even higher.

Evil Oil Companies Reap Big Profits Cause Gas Prices to Spike!

What is fascinating about both the current concern over the rise in gas prices and the report published by AG Lockyer is the consistent amount of spin on what it was that was causing the rise in prices.  As we move into the next few weeks and months, once again, we will hear from the media, and many talking heads, how this is all the “evil” oil companies fault.  How they are making record profits and they are simply preying upon the people of California, or on the national scale the U.S. citizens, to enrich their shareholders and continue to pay huge salaries and bonuses to the 1%’ers and leaving the 99%’ers in a continually worsening position. But there is a big problem with this spin!  For the most part, it is just not true.

Look, I have no vested interest in the oil companies and I am by no means a fan of some of what they do sometimes.  Sure, oil companies make a huge amount of profits when you look at the overall dollars but, like other such vilified industries and their executives including, big Pharma, and insurance companies among others, the percentage of profit is ridiculously small, when compared to other businesses and most small businesses.  More telling, however, is that the real profit built into the gas and oil supply chain has reduced significantly since Lockyer published his updated report in 2004.  The enclosed chart shows the break out of costs for a gallon of gasoline as reported by the California Energy Commission in 2004 and again as of today in 2012.  What is startling is that the “evil” oil companies’ and refineries have reduced the cost and profit part of the price over 27% while the state of CA has increased their percentage per gallon over 42% and the federal government has also increased their take per gallon by 20%.

Source: Author

Another, great misconception—perhaps misrepresentation?—is that the cost per gallon is driven solely by the per barrel price of crude oil.  Well again, if you look at the table I prepared, you see that if that logic was, in fact, correct, the price per gallon would now be $6.02 per gallon already instead of the $4.04 it is today.  So, there is some disconnect in the price per barrel equivalence to the price at the pump.  Clearly, there is not a direct corollary.  While it likely does have some impact, I suspect there are a number of other things at work that drive the price at the pump. So, one may want to question if the conventional headline as shown at the beginning of this section is true?

What else could be driving up gas prices in California?

One other interesting segment of the Lockyer report is the change in 2004 from MTBE to ethanol.  For many who don’t know, and for those that do not remember, MTBE was the additive to California gasoline to reduce pollution as demanded by the environmental movement.  In 1990, with a large amount of money, and huge political activism, environmentalists lobbied the U.S. to amend the Clean Air Act requiring 2% oxygenating additives (typically MTBE) to lower pollution.  The cost of refining gas for use in California went up and so did the taxes on gas to help pay for the increased bureaucracy required to monitor compliance.

Now like most things driven by ideology, a number of years later the same environmental factions now came forward to demand the removal of MTBE from our CA gas as it was polluting the environment (it had been found in high concentrations in the water table of Lake Tahoe and in the water table).  So once again Californians had to foot an increase in the cost of gas as a result of this change and an increase in the cost of the additive (ethanol) as well as an increase in the bureaucracy to manage compliance—oh and let’s not forget increase in fees and taxes. So far I have yet to see an acceptance of responsibility for the initial inclusion of MTBE in the first place, no offer to pay for the removal, and no apology for the mistake from those that promoted the MTBE solution in the first place! (If you would like to read an interesting article on this read MTBE: A PRECAUTIONARY TALE by Thomas O. McGarity, June, 2004 in the Harvard Environmental Law Review)

On a side note, you will also be hearing how the profits made in California by the evil oil companies surpass the national average!  Well the percentage is actually less but the price per gallon is a lot more, so of course the total dollars will be higher.  Further, the costs of operating a business in California are intrinsically higher due to higher labor, infrastructure, legal, regulatory and insurance costs.  When you look at all the costs, what is surprising is that overall California gasoline retailers, distributors and refiners have fought to lower their costs significantly over 27% since 2004.  Not the work of evil geniuses!

The Law of Supply and Demand

Recently, some news outlets are questioning why since the general demand for gas and oil in the U.S. is down significantly and we have had a surplus in supply; prices are still rising—not falling as predicted by the law of supply and demand.  Welcome to the One World Economy.  There are those in the progressive movement, evidently our President included, that have long desired the U.S. to become a member of the One World vision—a One World Economy.  For the past 20 years, much of Europe has been experimenting with this grand vision of utopian fairness.  Looking at the status of Europe today, particularly Greece, France, Italy, and Spain one would really want to ask how this is working out for the citizens of those countries!

The problem with the One World Economy is now supply and demand for our U.S. refined products, regardless of their in-ground point of origin, is based on demand anywhere in the world.  One can take a narrow view and determine that oil refined in the U.S. should stay in the U.S. but economically that doesn’t work because when “evil” oil companies ship this product to other markets, that will pay a higher price, it is actually a good thing for the economy because the U.S. adds revenue to its export sales, reducing the amount of money we need to print to pay for our international purchasing deficit.  We must remember that the U.S. is a net importer of products; therefore more of our dollars flow out of the U.S. than we get back in sales of our goods and services outside of the country.

As an example, suppose you live in a house with your wife and one child.  Your mortgage is $1,000 per month, your other expenses are $1,000 per month, you and your wife both work and you both get paid $1,500 per month.  You are selling your services in excess of what you are spending and each month you gain real asset value of $1,000 each month.  Let’s assume one of you loses your job.  Now, each month you are buying $500.00 more in goods and services than you are taking in.  All things being equal you can do this for twice the amount of time of when you were both working. When you get to the point that you have spent all the money you accumulated (saved), you look in your checkbook and see you still have checks.  So you keep writing them.  It won’t be long before someone comes and knocks on your door.  We have for the last fifty years been ignoring this very  problem of just writing checks because they were in the book and now have a $12 trillion accumulated trade deficit and have over $16 trillion in currency in circulation.  Not only is this a big problem for our general economy, it is a big problem when it comes to commodities that have real tangible value like gasoline and oil.

Since we eliminated the international gold standard in 1972, countries whose economy is based on net exports of predominantly tangible goods and services (like manufacturing and raw materials production) have currencies, like China’s Yuan, that are based on increasingly real tangible values.  The U.S. economy, being a net importer, with little manufacturing and raw production, has an economy whose currency is more and more based on intangible, perceived value like debt against real estate or financial securities.  While the U.S. dollar is still the benchmark currency, perception of many in the world is changing.  Oil is perhaps now the single most valued commodity—not in price per se but in need.  Its price, like gold before it, is set by world demand. There are those who argue that “petrol dollars” should become the new world benchmark.  In other words it would be the new gold standard.  The day that the dollar is replaced, the U.S. currency will simply get crushed! If you think gas is expensive now…

So companies selling products today have an interesting problem when it comes to U.S. customers.  They can take their production and sell it to us and get paid in a currency that has a total amount of money in circulation of $16 trillion dollars with arguably a real tangible value of only $5 to $6 trillion. Remember they will be selling this valuable commodity to a country that each year is buying much more than it is selling so the tangible value of the assets backing its dollar are continuing to slide down or, they can sell them to China whose currency is now internationally recognized, is relatively stable, and is backed by a constantly increasing national asset base due to huge net exports and low manufacturing costs.  Barring a simply patriotic reason, most will sell to the increasing asset value country.

