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‘A Well Tailored Safety Net’: Social Security and Old-Age Risk-Sharing

by Bruce Webb

Well I guess my reputation precedes me at least a little bit. Jed Graham of Investor’s Business Daily has devised a new fix for Social Security and published it as A Well Tailored Safety Net (link to chapter summary) and kindly offered to send me a copy to review. Well I am in the midst of a move South to Seattle and a new job search (see note under fold) and so won’t have time for a full reading but will put some first impressions below the fold. Mr. Graham points us to a favorable review by Jonathon Chait Noam Scheiber on Chait’s blog in The New Republic (h/t Graham) A Bona-Fide Social Security Fix as well as a piece in The National Review by Reiham Salam Jed Graham on Work Disincentives and concludes with some apparent satisfaction:

It’s kind of noteworthy when these liberal and conservative publications see eye to eye on an issue as ideologically divisive as Social Security reform. It’s even more noteworthy considering that these are two of the more thoughtful people writing about economic policy.

Well while Chait is a reasonably consistent liberal both him and TNR lean a lot heavier in the direction of ‘neo’ than ‘New Deal’ liberal, if we had an equally favorable opinion from The Nation maybe we could talk here. But Angry Bear readers can make up their own minds on the substance of the reviews and the overall political approach of the reviewers.

Meanwhile Mr. Graham appended a copy of his testimony to the Obama Deficit Commission What I told Obama’s Fiscal Commission About Social Security.

Well having let Mr. Graham by implication make his full case up-front I will address some of his points below. Rather roughly I am afraid, since merits of his specific proposal aside he is working from the same flawed conception of Social Security as almost everyone else, he just adopts them to screw over workers in a slightly more equitable way than most other ‘Reform’ plans.

(First on that job hunting note. I am looking for full, part time or project related work in the Seattle area, if interested my resume has its own blog PlanWebb)
Okay back to Mr. Graham.

First, and a minor carp, Graham didn’t tell the ‘Commission’ anything, instead he meet with two unidentified but “first-rate” staff members. which considering much of that staff was supplied by Pete G Peterson may mean little more than preaching to the converted.

But more serious objections can be found in his chapter summaries linked above.

Chapter one: “Social Security’s $2.4-trillion trust fund contains no real resources.” Graham has simply adopted the ‘Phony IOU’ narrative whole. There is nothing in the law or in past or current practice to suggest that the Special Treasuries will not be honored just as they were in the entire period from 1971 to 1982 when interest and principal were honored down to the next to the last dime or as they are being honored TODAY in respect to the DI Trust Fund which has been taking accrued interest in cash since 2006 and principal since 2009. If they are not “real resources” why is Treasury forking over some $32 billion in cash to the Disability Trust Fund in 2010 alone? The reality of those resources is proven every time a disability check hits a bank account. Graham thus loses me at sentence one.

Chapter two; “Social Security’s history over the past quarter-century reveals that today’s predicament of a worthless Trust Fund didn’t take anyone by surprise”. Pure polemic. The Fund is not “worthless”, a fact revealed by the redemption of DI assets over the last year and a half with no outcry from anyone. The Special Treasuries are real as the regular Treasuries held by the CCB and the proof is in the continuing benefit checks. And Graham doesn’t build back any cred with me by titling this chapter ‘A political fraud’, instead the political fraud is insisting that notes that in accordance with the Social Security Act of 1935 are “fully guaranteed as to principal and interest by the Federal government” are nothing of the sort.

Chapter three: ‘The Price of Delay’. Well unless we ignore that the cost of delay since 1997 has been a projected payroll gap down by more than 10% (from 2.23% over 75 years to 2.01% in 2010) even as the change in projection period itself should add 0.05% per year to the gap, the drop itself shows that the whole concept of “We can’t afford to wait” could use some examination. And Graham suggests that an immediate fix would require 1% of GDP where a fix delayed until 2037 would require 3% which numbers could use some sourcing. Per this Table from the Report Table IV.B6.—Unfunded OASDI Obligations for 1935 (Program Inception) Through the Infinite Horizon, Based on Intermediate Assumptions total Infinite Horizon GDP gap is 1.2% of GDP whereas the 75 year gap is put by the Trustees at 0.6%. Nor is it clear that GDP is the right measure here, far more informative would be to put these numbers in pocketbook form as a percentage of payroll. And the Trustees put that cost if the Trust Fund goes to depletion at 3.7% of covered payroll (12.4% to 16.1%), an amount significantly less than 3% of GDP.

