Friday, January 31, 2014

The great health insurance lie

We have all heard the fact that before Saint Obama granted us Obamacare, if you got sick, your insurance company would drop you. This is quite simply not true. But that has not kept our wise overlord from perpetuating the myth as part of the justification for Obamacare.

The truth is, before the government interfered with the market, the market offered guaranteed automatic renewals. Sure you might have had to pay a little extra for it, but it was an option people could choose. HIPAA violated people's right to choose and mandated guaranteed renewability, forcing people to pay for something they did not want or forcing group insurance plans to not exclude members due to preexisting conditions.

This means that for the past 18 years since HIPAA was passed, no person has legally been denied the ability to renew their health insurance due to sickness. Every individual health insurance policy is mandated to include the extra charge for guaranteed renewability.

So next time someone says that Obamacare saved people from being dropped, ask them to show even a single case where someone has been dropped due to getting sick.

Wednesday, January 29, 2014

Fixing inequality

The president does not understand even basic economics. In his State of the Union address, he showed his misunderstanding several times when talking about inequality. Two important topics he talked about are corporate profits and the minimum wage.

While it is true that corporate profits are up for some companies, this irrelevant to the topic of inequality. This is an attempt by an ignorant president to instigate class warfare to divert from the fact that inequality has risen during his administration largely due to the policies he endorses. He ignores the important role profits play and if government would get out of the way, long run profits will decline as new competitors enter these markets seeking some of those profits for themselves.

As for the minimum wage, it is a largely uncontested fact that minimum wage causes unemployment. A few studies have tried to show that increasing the minimum wage does not cause unemployment but there are serious methodological flaws in these studies. We can see the effect of minimum wage in the employment statistics. Younger unskilled workers have a very high unemployment rate compared to the general population.

Rather than help the poor and fix inequality, President Obama wants to double down on his own failed policies. If we seriously want to fix inequality, we need to get the barriers out of the way that the government has put up. We need to abolish the minimum wage and begin to deregulate industries. We need to make it easier for manufacturers to produce in America. Manufacturing, the industry government has been working hardest to drive out of the US, is where the high paying low skilled jobs are located.

Monday, January 20, 2014

Default or hyperinflation?

The US is in a bind. Our leaders have no ethics and the economists at the Federal Reserve are incompetent. There are four possible endings to the US government's current fiscal position and only 2 are plausible. Currently interest on government bonds is at historic lows and such a situation cannot last. When interest rates go up, either because the Fed reduces quantitative easing or because inflation becomes too obvious to ignore, the payments for the debt will begin to consume a significant portion of the budget.

The US government will either default on its debt obligations or we will suffer hyperinflation. The other two possible but unlikely options are tax hikes with no spending increases or spending cuts. Let me fist explain the unlikely options.

The only time government spending declines is when temporary spending ends. Spending on long term programs is never cut. The government's spending problem is so bad that they lie and claim spending cuts when they increase spending by less than they originally planned.

If spending cuts are off the table, what about tax increases. I am not talking about increasing tax rates but tax revenues. The confusion between tax rates and tax revenues makes this a hard path to follow. Regardless of the tax rates, the government has historically never taken more than about 19% of GDP. To increase tax revenues, the government has to promote progrowth policies. However, the government prefers to try increasing revenues by increasing rates which has the effect of reducing growth and thus reducing future revenues and exacerbating the debt crisis.

Even if the government could increase revenues, that does not mean it would fix the problem. Historically the government has taken additional revenues and increases spending by the same amount plus more.

Now that we know what won't happen, what are our remaining options. The government will either default because it cannot continue to make payments on the debt or the Federal Reserve will monetize the debt and we will suffer hyperinflation. Clearly the country would be better off with default. Some would suffer who held US debt but everyone will suffer from hyperinflation.

Tuesday, January 14, 2014

Rising house prices are a bad sign

How prices have risen significantly in the recent years. Naive economists claim that this is a sign of recovery. There are two primary reasons for increases in housing prices, or any price for that matter. Prices increase if there is a decrease in supply or increase in demand.

New housing starts have been picking up pace recently based on data from the National Association of Home Builders. And with the large stock of homes built during the housing boom that still need to be sold, it would seem to be unlikely that rising prices are due to a decrease in supply.

Since we know it is most likely an increase in demand that explains rising house prices, is this not evidence of a recovery? Surely people buying homes is a sign of recovery. However, the US median real income is falling. From this fact alone we know that there is no recovery. We can also know that the increase in home purchases is not by middle income home buyers purchasing new homes. They could not afford these homes.

Home purchases are due to investors. We know this because of the stagnant incomes and that a large number of purchases were in cash. With stagnant incomes and low savings rate, regular Americans are in no position to purchase homes with cash.

This means that rising house prices are an asset bubble.

But things get worse. Rising house prices make it harder for middle class Americans to purchase homes. The wealth effect leads to excess consuming by home owners who feel richer do to the higher home values. This leads to borrowing against the home equity. With stagnant incomes, home owners will not be able to pay back these new loans. When interest rates begin to rise, these homeowners will be in a world of hurt.