Drill Baby Drill

We can increase domestic production, we can drill more, and we will find that we will reduce local prices somewhat.  While the President says, that drilling will not solve the problem, he is not telling the whole truth.  We can’t mildly increase our production; if we do then he is correct.  We have to significantly increase production to have the effect we seek. The break-point for lowing domestic costs is when we get enough production to reduce the dependency on foreign oil to such a level that the vagaries of their price gaming become meaningless.  There are enough oil reserves in the U.S., with existing technologies to get to it, to replace most, if not all, reliance on foreign sources.  What is necessary to get there, is time and the will of the people.  Unfortunately, we are coming to the point when we simply must face the reality that while protection of the environment is a noble goal it cannot be the only, or preeminent, factor in all our decisions on the energy issue.

Finding alternative sources for energy is definitely a necessary step and is a proper goal.  But, the solutions found in the alternate sources, can neither cost more than the available domestic oil, gas and coal sources, nor can they require us to collect taxes from some, or all, to subsidize the price to pay for us to use it.  Following the subsidized route as we are increasingly doing in this and other industries, is the height of lunacy.  The money we need can no longer come out of thin air as it has for the past forty years.  Taking money from ‘us’ to pay for purchases by ‘us’ from ‘us’ is not only a zero sum game, it is simply increasing our costs as a nation and making us further uncompetitive with other nations who in turn are happy to produce the goods that we can actually afford to buy.  In the end, we will at the same point we are right now with gas and oil today.  We can produce it, but we just can’t afford to buy it.  So then we have to sell it to countries that can afford it like China.

Do you think we will ever learn?

Are the poor lazy, or are the lazy poor?

Aside

First correct the semantics then argue the points!

It seems that I am hearing the invective phrase, that so-and-so republican really said in his speech that, “the poor are lazy”. This phrase is often attributed to a democrat or liberal leaning media person or pundit.

Forgetting the political nature of this statement in the first place, and trying not to take a side in the partisan argument, my issue falls in the fact that the statement itself is carefully crafted to be inaccurately damning a class. The reference is that someone, or some group, who doesn’t like or care for the poor really believes that that if you are poor then you must be lazy. But, if you read the original statements, and not the convenient sound bite, what they are saying is, “if you are lazy, then you likely will be poor.” The former statement damns a class, the latter damns a behavior.

Words matter and when one reads the interpretation of another’s words it is a good idea to actually read the original statement and remember that in politics, each of the replies, regardless of party, has been manipulated, crafted and tested to provide a vilification effect on the opposing interest, regardless of the original intent or context.

Words and their order in a phrase can alter meaning. These slight placement differences are never accidental. We are in an age where most of politics is now based on some form of fraud. And it is we who now suffer its effects.  In the world or profligate soundbites we know longer think–just emote– and the effect on us and our society is building to a catastrophic conclusion.

If we are to combat this soundbite, words as weapons, mentality we must first and always correct the semantic error and then argue the real point. In this case, we need to make sure the point is not the the poor are lazy but that if you are lazy you will likely be poor.  Then, one can argue the real point and not get bound up by false emotional relativism.

Perhaps we should go back to thinking!

Fair Shot, Fair Share, Fair Play: Is life really fair?

To sleep: perchance to dream: ay, there's the rub: For in that sleep of death what dreams may come...

(Readers Note, this is not a short discussion!)

So who ever said life should be fair?  It seems of late (this campaign season) that all I am hearing everywhere is about fairness.  Somewhere, somehow, I must have missed some proclamation.  There must have been some fundamental shift of the polls, or a radical discovery somewhere deep in the cosmos, because I have been operating for all of my life under the safe and secure knowledge that life was not fair—never was!

In my youth, when academics governed my acquisition of knowledge and much of my existence, before life stepped in and modified the theory with practical experience, I studied, chemistry, biology, physics, and other natural sciences. In all my studies in the natural sciences ,I have seen nothing anywhere that tells me life is fair.  Nowhere have I seen any natural system that is predicated on fairness.  I also had an interest in philosophy and religion, and took some classes in these subjects and in my life have read much more in these areas. With the exception of only rare occasions, and those typically only in discussion of the pursuit of an ideal, no religion seems to espouse the theory of the innate fairness of the universe nor in us a people. So I am perplexed how this “Fairness” thing has now become a reality without me hearing about it.

What does it mean to be fair?

fair 1 (fâr)

adj. fair·er, fair·est

  1. Of pleasing appearance, especially because of a pure or fresh quality; comely.
    1. Light in color, especially blond: fair hair.
    2. Of light complexion: fair skin.
  2. Free of clouds or storms; clear and sunny: fair skies.
  3. Free of blemishes or stains; clean and pure: one’s fair name.
  4. Promising; likely: We’re in a fair way to succeed.
    1. Having or exhibiting a disposition that is free of favoritism or bias; impartial: a fair mediator.
    2. Just to all parties; equitable: a compromise that is fair to both factions.
  5. Being in accordance with relative merit or significance: She wanted to receive her fair share of the proceeds.
  6. Consistent with rules, logic, or ethics: a fair tactic.
  7. Moderately good; acceptable or satisfactory: gave only a fair performance of the play; in fair health.
  8. Superficially true or appealing; specious: Don’t trust his fair promises.
  9. Lawful to hunt or attack: fair game.
  10. Archaic Free of all obstacles.

adv.

  1. In a proper or legal manner: playing fair.
  2. Directly; straight: a blow caught fair in the stomach.

tr.v. faired, fair·ing, fairs

To join (pieces) so as to be smooth, even, or regular: faired the aircraft’s wing into the fuselage.

Archaic:

  1. A beautiful or beloved woman. (Old English fæger “morally pure, unblemished” – late 12c.)

Like most abstract concepts, even the definition of fairness depends on your point of view and the subject matter. The thefreedictionary.com definition at the left shows that fair has many meanings in many contexts.  It also shows that the original form of the word specifically related only to a beautiful or beloved woman.  Like the word cute, which originally meant bow-legged, our concept of fair has changed much over time. So if we can’t count on the definition, what is fairness?

What is it?

So, what is fairness anyway and why all of the sudden do we expect it? Why do we think we have a right to it? Why, given thousands of years of history to the contrary, do we think we can get it even if we wanted it in the first place? And, do we really want fairness for all or do we just want fairness for ourselves? Is fairness a real thing or just some perception, some passing fancy on which we are now pinning our hopes of ending our own struggles for survival? If fairness is really a perception, is it not then that life is innately unfair?

Why do we think  fairness is real?

To me, the idea of fairness as an attainable concept seems to be something that comes in the night to people that move from struggling for their day to day existence, to some level of affluence.  Those who believe in fairness seem to arrive at this belief either from their success or their failure to succeed.  Lest you think I am being duplicitous, let me explain further.

Some of those that arrive at the concept of fairness due to their success, seem to me to be those who have achieved some level of affluence in excess of what they expected they were due; based largely on the effort they put in to achieve their success.  In other words, they now have some level of personal guilt over what they now have.  Some, instead of embarking on a direct philanthropic effort to help others, decide that the method of their success was not fair and now want to change something to make it such for everyone.  But those changes actually make it unfair for others who are doing the same thing to be successful and remove their opportunity to achieve parity, replacing it with granted (not achieved parity)

Others arrive at the concept of fairness based on their failure to achieve and compete in some way.  In an effort to justify the failure of achievement, they seek analysis as to the outside circumstances that caused the fault.  In any analysis like this they will find casuations outside their control.  In no way am I trying to say that these causes are not real.  They very well may be real and have had a real effect. The end point, whether the cause is real or imagined, is the same. Convinced that it is simply a matter of abject fairness, people seek some form of redress in order to gain a different outcome. Regardless, the end is the same. An inherently arbitrary equalization system results.