Well I don’t have the time or inclination to go through the rest of the chapters but as typical Graham ignores the simplest solution to Social Security: keep the current structure in place and raise FICA by 0.1% per year (less than a tenth of projected Real Wage increases projected) for 20 years and per CBO the problem is solved without the complicated structure proposed by Graham. Plus the table in Graham’s testimony tells it all. Under his plan average workers taking early retirement are absolute losers compared to the current system for the first seven years of retirement and only slowly make it up via extra years of life. And since the initial cut is to 56.9% instead of the current steady 80.1% the net effect is to tie low income workers to the plow for some extra work years, a prospect pleasing to those fully invested in the Protestant Work Ethic (particularly those whose own jobs are pretty cushy) but not necessarily to the low income worker who is not a good bet to beat the mortality tables anyway.

In any event Graham would have to address my objections to his formulations and numbers in Chapters 1-3 for me to take this proposal seriously.

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Link Worth Noting: the Wall St. Journals anti-FAIR Tax editorial, and Ed’s comment at TaxProf

by Linda Beale

Link Worth Noting: the Wall St. Journal’s anti-FAIR Tax editorial, and Ed’s comment at TaxProf
crossposted with Ataxingmatter

I’ve often commented on the so-called “FAIR Tax” on this blog–a proposal for a consumption tax that tends to be supported by GOP politicians and right-wing propaganda tanks and is often blatantly misrepresented in discussions. See, e.g., Bruce Bartlett on Fair Tax Proposal ; FAIR Tax: Huckabee’s win in Iowa requires more discussion of his tax proposals. Caron on TaxProf notes today the Wall Street Journal’s editorial on the issue and commenter Ed D notes a number of the problems with the FAIR tax that I’ve pointed out before.

The so-called “FAIR Tax” is in fact terribly unfair. It is an extraordinarily regressive tax, since it is a tax on consumption rather than income and at least the bottom half of the income distribution tend to spend all of their income. It is often represented as a 23% tax, but that figure is misleading, since it is calculated based on a tax-inclusive sales price rather than a tax-exclusive one as most sales taxes are (so a 23% tax is really considerably higher than 23 dollars on a 100 dollar purchase price). Further, the rate would have to be much higher than that to be revenue neutral– at least 30% and realistically even around 50%. The Fair Tax proposal includes a tax paid by the government to the government and other unlikely sources of income, assumes no losses due to compliance problems, calls for “simple” enforcement due to elimination of the income tax, and assumes away transition problems (if our income tax were abolished in favor of this regressive tax) while shoving a huge burden to the states. All of those proposals are unworkable:

  • there is no increase in revenues when the government pays tax to itself;
  • compliance problems are likely to be higher with a national sales tax than with an income tax (most studies, based on other countries with consumption taxes, suggest 20-25% noncompliance);
  • an agency equivalent to the IRS would be needed to audit compliance and to interpret laws and to pursue legal cases, just as is needed with the income tax;
  • transition problems are gigantic: the elderly already living on retirement income have generally already paid an income tax on their earnings (and possibly on their savings income as well) but will now have to pay a consumption tax when their spend that savings, so they will be double taxed (think of all the areas that would be affected by removing the current tax system as well–prices generally have tax incentives built in, so that is another area that will hit established families much harder than young ones, and the elderly who are not rich especially hard);
  • states that have income taxes mostly start from the federal income calculation as the base–they will either have to develop their own equivalent machinery to the IRS or completely revise their tax systems as well; states that already have sales taxes will now have much more of a problem collecting sufficient revenue, since a low-income person making a 100 purchase will have to pay the high federal rate of tax (say 40%) as well as the state rate (perhaps 7%), resulting in the $100 purchase now being $147. Many of the national sales tax proposals assume that the states will do the collecting for the federal tax –which brings its own problems in terms of inordinate burden on already stressed states, likelihood of inadequate compensation to the states, problems of confidentiality and consistency of collection across the states, etc.

IN short, a national sales tax system would be disastrous for us, and especially so as a substitute for the income tax.

The Wall St. Journal editorial suggests that GOP candidates should step away from the Fair Tax during the campaign: The Fair Tax Trap (Oct. 29, 2010). Given the title of the Wall Street Journal piece, one might have thought that it was going to address the many problems with the national sales tax proposal. But it doesn’t really. Instead, it argues that Democrats are attacking Republicans who support the FAIR tax without “mention of the tax-cutting side of the proposal”, bemoans that “the attacks do seem to work” and suggests that the “political reality” means that it would be better not to talk about the Fair Tax now and instead wait until “the income tax is on the road to repeal.” About the only issue it acknowledges is the vast increase in amount paid at point of purchase if someone lives in a sales tax state and ends up also owning a national sales tax amount of 23% (especially if there is still an income tax), which it admits could lead to cheating and the continuing need for an enforcement apparatus.

