Tuesday, September 30, 2008

Unintended Consequence: Energy

The oil embargo of 1973 was a shock to our economy. The congress implemented price controls on new and old oil to keep the price down and spur exploration. At the same time there was a windfall profits tax on oil pertaining to existing wells prior to a particular date.

Over the past decades congress has provided tax incentives, credits and exemptions to oil and other energy sources.

These practices artificially priced energy at incorrect levels. It hindered new sources of energy by subsidizing current energy sources.

Subsidizing ethanol production is a prime example

  • When first initiated corn was under $2 a bushel
  • Demand for corn raised prices to a high of $8 a bushel
  • Farmers began to plant less wheat and other grains and more corn
    • This increased prices for Wheat and grains
    • Higher grocery prices
  • More corn acreage and less rotation required more fertilizer.
    • Fertilizer prices increased over 100%
  • With corn rising and 91% of all corn used for beef, poultry, pork and dairy feed, the price for meat and dairy increased dramatically.
  • At 51 cents tax credit per gallon of Ethanol, the government used our taxes to give to Ethanol producers who then competed against consumers for corn. At the same time the tax credit diminished tax revenues for roads and bridges which are now being funded by general revenues which has had continued deficits since 1957.

Instead of allowing the price of oil to reach its natural level, which would have been higher, other forms of energy that might have competed and replaced oil were never developed because of government interference.

This artificial pricing has allowed us to use more of the oil we had, become more dependent on others and delayed alternatives or the next generation of energy.

Monday, September 29, 2008

Unintended Consequence: Medicare

The objective of Medicare was to help seniors with medical bills. These bills in 1965 were relatively low consisting of office visits, some hospitalization and very minor surgery.

  • Prior to 1965 few had any health insurance
  • Individuals paid for their own care and rationed it accordingly
  • Medicare reimbursed at a 100% rate.
    • This created a new market for entrepreneurs to treat and test
    • CT scans
    • Implants
    • Drugs
    • Tests
    • Surgical Procedures
The taxes paid by workers were shifted from retirement savings, which would not be needed for decades, and used to pay current Medicare costs. This created a huge incentive for the Health Care community to create and invest in better treatments and get paid for it. Medicare created a entire new economy. Prior to this people could only afford that which existed. The risk was just too great to invent in new tests, drugs, equipment, etc and not be able to cover the costs. Medicare began to hemorrhage and began setting reimbursement rates.
  • This caused doctors to shift costs to other patients not on Medicare.
  • Some providers exited the Medicare field.
  • Private insurance and companies who received the shifting costs attempted to reduce their exposure by
  • Negotiating set fees.
  • This again shifted costs to those not covered by Medicare or Insurance.
  • This created a pricing tier that different people paid for the same exact service.
  • This ever increasing shift costing has caused many to become uninsured.

Medicare began the medical technology revolution while private health insurance added a boost up to 1985 at which time the system began to implode

  • We have workers paying 2.9% of wages to Medicare and benefit not one cent from it.
  • Workers are competing for healthcare with Medicare beneficiaries funded with workers money. Demand causes prices to increase
  • As we get older, the amount we spend on health care goes up. As the birthrate dropped and reached zero population growth, the average age of the US population will increase from 42 to about 46.
  • Therefore, health care costs will increase faster than inflation until the average age of the population stabilizes. In simple terms, health care costs are increasing at inflation rates for each age bracket of the economy. However, because the bubble of the aging is moving into ever higher cost years, overall health care increases far faster than inflation.
  • Because health care is not prefunded, but later the cost is even higher.

While trying to assist a few seniors, we have created a technological marvel of a health care system that we simply cannot afford. We used the potential savings of 40 cohorts to create this, but they have no resources with which to take advantage of it.

Unintended Consequence: Social Security

Social Security

Objective was to entice older workers to leave the work force in exchange for money to make room for younger workers. However, instead it did;

  • Increase in SS-OASI tax has reduced the US Savings rate.
  • Increased the cost of doing business
  • Increased the cost consumers pay for items
  • Shipped labor-intensive jobs over seas to lower cost countries.
  • Due to the large increases in the FICA tax in the late 60's and early 70's the Earned Income Credit was created by congress. Its objective was to compensate low income workers for paying higher FICA taxes. The problem was that the compensation came from general revenues, not FICA taxes. Sincere there has not been a general budget surplus since 1956, the direct impact of this legislation due to FICA has added $1 Trillion to the National Debt.

For 71 years Social Security paid benefits far in excess of what it could have. It was able to do this by draining the paychecks of workers. This caused workers to take out longer loans (30 year mortgage versus 10 years). This lowered the velocity of money through the economy,

It has also artificially priced retirement. Now that the system has reached maturity, the mature cost of the program is coming due.

Social Security helped millions of people and lifted living standards for seniors dramatically above what the economy could have sustained individually at the expense of three entire generations; baby boomers, generation x and generation y.

Since 1983, social security has been working on resolving its latest funding problem. It is no closer to a solution now than it was in 1937. Social security has earned 8.6% compounded continuously since 1980, but as a middleman will pay you a 0% return. A program that pays those born after 1985 just 29 cents in benefits for each dollar of taxes and credited interest is not fair. Americans want value for their dollar. You can buy a value meal at about any fast food chain consisting of a sandwich, fries and drink for about $4.00. If Social Security were to pay for a value meal, it would cost you $13.79. If we want to save social security, then each adult must send a check today to social security for over $100,000, or cut benefits by 40% or raise taxes by 85%. There simply is no painless solution. How firm are you on saving social security? I propose all workers keep their social security old age tax paid by employee and employer in their own accounts. Seniors who are found to be in need would be paid a means tested benefit of $1,214 a month.


The bailout will extend the duration of this problem. It will spread the cost among those who had no part in its making. These homes that are the subject of subprime loans were sold to those who could least afford them. These loans artificially increased the stock of homes in the U.S. This means until new qualified buyers come along that do not already own homes, there will be substantially fewer homes being built and depressed home values. This could take a very long time considering that only 45% of households are financially capable of owning and maintaining a home.

When Congress passed legislation to increase home ownership, it did not increase the ability to own and maintain a home. This means there could be as much as a 25% surplus in the U.S. housing market.

Transferring the cost of maintaining and disposing of these homes to taxpayers will increase the National Debt causing oil and other commodities to increase in cost. This is a zero sum option with high risk. Therefore, we should not bail out those who made profited from high risk investments.

This mess was caused by unintended consquences. The objective was to increase home ownership. Our elected representatives created this mess by straying from the core responsibilities of the Federal Government. What can all Americans do about this? VOTE THEM ALL OUT!

NBC-33 Debate poll results from 2002