The politics of calculation?

I have heard a number of times, likely based more on anecdotal evidence, that the country is divided 50/50.  Perhaps it is true the 50% of us would respond that we believe life should be expected to be fair and the other 50% would respond, it is not fair and we should not expect it to be so.  Politically this would appear a non sequitur.  Why then has history shown that the political promise of fairness is so successful?  Because, like most things political, when you look beneath the surface, the obvious, you will find the intrinsic value to the politician on selling the promise of fairness and equality.

Of the 50% that say they believe in life’s innate fairness, it is much more likely that regardless of what is said in the polls, only about 20% believe fervently that life can be fair and the remaining 30% say it because they think that such a concept will lead them to additional attainment. This 30% neither truly believe life is fair nor do they really want fairness.  What they want is to get part of that the others, who have been lucky enough, worked hard enough, or were unscrupulous enough to get more than they have.  Whether they earned them, or not, is not part of the equation.  The basic nature of this thought is based on the fact that life is not fair, they got more because it was not fair and only with some intervention that arbitrarily shifts the unfairness in my direction will I get the appearance of it being fair.  And it is the appearance, not real fairness that is the politician’s key.

Political fairness, historically, has not equaled equality.

Life is never fair, and perhaps it is a good thing for most of us that it is not.
-Oscar Wilde

Most of the great philosophers debated the issue of fairness, and likewise debated the issues of equality.  Up until more recently the two issues were not intertwined.  For instance, Solon, was an Athenian statesman, lawmaker, and poet from 638 BC – 558 BC. Justice, for Solon, was not an arithmetical equality: giving equal shares to all alike irrespective of merit, which represents the democratic concept of distributive justice, but it was equity or fairness based on difference: giving shares proportionate to the merit of those who receive them. The same ideas of political order, leadership, and justice can be found in Plato’s dialogues.

For Plato, like Solon, the starting point for the inquiry about the best political order was the fact of social diversity and conflicting interests, which involve the danger of civil strife. The political community consisted of different parts or social classes, such as the noble, the rich, and the poor, each representing different values, interests, and claims to rule.

In Plato’s great work, Republic, he describes four virtues that are the characteristics of a good political society: justice, wisdom, moderation, and courage. Plato described justice as the equity or fairness that grants each social group its due and ensures that each “does one’s own work.”

Wikipedia cites Fairness and Justice are often confused.

According to most contemporary theories of justice, justice is overwhelmingly important: John Rawls claims that “Justice is the first virtue of social institutions, as truth is of systems of thought.” Justice can be thought of as distinct from and more fundamental than benevolence, charity, mercy, generosity or compassion. Justice has traditionally been associated with concepts of fate, reincarnation or Divine Providence, i.e. with a life in accordance with the cosmic plan. The association of justice with fairness has thus been historically and culturally rare and is perhaps chiefly a modern innovation [in western societies].

Studies at UCLA in 2008 have indicated that reactions to fairness are “wired” into the brain and that, “Fairness is activating the same part of the brain that responds to food in rats… This is consistent with the notion that being treated fairly satisfies a basic need”. Research conducted in 2003 at Emory University, Georgia, USA, involving Capuchin Monkeys demonstrated that other cooperative animals also possess such a sense and that “inequity aversion may not be uniquely human” indicating that ideas of fairness and justice may be instinctual in nature.

So why drive to get what we know is naturally unobtainable?

For many, the base concept of fairness is a diversion, a mere bauble, a trinket to dangle in the eyes of those that want it to be true, and something that can even be sold to those that don’t. It’s a dream for sale!

Assume for a minute the country really is one-half believers in innate fairness and the other half cynics.  From a political perspective, the hopeful believe in the dream and will buy it at almost any cost with their votes.  The cynics don’t believe it but, some of the cynics recognize that the dream provides a sociologically and politically correct way to justify getting more from someone else. The concept of fairness fosters the action of redistribution or reallocation because those that believe life should be fair will support the program of accommodation.Some Cynics correctly calculate that they will receive a gain. What they have been unable to attain by a survival of the fittest process, they can now get through the believers voluntary capitulation to a government imposed re-equalization fueled by their guilt.  This proceed adds relative value or assets to what the Cynics naturally received through competing in the “unfair” manner.  The process is now innately and hypocritically even more unfair because these Cynics are receiving “fairness” based on an unfairness to others resulting from a concept they do not believe in the first place.

This is now so ingrained in our political mind that right or wrong,  fairness has now become the watchword and income redistribution the measure!

But is life really fair?

Bill Gates said: “Life is not fair; get used to it.”

This is an interesting question, and perhaps it is the most important one to answer before we embark on yet another generation of programs geared to seeking government equalization for perceived unfairness.  One thing we need to consider is that much of our history and knowledge rules against the concept that life is, or could be, fair.

Theory of Evolution sides against life as fair!

Since the theory of evolution (according to the extreme right-wing conservatives) is a liberal theory, you would think that it might provide some basis for the concept that life is fair.  Darwin’s theory, even the modern modified form of it, is predicated on the main concept of survival of the fittest.  Those that do not survive, fail to reproduce as much as others more capable and therefore over time the advantageous characteristics of the fittest survive, and the disadvantageous characteristics of the rest of the species die out.  Clearly this is not a very fair system to those that don’t make it to the next evolutionary step now is it?

Creation Theory sides against life as fair!

So if evolutionary theory is a bastion tenant of the left, let us look at the extreme left-wing view of what is a bastion tenant of conservatives—Creationism.  Once again, this theory also does not support the concept of life as fair. Let us just look at one point of many.  As God dropped the innocent Adam and Eve into the Garden of Eden, he set up one thing that they could not do.  They could not eat the apple.  Now is that fair?  Eve didn’t think so!  The non-biblical theory of creation is rife with the inherent conflicts and accomplishments that brought man forward from historic to modern times.  It was man’s ambition, effort, and conquests that defines his steps to modernity.  No where in this theory is the concept of fairness used to illustrate mankind’s gains. In fact in many of the illustrations it was mans innate unfairness that gave one group an advantage over the other.

Big Bang theory sides against life as fair!

OK lets look to pure science. According to the Big Bang Theory, the universe began, perhaps after a great cyclic gravitational contraction, with a large explosion.  Everything that existed prior to the explosion was destroyed and released anew as pure energy.  As the universe cooled all the various forms of matter formed according to what we know of the laws of physics, and the chaos of the explosion became replaced with some relative and random order. So according to this theory you have a massive destruction of something that gradually re-consolidates into something else.  Clearly, this was not very fair for that which got destroyed now was it?

I guess it could be called the ultimate in income redistribution!

No government process yields fairness

The United States, by all external accounts, has one of the fairest judicial processes in the world.  Hundreds of thousands of pages of rules and laws have been written and established with fair justice as the principal goal.  Yet, look at the O.J. Simpson trial, or more recently, the Casey Anthony Trial.  Ask most Americans if the outcome was fair and they will tell you that both of them got away with murder.  Clearly, our own experience shows us that life is not fair and no government can provide fairness.