The Wall St. Journal thus appears to be advising its base (the right-wing and Republican party) on how to win an election by continuing to deceive people. It says it is a problem that the Democrats don’t mention the “tax cuts” from a FAIR tax. Come on. That’s tax cuts only for the rich: the poor will pay even more of their income out in taxes under the extremely regressive national sales tax. What about the transition problem (that people currently ready to retire would have already paid their share of tax on their wage income but would pay it again every time they spend a dime) or the problem for the states or even the deceptiveness of the rate? Not about to fill people in on those issues.

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Note on Elizabeth Warren

This post caught my attention, and worth holding in mind as regulation develops.

After several weeks of officially pleasant interactions, signs are emerging that the Treasury Department’s knives may be coming out against Elizabeth Warren. In recent weeks, Treasury officials have leaked details about Warren to Politico as part of what appears to be an effort to paint her as some kind of prima donna. These relatively silly stories raise troubling questions, however, about what Treasury officials may be leaking with fewer fingerprints and greater ramifications.

The Politico pieces have been petty, but there’s no doubt they both came from Treasury. On Oct. 12, Politico ran a piece featuring this anonymous nugget (among others):

If Treasury is indeed behind the Date hit-piece, there could be no real question about Geithner’s machinations. Trash-talking Warren, her top advisers and the CFPB itself would be an unmistakable effort to compromise the entire enterprise. If it worked, Geithner could deny Warren the formal nomination as CFPB director, Warren would go the way of Brooksley Born, and less consumer-friendly officials could quietly crush the young agency.

That would be a shame, since a strong CFPB headed by Warren is the signature accomplishment of the Wall Street reform bill Obama signed this summer. Whatever its other shortcomings, the legislation created the opportunity to level the playing field between bigwig bankers and ordinary citizens and strengthen the financial security of American households.
That’s a big if, of course. But reformers will be watching Treasury very closely from here on out.

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Can I Buy a House without Speculating ?

Robert Waldmann

Matt Yglesias wonders if people have to speculate in housing. What if someone wants to buy a house but doesn’t want to gamble that house prices will increase ? Is there anything to be done ?

In theory, this problem has been solved. It is now possible for home buyers to hedge. It is also possible for professional investors to speculate in housing. I’m not sure they would do better than the amateurs, look how well the RMBS and stock markets function.

The solution, in theory, is the Case-Shiller house price index. You can roughly hedge the price of a house you own using the index. The problem is that the risk you want to hedge is that you want to sell the house and it is cheap. So long as you own the same house, the price only matters for property tax assessments.

Shiller really really honestly believed that he had made the world a much better place when he confinced the Chicago Commodities board to introduce trading in the index. But then almost no one traded it (what if you held an index and nobody came ?).

I think that the correct innovation which will really fix things is one in which the balance of a mortgage is indexed to the Case-Shiller index. If the index were perfectly matched to your home, your equity in the house would just grow with repayments minus interest. Oh the interest to be paid would be constant (OK indexed to wages or the CPI to be perfect), not a constant times the balance owed. So, to the extent that the index worked, interest and principle payments and equity in the house wouldn’t depend on housing price fluctuations.

This makes mortgage initiators waay long the local Case-Shiller house price index, but they can hedge that risk by shorting it.

Problem solved (except for people who own their houses outright and, hey they can bear a bit of risk) ? Or not ?

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Americans are voting on the wrong information

by Linda Beale

Americans are voting on the wrong information
crossposted with Ataxingmatter

Even the Washington Post knows it–a new Bloomberg poll shows that Americans have wrong information about the Obama Administration’s record.   see Americans Don’t Know, Oct, 29 2010.  They mistakenly think taxes have increased (they haven’t–they’ve gone down), that the TARP money won’t ever be repaid (most of it already has been, and the bailout amounts still at risk are those used to bolster mortgage lenders); and that the economy is worse off because of the stimulus (not so–more than a million more jobs would have been lost without the stimulus, and many important public priorities have been funded).