In an odd way, the system itself recognizes life is not, nor ever will be, fair.  Our form of justice is not as much about fairness as it is equalization of injustices, both perceived and real, by the transfer of some value or asset from the defendant to the plaintiff.  Even things that are clearly recognized as accidental, now include compensation for the victim as part of the “fairness” concept of justice.  In the early 1800s through the mid-1900s, liability for damage due to death from addictive patent medicines rested in the hands of the person who purchased it and chose to take it.  If you used a piece of equipment in the 1840s or 1850s and you lost a finger—well, its a shame you lost the finger, stuff happens you know!

Today, for some, by no means all, such events become a life changing payday.  Our concept of fairness has evolved much over the last century or so.

Point of View

Fairness is clearly just a point of view. The concept means different things to different people, at different times, and in different circumstances.

Aurthur Brook, the president of the American Enterprise Institute,  defines fairness this way:

We are not a perfect opportunity society in the United States. But if we want to approach that ideal, we must define fairness as meritocracy, embrace a system that rewards merit, and work tirelessly for true equal opportunity. The system that makes this possible, of course, is free enterprise. When I work harder or longer hours in the free-enterprise system, I am generally paid more than if I work less in the same job. Investments in my education translate into market rewards. Clever ideas usually garner more rewards than bad ones, as judged not by a politburo, but by citizens in the marketplace.

Others define fairness on some system of compensation for perceived, or real, inequality.  But in such calculations, one persons fairness is another person’s unfairness.

While the goal of Affirmative Action is to offer incentives, subsidies, and other compensating systems to change the future results in favor of those who were viewed to have been historically treated unfairly, what is fair for the recipient is now unfair for some, if not many, of those who now do not get the benefit.  If such systems are compensation for past unfairness, at what point does the balancing cross over to real unfairness in the other direction?  What system is in place to measure and determine the point for the balancing re-equalization to stop?  Initially, such systems may appear fair but they are not universally fair.

Look to the movie “Unforgiven” when Hackman’s character says in his dying breath, “I’m building a house. I don’t deserve it.” and Clint’s character says, “Deserves got nothing to do with it.”

Universal fairness, in the end, is the concept that belies the concept of fairness in the first place.  What may seem fair for one set of people and one circumstance is seldom fair for others, or perhaps for all.  For the sake of argument, let us assume that Theory of Evolution is correct and the continued survival of a species is based on its continuing evolution through the mechanism of survival of the fittest.  If this is true, then our modern healthcare system—that is solving for all the inter-species competition and environmental damage that normally would be spelling death knells for individuals, or seriously impacting their ability to reproduce—is prohibiting this survival of the fittest process from taking place. Therefore, it might be argued, modern healthcare is not innately fair for the species as a whole.  It can also be argued that keeping people alive to an older and older age where their productivity for the benefit of the species becomes much less than what they consume is also innately unfair.  Yet, none of us as humans make this argument, or myriad others that could be made, because we believe we are a special species on this planet that feel and care for others of our own kind.  Now, we also even significantly express care about the other species as well, sometimes to our own fiscal detriment.  Is this well founded enlightenment or is it simply a long term strategy of our own species’ self destruction?

Fair Use, Fair Trade, Fair Employment, Fair Market Value, all use different fundamental concepts or measure of fairness. Often, in the end, fairness adds up to being the political concept of equal treatment for some based on the justifiable unequal treatment of others.

Conclusion

While I am going to be using the President in the following example, I see the same thing from the candidates on the other side of the aisle. Please do not draw the conclusion that I am only finding fault with President Obama. I n fact, I find fault with them all on this point!

For this election, President Obama is now decided to use the main theme (sound byte, talking point, mantra – you pick it) of Fair Shot, Fair Share, Fair Play.  In these moments he contra-poses the hope of fair with the negative of things like the mortgage foreclosure crisis or the stock market collapse, or the “greed” of wall street and the rich corporations.  Without stating it directly, first he imparts the message that we should expect fairness and it can, in fact, be attained.  Secondly, he is building the image that only he is fair and anything else is not fair.  He makes the statement that everyone should be able to buy a home but does not discuss whether or not they should have the requirement to afford the home in the first place.  If they can’t get the loan, for whatever reason then the lender is not fair.  If they buy the home and now the lender wants to collect or repossess the home than the lender is not fair. He uses terms like unscrupulous in these cases to paint a broad picture.

Clearly, some lenders are unscrupulous, just as some people seeking loans are also unscrupulous.  But being a lender does not directly equate to being unscrupulous any more than being a borrower automatically equates to deadbeat.  While one side can quote statistics to show how all the lenders did such-and-so to be unfair to home buyers, conversely the national statistics on upside mortgages and home mortgage defaults leads one to draw the conclusion that a large part of borrowers are deadbeats.  Neither of those assumptions are of course true.

Framing the argument for his re-election in such a lopsided way is indirectly and in some cases directly, instilling in the public that they have a right to own a home regardless.  If they, you know those unscrupulous people, don’t loan you the money or you can’t pay it back it is they, the unscrupulous, that are unfair…

The President in a recent video discussing fairness said, “Congress cannot end the year taking money out of the pockets of working Americans.”  But, in the end, that is what all government fairness programs really do.  They do not provide fairness, they provide unequal treatment for some to provide equal treatment for others, usually based on a specious and arbitrary determination.  When it is the result of a political issue then it is simply unequal treatment for the group that is the numerically the smaller group of voters for the benefit of the larger voting block. This is why our founding fathers were so adamant that we became a republic, not a democracy!

In the President’s case, perhaps it is that he simply believes his system is fair because the Working Americans he favors deserve more fairness that all the rest of us.

As Hamlet said, “…Therein lies the rub: for in that sleep of death we know not what dreams may come…”

But then again, maybe we do!

Be sure to subscribe to this blog.  Also I invite you to follow me on twitter @twloker.

$25 billion in foreclosure relief: Will Americans really benefit?

(this article originally  ran in California Political Review it is re-posted here with permission.)

Median Housing Price compared to CinC 1960 to 2009

While the news today is full of various articles touting the $25 billion government settlement between the nation’s biggest banks and homeowners there is one big question for the nation’s citizens, and in my local case Californians—will this really be a benefit? While I am looking at this from a California perspective, this really is the same for the country as a whole.

In examining this question, there are at least three things to consider:

  1. Will the initial settlement amount become a meaningful amount for homeowners and truly affect their current financial situation?
  2. What are the long term implications of this settlement for mortgage holders?
  3. Will this settlement resolve the underlying problem in housing prices and declining values?

Before I get into this topic, first let us commend California’s Attorney General, Camilla Harris, for her efforts at getting a better deal for Californians.

Meaningful Amount

Question number 1 is perhaps the most current.  Clearly, this is the question on anyone’s mind who owns a home in California.  Will the $25 billion really have a material effect on my mortgage problems?  California has the most homes underwater of any state, according to Santa Ana-based data firm CoreLogic.  There were as of September 2011, more than two-million homeowners that owe more on their homes than they are worth.  By percentage, California ranks fifth with 30.2% of all homes upside down in value.  Compare this with the national average of 22.5% and you will see there is a big problem here.

If you take the national total of 10.9 million home owners spread across the $25 billion, and you apply a “historical fairness” standard where everyone gets treated equally, you get an average payment to each homeowner of $2,293.58—not very meaningful is it? Now, some believe that the “rich” do not need, or deserve, the extra money, so using a “revised fairness” standard, and the fact that some significant number of people will not apply for the funds, the settlement group estimates that the average amount granted to those participating will be more like $20,000.00.  This number sounds better but, there is a big but attached. The combined negative equity of all US homes is over $700 billion meaning that the average homeowner is underwater by at least $50,000.00.  And higher priced homes, like those owned by the rich, often are underwater by a significantly higher percentage.  Adding in the fees and other charges that will get levied by the banks for the processing of these claims and the effective gain drops even more.  So on a national basis, some could take the cynical view that this is not a meaningful amount—but, what about for Californians?

California, by the CoreLogic study has about 2.06 million homes underwater.  The state is targeted to get about $430 million. Using the same comparison above, the “historical fairness” allocation would be $208.74 cents per homeowner and the “revised fairness,” amount, where the rich don’t get any help, will equate to about $3,779.82.  Since California’s market has been hit harder than many other states and its average home price is much higher, the proportional amount negative equity is also likely higher.  So, one could argue that Californians may not only feel the amount is meaningless, they may also feel it is not fair overall!

Long Term Implications

Like most things revolving around government driven programs and settlements, we need to think about the long term consequences.  Where does the money come from that makes up the settlement?  Well it comes from the banks—right?  As the last stop before it gets paid into the settlement that is correct.  But, while this may be the end of the story, as usual, it is not the whole story.  The money comes from us via two primary routes; one visible and understandable and the other confusing and relatively insidious.  First, it comes from the bank’s profits, if any.  And of course their profits, if they have them, come from the fees they charge us, and if the bank’s costs go up they charge more fees to us and we pay them.  So in this route the money comes from us.  The second main route, the more insidious one, is from loans made to the bank by the Federal Reserve to help the banks maintain liquidity or inject more cash into circulation, sometimes called “quantitative easing.” In this case, the money is created out of thin air by the Federal Reserve increasing the total amount of money in circulation—with no increase in value of the underlying assets—passed down to the banks to pay out to us to reset our loans and it reduces the real value of our money.  The result is; goods increase in price, the money we earn goes less far, and we in effect are even poorer.

The cynics among us, who have concluded long ago that there is no free lunch, realize that no matter what the money we get is really coming from us. They may argue that the long term implications from this program are not very good.  The reality is, there really is no free lunch and we can expect that this particular settlement will not work out well for any of us in the long run.  Since many of the people who have the worst upside down mortgages would appear to many other to have been rich, it is not clear that this program would even be a model for the execution of “income redistribution” that some proffer as a solution to all of our ills.

The Underlying Problem

If you look at the graph at the top of this article you will see that the route of our underlying problem goes much deeper than it first appears.  While some argue the cause is the profiteering of the rich and corporations, and others charge it is the irresponsibility of people borrowing to buy houses they could not afford, the real root of the issue is the underlying basis of our economy.  Prior to 1972, the total amount of currency in circulation, referred to as the CinC, was about $500 billion dollars.  The amount of actual currency was restricted by a mandate that each dollar had to be backed up by a set amount of gold.  By 1972, this had become a huge problem as we could not increase the amount of currency and the government, therefore we,  did not have enough cash to pay for all the expenses the country was racking up like War, Social Security, Medicare, Medicaid and myriad other subsidy programs.  Also we were accumulating an increasingly large trade deficit.

But in 1972, then President Nixon, removed the country from this check and balance. By today we have increased the amount of money in circulation to about $16 trillion.  This is a thirty-five times increase in the total amount of the money supply.  No one will argue that the total value of the US assets has also increased thirty-five times—hence the problem.  If you look at the chart, you will see that the median home price in 1972 was about $24,224.  At the peak of the housing bubble in 2005-2006 the median price had risen almost point for point with the increase in the money supply to $298,500.  If you now look at what the median home price would have been if we had not done this, the median price projects to be more like $115,734. The point is that if it is true that the amount of money in circulation is not representative of the real value of American assets, then our total economy, is overvalued.  Even with the tech gains from our NASA investment in the 1960’s and 1970s, the economy would project to be about a $5 to 6 trillion economy not $16 trillion.  Housing, under this calculation, would have to decline another 46% in order for all to match up.

Even if these calculations are off and the relative value of our assets has increased at a rate higher than the pre 1972 rate, there is likely still a large correction coming to our economy in general and housing in particular.  California will be the eye of this perfect storm.  I submit that this mortgage fix neither addresses the underlying problem nor ameliorates Californian’s personal and current dilemmas.  I think it may really do the exact opposite and compound our problems with false hopes, false senses of security and increasing debt based on inflated values that are doomed to correct.

Regardless, this is an unbalanced fix in that it is trying to fix the debt side for a few and ignoring the unbalanced asset value side for everyone else.  Even if pumping more arbitrarily printed money into the economy buoys the market in the short term, the continued unrealistically inflated values will again decline and once again we will be faced with the same problem. This will promulgate more borrowing against what likely will continue to be declining values in an overvalued economy—potentially spelling disaster. The only fix that will work is to address both sides of the problem across the board resetting both the Debt and Equity Value side at the same time.  Perhaps it is time for either the Federal Government, or California, to consider a “Land Bank” system of mortgage financing.  We need to address the balance sheet of the bank and homeowners at the same time we address the asset value side of the equation. Only then can we truly, fairly, and equitably address the fundamental problem.

So in the end is this deal a good deal for Americans?  For Californians? And the more important question we all need to start asking is this!

Regardless of the impact to me personally, is this the right thing for America?

I keep wondering why this is so hard!

Headline screams – Once-hot profits may be cooling for big business: Is there more to the story?

Associated Press reporter, Bernard Condon, wrote an interesting piece this morning. My local paper, the San Ramon Valley Times, headline was “Once-hot profits may be cooling for big business.” The US. News and Word Report picked up the article as, “Corporate profits aren’t what they seem.” The subtitle is the telling point.  Growth appears to ebb as firms find less to cut, dollar strengthens.

This is a good article because the author correctly brings to light that the once mighty engine of America’s prosperity is faltering.  It is not a great article because the author misses the real cause of the decline in profits, and like most others,misses the point that we critically need to understand in order to rectify the real problem. America’s prosperity engine faltered quite a while ago.  We have been living on years of the banks and the Federal Reserve, steadily increasing the amounts of money in circulation with no regard for real value.  While many of us feel like we have prospered because we have continued to get more money and buy more stuff, the amount of our “prosperity” has not kept up with our spending and has left us a very large hole to fill.  As my brother-in-law, who was a farmer and a waterman, used to say, “It ain’t no good to want them Cadillacs when you can barely afford one of them Ford Pintos.”