The Obama administration has cut taxes — largely for the middle class — by $240 billion since taking office Jan. 20, 2009. A program aimed at families earning less than $150,000 that was contained in the stimulus package lowered the burden for 95 percent of working Americans by $116 billion, or about $400 per year for individuals and $800 for married couples. Other measures include breaks for college education, moderate- income families and the unemployed and incentives to promote renewable energy.

Still, the poll shows the message hasn’t gotten through to Americans, especially middle-income voters. By 52 percent to 19 percent, likely voters say federal income taxes have gone up for the middle class in the past two years.

“He’s all about raising taxes,” says poll respondent Jeanette Bagley, 74, a retired home health aide in a suburb of St. Paul, Minnesota. “He’s all about big government and big spending.”

The view that taxes have gone up is shared by a majority of almost all demographic groups, including 50 percent of independent voters, among the linchpins of Obama’s victory in the 2008 election.

***

[We recovered most of the TARP money, but] 60 percent of respondents say they believe most of the TARP money to the banks is lost and only 33 percent say most of the funds will be recovered.

***

In the past year, the economy has grown 3 percent and is expected to show improvement in the second quarter of this year.

Voters aren’t seeing the better climate: 61 percent of poll respondents say the economy is shrinking this year, compared with 33 percent who say it is growing.

The WaPo article notes a pollster who blames the Dems for not communicating well enough about the way that the economy has improved during their stewardship. Certainly at least partly to blame.  But I suspect some of the blame also goes to those anonymously funded attack ads and robo-calls that distort and misrepresent. For example, I got a recorded call today from some right-wing organization that started out with “the Democrats are lying to you” and went on with multiple distortions.  The Atlantic notes “Five Reasons Americans Are So Wrong About Major Economic Facts“–both of those reasons are in the five, as well as the media’s failure to inform, the response of people to their own economic misfortunes (when an economy feels bad to you, then you will believe the negative attack ads more readily, I guess), and our own individual failure to exercise our responsibility to know the facts rather than buying the garbage.  Yes, that last is a huge one, as the Atlantic says:

Here’s a simple culprit: us. The civic responsibility to know basic stuff about the economy ultimately falls on citizens. It might feel like the banks are still living with our tax money, or that taxes have increased or will soon, or that the economy hasn’t grown in forever. But that doesn’t make it right.

One thing is for sure:  Americans will not vote wisely when the groups competing for their vote don’t deal honestly with the real issues that face this nation.  Wake up, America.  China just built a far faster supercomputer than any we’ve built.  We should be funding technology and innovation that will guide our economy into a better future.  We should not be electing zany, tax cutting, Social Security privatizating, global warming deniers who want more of the ostrich-head-in-the-sand economic policies that got us into this mess to start with.

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Eurozone unemployment rate up in September

Yesterday Eurostat released the September unemployment rate figures for the European Union and the Eurozone. From the release:

The euro area1 (EA16) seasonally-adjusted2 unemployment rate3 was 10.1% in September 2010, compared with [downward revised] 10.0% in August4. It was 9.8% in September 2009. The EU27 unemployment rate was 9.6% in September 2010, unchanged compared with August4. It was 9.3% in September 2009.

The Eurozone unemployment rate has been above the EU (27) unemployment rate by an average 0.45% since the outset of 2007.

Across the Eurozone 16 countries, just 5 have seen their unemployment rates fall since October 2009 (I use the teilm020 table at Eurostat, which limits the time series to this time frame). Note that the unemployment rate in Italy rose over the month (8.1% to 8.3%), so unemployment rate is now unchanged since last year.

In the third quarter (the 3-month average ending in September 2010), the unemployment rate fell across 57% of the sample listed below (a highlight of the EU (27) countries plus Japan and the US) compared to the previous quarter. This is good, but the improvement is sluggish.

Rebecca Wilder

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Flashback: How Donald Luskin Earned His Title

Max Sawicky, on his Twitter feed, sends us to this classic piece from Donald Luskin

Believe me, if we raise taxes on hedge-fund managers we’ll get fewer hedge-fund managers. Today, with lots of hedge-fund managers trading all the time and keeping markets efficient, stocks are at record highs around the globe and markets are deeper, more liquid and less volatile. With fewer hedge-fund managers, markets would shrink, become more volatile and more costly, and tumble from their present highs.

The date on the piece is 20 July 2007. Just over three months later—pretty much exactly three years ago—the IB-sponsored MBS origination market effectively died, having taken much more value than was produced by the underlying property and placed it firmly into the pockets of traders and originators who knew that the present value they were claiming was—let us be nice—overoptimistic.