As you have seen me report many times before.  We have raised the total amount of money in circulation from $500 billion in 1972 to over $16 trillion today with no real and equal corresponding increase in the total asset value of the U.S. As a result, we have drastically increased the perception of constantly rising profits, because we have simply increased the amount of the benchmark item, U.S. Dollars, that we use to measure our worth.  Lest we start to think that perhaps we really have increased the relative net worth of all the value of the U.S. in excess of thirty-five times since 1972, let us remember that we have been buying from other countries much more than we have sold to the other countries since 1972 accumulating over $12 trillion in trade deficits.  In other words, our collective house spent $12 trillion more than it took in in the same period.

Thank God for the banks, huh? Their ten-to-one fractional-reserve lending system, and the Fed’s ability to just inject whatever amount of cash was necessary into the banks to make everyone feel like they were earning more money and getting richer has really saved the day—don’t you think?.  Without the drastic program of printing new money with no governing checks and balances, we would have faulted long ago—right?  It’s just a great thing that they could keep printing money with no real tie to tangible values—wasn’t it?

So in case you did not clearly get the sarcasm… NO,  it was not good!  In fact, our economy did fault long ago.  We have been living on dreams, wishes and baseless valuations for at least forty years. Depending on how you consider the issues, the problems that caused our decline could be argued to trace back almost seventy years.

In order to conceptually grasp the issue let us simplify the problem.  Let us go back in time to when there were just a few settlements in America.  In this hypothetical example I will use a place near and dear to my heart, St. Mary’s, Maryland founded in 1632.  In our hypothetical example, the year is now 1636.  The colony has grown to 100 people.  The money was Maryland dollars that were acceptable in England at an exchange rate set in agreement between the King and Lord Calvert—the founder of the Maryland Colony. (yes, I know this is not historically accurate, none of it is, this is all made up to illustrate a point).  There were only a total of $10,000 printed Maryland dollars available to the residents of St. Mary’s, there was no credit, no electronic money, and no barter.

Since they had been living in the area, they had been focused on building out their community.  As such, they had harvested resources like trees, clay, iron, etc., and converted those into lumber, bricks and nails to build their structures.  They had planted and harvested crops, hunted and raised animals for food and generally eked out a basic existence. While they had been able to make many things, they had had to purchase as many more through Lord Calvert’s Maryland Company to vendors back in England. Items like dishes, glasses and tankards, patent medicines, fine tools, cloth, clothing, and many others had to be ordered and shipped from other countries to the Maryland colonists.

Since they had been completely consumed with building the infrastructure they need for basic survival, they had yet to develop any industry.  They had , as yet, had no excess production of any kind and as such they had been sending their money to England to pay for their goods and, had not sold anything to England to bring these dollars back to the colony. Pretty soon, the colony had spent almost the entirety of their $10,000 Maryland dollars in England and there were only a few hundred Maryland dollars left collectively among all the colonists.

The leaders in St. Mary’s called a meeting of the town to discuss what to do about the pending disaster.  In the meeting a member of the town council, Mr. John Connally—a pig farmer and great speaker, suggested they use their last $300.00 to buy a printing press.  Then they could print more dollars and they would be able to pay for more goods in England and avoid the pending crisis. Since, Mr Connally’s words were so well spoken and the solutions seemed so simple almost all immediately agreed. All, that is, except Mr. Burns—a clerk, who said that he was concerned that this would not work.  As he began to explain his concern, the Governor, Mr. Nixon, interrupted him, told him they would proceed with the purchase since the majority had agreed, and that Mr. Burns would now report directly to Mr. Connally with any of his concerns.  Mr. Connally would not longer be a pig-farmer, he  would now be in charge of all the money.

The printing press was ordered from the Gutenberg company in Germany, it arrived in time and all seemed to be working perfectly.  Mr. Connally, no longer a pig farmer was now the chairman of the central bank and was printing money as fast as it was needed.  The new money was going to England to buy goods and everything looks just hunky dory. By about the third purchase of goods in England, with about $2,000 in new money printed and sent to England to pay for the purchases, the settlers were informed that the prices of the goods were going up by 25%.  No matter, said Mr. Connally, I will print us some more money and again all will be right with the world. A few months later, another $2,000 is put in circulation, more goods are purchased and the price once again increased by 25%.  Again, Mr. Connally printed $2,000 more, they bought even more goods and the prices went up another 25%.

Every time, they got to the point that only $300.00 was remaining, Mr. Connally printed another $2000. All the people were happy!  They had been able to buy bigger windows, more and better china, flat screen TVs, new sound systems, GPS for their fishing boats and buggies.  They were starting to really feel like they had finally arrived.  With all the building and purchasing they still had not gotten around to producing much to sell back to England.  In fact, they now wanted to get some indentured servants to do the manual labor because working in the fields, on the water, in the brick yards, and the forests, was hard dirty work and the constant tracking of dirt and grime into their new larger and much finer homes was making their new furniture, and clothing dirty, uncomfortable, and it wore out much faster. The women-folk were getting tired of keeping up these bigger homes and their nice clothing really did not lend it self to domestic work.  They wanted more time to get together with the other women-folk to discuss new ways to improve their lives even further. It became fait a’ compli that now that they had money, they could simply get some immigrant workers to do all the hard and dirty work.  Getting these indentured servants from other countries, who will be glad just to get out of their slums, would free the colonists and their wives to focus on this productivity thing, that they needed to do, and they wouldn’t have their fine homes and goods soiled and and their wives wouldn’t get so worn out. Evey one was much happier!

Sometime in early 1639, Lord Calvert was informed that his company had in their safe $26,700 Maryland Dollars.  Lord Calvert was now very concerned because he had no idea where the extra money came from.  His deal with the crown was that Maryland could have $10,000 and the King would back that against 10,000 ounces of gold.  That meant that each Maryland Dollar was worth one ounce of gold.  The King only provided the 10,000 ounces of gold, no more and no less. Calvert was responsible for any other costs.  As the Marylander’s demand for goods increased, the vendors in England charged more so he was getting less and spending more dollars, this was a big problem because the difference was coming out of his pocket.  His accounts were in effect making up the short fall and he was losing big money.  Let’s take a look at his calculations;

Lord Calvert’s Accounting

Date Maryland $ Kings Gold in oz. Exchange Rate in oz. of Gold Demand Price Inflation Lord Calvert’s Loss in Gold oz.
1632  $  10,000.00    10,000.00 1.00 0  0.00
1634  $  10,000.00    10,000.00 1.00 0  0.00
1636  $  12,000.00    10,000.00 0.83 25%     5,000.00
1640  $  17,600.00    10,000.00 0.57 95%   12,000.00
1642  $  26,700.00    10,000.00 0.37 209%   23,375.00

So Lord Calvert books the first ship he can find to come visit the good citizens of Maryland and find out what the hell is going on.  When he gets there he finds out about the press, the the leaders decisions.  He is told by the citizens about how great everything is going.  He sees that they have bigger houses, servants, Flat Screens, GPS systems, he is told how all this is helping production.  He sees the new servants toiling away and while he initially was pissed, he starts to see that it may all work out.  Feeling comfortable, he books passage back to England, and tells his partners and the King don’t worry these guys got it all together.  This is going to be just great!  You should see all the fine stuff they have, all the people working in the fields and factories.  They are going to do just great.  We will have so much new stuff to sell back here in England, we will all be rich!