Does anyone wonder why Brad DeLong designated Donald Luskin “the Stupidest Man Alive Emeritus“?

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Coming Boomer pension cuts

This site, Remapping Debate, by Colombia Review Journalism shows some promise for information.

Here’s a piece missing from the debate on the impact pension cuts on a consumer and credit driven economy (Coming boomer pension cuts…what impact on the economy, by Diana Jean Schemo) might have on the Great Recession.

It is long and has great links:

Over the last two decades, pension cutbacks have left relatively few private sector workers with defined benefit pensions plans. Now, with health and pension funds for state and local government employees said to be facing massive funding shortfalls, many are describing the guaranteed retirement benefits paid to teachers, police officers, street cleaners, and other public workers as overly expensive and sclerotic. These pensions, the argument goes, are unrealistic — they are throwbacks to another era that must now be curbed.

…If there is one document that can be said to have galvanized public alarm over the state of public pensions, it would be an analysis issued by the Pew Center on the States last February. The study, whose findings were reported by almost every major media outlet and echoed by countless lawmakers and pundits, threw a spotlight on public sector pensions and health benefits for retirees, estimating that these obligations were under-funded by at least $1 trillion. It urged drastic and immediate action to put existing pensions on more solid footing, and to lower future taxpayer obligations by curbing benefits. In state houses across the land, lawmakers are heeding the call.

But another major analysis of the movement in pensions, alarming from a different perspective, drew virtually no notice. The November 2009 study, by researchers at the Social Security Administration and the Urban Institute, modeled the consequences over the next 22 years of eliminating many defined benefit pensions. The report projected what would happen if, over the ensuing five years, all defined benefit plans in the private sector were frozen, and a third of all state and local government plans were also frozen. It then asked: what would that mean for the income of Boomers when they reach the age of 67, between now and 2032?

Remarkably, the report disappeared into a media and public policy-making void. Not a single newspaper covered the report’s projections and, according to Nexis, the news database, they have never come up in public hearings or testimony debating the future of defined pension benefits.

Drawing on more than 100,000 employee records, the report makes its forecast based on the premise that current participants in defined benefit plans would collect benefits based on their previous service, but would not accumulate additional benefits. Based on past practice, the model also assumes that employers would shift their contributions to 401(k) plans. (The assumption may or may not hold entirely true, given that the aim of cutting retirement guarantees is largely to save money.)

With 50 to 56 percent of Boomers not in line to receive defined benefit pensions — in part, a result of the abandonment of defined benefit pensions that has already occurred in the private sector — the report found that many Boomer retirees would be unaffected by the changes envisioned in the model. But among those who do receive such pensions, the changes would be substantial. The report broke its findings down by four waves of Boomers, from the eldest, born just after World War II, to the youngest, born in 1964. In each wave, there would be more losers than winners, with the repercussions for the youngest Boomers most severe: 26 percent of them would lose an average of $4,200 in retirement income, while 11 percent would see their incomes rise by an average of $2,800.
The result: a net decline in retirement income among Boomers, in 2010 dollars, of roughly $46.3 billion a year once all Boomers have retired.

Taking the Social Security Administration report, and then drawing on census data to calculate the aggregate net impact on each cohort of Boomers, it appears that the net loss would be $2.9 billion a year among the oldest Boomers, $10.4 billion a year among the group that will turn 67 starting in 2018, $17.1 billion a year for those retiring around 2023, and $17.8 billion for those retiring between 2028 and 2032.

Allowing for deaths as the population ages, Gary Burtless, an economist at the Brookings Institution who helped develop the mathematical model used in the pension study, suggested a graduated formula for calculating the accumulated impact once all Boomers have retired. The result: a net decline in retirement income among Boomers, in 2010 dollars, of roughly $46.3 billion a year once all Boomers have retired.

That scale of loss, said Rodrigue Tremblay, an economist who has written widely of the risk of “stagflation,” would weaken the larger economy.

“Because Boomers represent some 75 million consumers, any spending cut by this group will have a profound impact on the overall economy,” Tremblay said. “This could precipitate a vicious cycle of slow growth, with fewer jobs for the young.” Boomers would not only retire with less disposable income, but — anticipating a less secure retirement — would spend less in the years leading up to retirement.

“Such a shift in pension plans represents, and will represent even more so in the future, a tremendous shift of investment risk from employers to retirees, and will negatively influence the macro economy,” Tremblay said, as retirees “spend less and save more to compensate for lower incomes and for a greater expected volatility in their income flows.”

http://www.aei.org/outlook/100948

http://www.mckinsey.com/mgi/publications/serving_aging_baby_boomers/index.asp

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ObamaCare IS Working – That’s WHY It’s a Problem

There’s a reason for this.