Then the goods start to arrive from Maryland; tobacco, corn, pork bellies, cotton, iron, and many more.  Initially, the people of England purchase everything they can get because it is all new and hey, it is from Maryland and everybody knows those guys got it goin’ on! But then it all starts to unravel.  First with tobacco.  New plantations in other places, like Virginia, start to grow more of it.  And their quality is just as good and the cost is much cheaper because they are not paying the laborers as much. Soon no one wants to buy Maryland tobacco. Rapidly the costing problem extends to the other products as well.  Fisheries, Lumber, Grain, Steel, Textiles, Oil, and the other core exports from Maryland stop selling because they are too expensive.  Even the people in Maryland are importing some of the same goods from the other places because they cant afford to buy the stuff they are producing.  And it is all getting paid with the dollars they are freely printing.

The next thing Lord Calvert knows, no one wants Maryland goods nor Maryland dollars. They all want to redeem their Maryland dollars for something that has real value. Now, there are over $934,500 Maryland dollars in circulation around the world and Lord Calvert has to come up with gold, or something just as valuable, to pay everybody back for the now worthless dollars they have. When all is said and done he has to come up with 1,158,124 ounces of gold, plus he has to pay back the King an additional 10,000 ounces of gold plus interest.  Lord Calvert feels perfectly and totally screwed!

He agrees to “lend” the Marylanders the gold to pay for the debt.  Since he is on the hook anyway he has no real choice.  The Marylanders agree to pay taxes to Lord Calvert and to  pay all the money back with interest.  And where does the money come from?

Mr. Connally prints it—of course!

For this fictional Maryland story, as you can imagine, there is no happy ending!

Since in the last 50 years America has purchased $12 trillion more in goods than we have sold, you need to ask yourself one more question.

“Where did all the reported large profits in recent years actually come from?”

To quote the famous song,

There was a farmer had a dog, And Bingo was his name-o.

California AB171 & AB254: And we wonder why healthcare costs in CA continue to increase?

One of the largest drains on every states budget is healthcare cost.  California has historically been in the top of state healthcare expenditures due largely to its past of providing one of the most generous sets of program benefits in the country.  Both Governor Brown and Secretary Dooley deserve a tremendous amount of credit for acknowledging the mounting problem of healthcare costs and taking steps to begin the process of addressing it.

Healthcare costs in the U.S. are estimated to top $3 trillion this year.  That is a significant increase from the estimated $2.4 trillion in 2009.  The Affordable Care Act (ACA), aka Obamacare, is supposed to be lowering the costs and improving efficiencies for healthcare.  While it can be argued, and it has vociferously, that it is early in the process and the projected savings will begin in the next four to five years, there are some significant indicators from the administration in Washington DC that more and more of the promised savings will not happen.  This will spell further disaster for states like California that already shoulder a disproportionate share of the healthcare burden of our population.

Before we can discuss AB154 and AB171, let’s review some broader recent decisions and data that have a direct impact on California’s projected healthcare costs.

Part of the plan to afford the care under the Affordable Care Act was to appropriate revenue from the purchase of healthcare and penalties for non-purchase of policies.  The governing method to assess the fees and assure collection was the IRS.  Within months of its passage the government had to admit that the idea of the IRS administering this program’s revenue would not work and that segment of the legislation was repealed.  This now begs the question how will this revenue be assured?

As we are all painfully aware, there is some disagreement over whether or not the Affordable Care Act’s mandate to purchase insurance is constitutional.  Scholars, pundits, and constitutional lawyers on both sides are already at polar opposites over the issue with each side quoting chapter and verse as to why, or why not, it will be upheld or declared unconstitutional. The reason for the gulf in the interpretation of the underlying law is its base on a prime case called Wickard v. Filburn from 1942 that started the justification for the federal government’s expansion into what had prior been clearly state jurisdiction.  Any non-lawyer’s reading of the case simply defies common sense—this will be a very sticky wicket indeed. If the Supreme Court declares the mandate unconstitutional then much of the insurance reform inherent in the bill falls apart. Another large segment of projected saving will revert to increased expenses ultimately burdening the state both directly and indirectly.

The U.S. Secretary of Health and Human Services, Kathleen Sebelius, has recently ruled that the CLASS Act—a segment of the bill that was designed to expand options for people who become functionally disabled and required long-term services and support—is not affordable by the definition under the act and therefore it has been suspended.  Where will these costs fall if the federal government stimulates the expectation but fails to provide the funding?

A major part of the projected savings was though the requirements of Accountable Care Organizations (ACO’s).  In the bill they were projected to provide a savings of approximately $333 million per year, or just about $1 billion over three years. The CBO recently announced the results of a 20 year study focused on disease management and value based payment methods that fundamentally negate most, if not all, of the assumption on which these projected savings were based. In fact the study indicates they will potentially increase costs.

Another main point of the Affordable Care Act was to eliminate treatment disparity.  Who wants to argue for disparity? No one!  But even CA Secretary of Health and Human Services, Dianna Dooley, has said publically that “…we all need to get used to the idea that disparities will exist.”  I commend her for this statement because it is unequivocally true.  There is a basic law of diminishing returns that says that you will spend 80% of your money trying to arrest 20% of the problems.

Another key segment area of the ACA savings plan is Insurance Rebates. The act maintains that it has teeth to control the insurance industry profits because of its ability to mandate rebates for fees in excess of the medical loss ratio that the U.S. Secretary of HHS sets.  In the first place, the rebate amount is a mere trifle compared to the $3 trillion national expense.  More importantly, rebates have been mandated by the federal and state governments of Pharma for years.  Rebates do not lower costs at all.  Rebates in this bad play are methods to redirect money from the general consumers of the products, prescription drugs in this case, to other areas that the federal government, or the state, wants to spend them.  They do nothing but increase the cost in an arbitrary and specious way and obscure the real cost of care in America.  If monies flow in payments to the drug companies, and then flow back to the states, and the states, like California, can redirect these monies back to the programs or the general fund to fund more patients, it amounts to nothing more and a consumption tax.  A look at the California budget shows that about ½ of the drug spend for some programs comes through mandated rebates.  Sure this is a good thing for the participants in the programs, if like California the moneys flow back to services—not all states do this, some pay for other infrastructures—but it is not good for understanding the real impact of these programs economically as the myriad of convoluted funds flow become impossible to track or account effectively.  Frankly, the $3 trillion in health costs for the U.S. is not likely even close to $3 trillion because it is an unintelligible mix of both invoice pricing and actual reimbursement payments.  And for those who do not know, a healthcare provider typically is getting reimbursed from eleven cents on the dollar to twenty-two cents on the dollar for services they bill—and they seldom can predict the amount.

Yet another key segment of savings under ACA was the premise that hospital readmissions will reduce.  The plan is to select a series of specific disease states and for the government to begin to select measures that will allow for adjustment, read penalties, to hospitals that have higher than the selected measures for readmission.  Houston, we have a problem.  One of the biggest drivers of healthcare cost is age related illnesses.  Since 1964, when we created Medicare and Medicaid, the lifespan has increased from about 70 years old to almost 83 years old today.  The effect of this increased lifespan has been to significantly increase the cost of care in one’s life and shift the cost curve of lifetime health expenses to our last few years of existence. A recent Kaiser study now indicates that almost 85% of our lifetime expense for healthcare will be made in the last 5 years of life—and the trend is still increasing.  We are aging, our culture of how we manage our elderly relatives has shifted from family responsibility to outsourced solutions (nursing homes), and we now are more focused on quality of life than just life as the basis for our expectation of care.

Let’s stay on the topic of re-admissions for another moment because this is a big one.  One of the assumptions that drive the belief that we can reap savings by setting measures and penalties is that and assumption is that the reason for the readmission is that hospitals get more money for readmissions. As a result, they are not doing much, or enough, to improve the outcomes in the first place.  But this is a false assumption for many reasons.  To illustrate the issue, let’s discuss Hospital Acquired Infections.  The premise is that Hospitals are sloppy or slipping when it comes to hygiene and if they simply do a better job following antiseptic protocols to reduce infection, then these unnecessary costs will go down.  The people drawing this conclusion do so from the basis that healthcare is more of a cause and effect system, a static system, where we have fixed cures for most of what affects us.  This is one of the main cores of why we keep thinking we can make progress if we just keep doing X process more and better…. But the problem is, the practice of healthcare, after all, actually is largely a war with other species (bacteria, viruses, and other complex pathogens), a war with our environment, (accidents, violence, and pollution) and also a war with ourselves (diet, exercise, work habits, and sleep). From time to time, we can see gains for ourselves in these battles, but our mortality assures us that we will all eventually lose the war. Basic biology and the laws of nature have stacked the deck against us. Innovations in technology, science, and medication have helped many of us delay the day of our ultimate surrender, but these advances have also fostered the false belief that no price is too high to pay for an extra day or week of life. Related to infections, we are losing this war as our chemical and biological weapons have continued to become less and less effective. The protagonists, other species, have evolved resistance to our weapons and the remaining available chemistries’ at our disposal have become more toxic to us who take them. Hospital readmissions will likely continue to increase.

Lastly, ACA relies heavily on projected savings from the mandate of conversion to Electronic Health Records (EHR’s).  While EHRs are a good thing and will very likely improve patient outcomes, any projected savings, should they even materialize, will be negligible.  How can I predict this so definitively?  If you look at where the healthcare dollar is spent only about 12 cents is spent in administrative costs today as it is.  The percentage that may be gained in efficiency from conversion to electronic records will likely be 10% to 20% of that number which would yield about 1.2 cents, to 2.4 cents, for every healthcare dollar.  The current plan for EHRs does nothing to change the current HIPPA regulations and as such the sharing or coordination of care though the transportability of these records between providers and sponsors is very expensive and practically prohibitive.  The application of technology has always been made with the promise of increased productivity and lower costs but an honest assessment of the past 40 years shows that overall lower cost and significant gains in productivity are the exception not the rule.

The largest cost drivers, where EHRs could have a major influence, are in the areas of duplicated services, defensive medicine, fraud, and abuse.  By many estimates, on both sides of the political spectrum, only about 33 cents of the governmental healthcare dollar is realized in services—about 60 cents is lost in these areas.  There is little debate on this total number across the aisles.  There is large debate as to whether the costs are larger in the fraud and abuse area or in the duplicated services/defensive medicine areas.  This debate is moot as EHRs could have the potential to drastically reduce these aggregate costs if, and only if, they are coupled with mandated coordination of care and benefits across all available sources.  By the way, I don’t mean single payer.   Single payer is a great sound bite but the term likely does not really describe what people are seeking.  Do we really want all care to come from a governmental source—eliminating choice, volunteer treatment, faith based programs, non-profits, philanthropic sources, corporate sources, etc.?  When I have had this discussion with various legislators, both state and federal, the answer invariably has become; well no, of course not!  What most really seem to want, and what is necessary to make this all work, is a central point of administration with the ability to connect the providers around the patient as the center point in a kind of virtual care team.  This is relatively inexpensive, does not initially even require full HER implementation to achieve significant savings, and provides a great role for state government to play.

With this as a backdrop, we come to the last big issue facing why healthcare is continuously increasing in cost and the issues with AB154 and AB171 drastically put at risk California’s healthcare future.  AB154 is legislation recently approved by the Assembly that will require private insurers to cover diagnosis and treatment of mental illnesses (it appears all mental illnesses on the books).  AB171 requires coverage of developmental diseases such as autism.  The Assembly also approved legislation to cover oral chemotherapy and mammography regardless of age.  While I applaud the sentiment, these kinds of actions that constantly increase the overall coverage of anything, and everything, which can ever affect anyone as they perpetuate their long risky walk through life to older and older age, in conjunction with the items previously discussed, are setting California up for a perfect storm.  As the ACA projections continue to fall apart and as the federal cost for healthcare programs like Medicare and Medicaid continue to increase, states like California will be left in the crosshairs of larger expectations for treatment and less, perhaps no, federal money to pay for it. Already the president refers to Medicaid as a state program.  I guess he forgets that both Medicare and Medicaid are just parts of the federal Social Security Act of 1964.  Of course, the states consider this a federal program and due to the increasing drain on state budgets some are trying to figure out how they can again opt out of this federal program.

Our largest issues come down to the following things.  We no longer truly insure health care to preserve basic life.  More and more we are requiring insurance to cover “quality of life.”  We have extended though technological gains the amount of time we can spend on the planet to the point that we are now on average way beyond the period where our bodily systems effectively fight the healthcare war.  As we have gained the additional ten more years of life from the past forty years of technical and medical accomplishments, we have moved into a new reality that to preserve our quality of life during this extended period we are consuming consuming more and more of our resources.  Unfortunately, much of what programs like Medicare and Medicaid are now paying for are not the actual costs of care.  They are paying for the things we purchased during the former years to improve our quality of life way beyond the realm of healthcare.  These programs are really funding the earlier purchases of larger screen flat panel televisions, vacations, 2nd homes, new cars.  They fund the things that, prior to 1964, we typically did not purchase because we knew we needed the money for our elderly rainy day funds.  We were worried that we would need to pay for the catastrophic accidents and illnesses that fate dictated we would face as we aged. Today we are all free to make these lifestyle purchases because the threat of elder catastrophe is now covered by entitlement.

This is not an argument to go back to the way it was, not an argument to eliminate these programs, not an argument that we should die earlier.  I know of no one that wants to see people die younger, suffer more, or live in destitution.  The point of this article is to bring to the front the dilemma.  It is here we need to develop a better dialog and, as Ben Franklin said, “find compromise, through tolerance.”  It is here we also need to start to focus our hard decisions on where personal responsibility ends and our safety net begin.  Until we do this, California faces the coming perfect storm and like all other state will likely face it alone without federal help.  The decisions we make on items like AB154 & AB171 while laudable are significantly increasing expectations and hence our risk of future economic collapse.  Remember it was Albert Einstein who said, “Insanity is doing the same thing over and over again and expecting different results.”  Wait, is this why AB154 is being passed?

I commend the Governor and the Secretary for their effort to begin to address this dialog.  While there are many who want to lay blame for everything at their feet, I find in both inappropriate and counterproductive.  Both have had long records of public service.  Both began, perhaps, more on the side of idealism but they have each arrived at pragmatism based on hard one experience and dedication to effective solutions.  I can’t think of any I would rather have trying to help California move these issues forward.  That said it is time we all begin to recognize the depth and diversity of the problems, reset our expectations and all become responsible for the solutions!