After the (wholly justified, understated) bitterness of my last post, a moment of cheer:  An old friend of mine is in the process of losing his job.

Now, normally I wouldn’t celebrate anyone—let alone a friend—losing a job, but, you see, he sells medical insurance in Texas and Indiana.  And he’s been told that over the next three years, his income will be reduced, and basically eliminated entirely ca. 2015.

Translation on a macro level: insurance companies—far from acting as if they are “uncertain”—are cutting the commissions they are paying to agents in preparation for greater competition as the phases of the PPACA come into effect.

We have already seen variations on this: insurance companies that will no longer write policies for only parents, because their children have other options.  Insurance companies complaining about the “cost” of having to cover basic services—you know, the preventive care that would seem to be implied when you call your plan a “Health Maintenance Organization” and which is covered by State Medicaid plans such as NJ FamilyCares.

The English translation of “the market won’t support it” is “we can’t compete with our current structure.”  It is a tale told by a capitalist since the beginning of double-entry accounting, with the steel industry being a recent example of American Rebirth.) Economists us the phrase “creative destruction” to explain it, even though there is very little creative and a lot of destruction (or, in significant cases, structural shifting) that goes on at the time.

“Bending the cost curve” means producing more consumer surplus. This is what competition does in economic models, primarily by cutting margins (“excess rent”) and thereby making firms allocate capital and labor more efficiently.  When your margins are large—through monopoly power, including “monopolist competition”—consumer surplus is low. Since Steve Jobs is the sexiest human being in the world, Apple products sell for higher margins than other communication/computing devices do.  This may always be so—or maybe the world will shift to Android phones, a and the Apple of five years from now will look like the Apple of 15 years ago, taking cash from Microsoft in order to survive.

Health insurance is an area hasn’t had true competition—search costs are too high for most people.  (Indeed, the evil of employer-provided health insurance deductibility isn’t that it is a suboptimal allocation of resources so much as it is that that pre-tax money allows insurance companies to maintain higher margins without the consumer feeling the full cost of their loss.  It is a system that perpetuates excess rent being paid, effectively as a transfer from the government to the insurer.)  One of the first things health economists noted about Medicare Part D is that, while one had to “shop” to find an insurer, the effort required meant that very few people would then switch, even if the insurer later reaped excess rent.  When switching costs (consumer) are higher than menu costs (supplier), excess rent is virtually an inevitability.  (In this case, again, the American taxpayer is footing a large portion of the bill for a transfer to insurance companies.  It is impossible to believe, given the bill’s enactment process, that this was not considered a feature.)

So there are multiple areas where consumer surplus is low in the health insurance industry.  Which means that many people—including my friend—have been “earning” more than they are “producing”—some of the excess rent is distributed, after all.  And, for the next few years, they will be seeing their incomes decline while people believe (as Jon Stewart said to Barack Obama last night) that PPACA will not take effect until 2014.

And Obama’s reply (starting around 7:30) was spot-on:

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Barack Obama Pt. 2
www.thedailyshow.com
Daily Show Full Episodes Political Humor Rally to Restore Sanity

So for the next few years, people such as my friend will see that the squeeze is hitting them, while the benefits haven’t reached all of the general populace.  (They have already reached many childrenincluding adult children who can’t find a job and can at least be insured by their parents—and helped many senior citizens who were being affected by the “donut hole.”)

We saw this same sequence in the mid-1980s and early 1990s in the travel field—slowly at first, and then quickly as internet bookings and purchases determined solely by price became the rule. The survivors were the agencies with large corporate accounts and the ones that provided specialty (“niche”) services you couldn’t get from Travelocity and its competitors.

The travel agency market existed for one reason: in the old days, it cost an airline about 16 cents of every dollar to get a seat booked.  An agent who could be paid 8-11% per ticket—with incentives for volume—was a bargain.  It was, to use the economist’s favorite cliché, a win-win situation. And the benefits of tour and hotel bookings could truly be treated as marginal cost increases, with their own revenue stream generally more than enough to justify for even a small office.

But true competition—the decline in the incremental Search Costs presented to consumers by Travelocity and its competitors, followed quickly by direct booking availability directly with a specific airline—meant the end of that model, leading to industry consolidation, downsizings, and closings—just as the insurance agents are feeling the pressure now of the impending “exchanges.”

And, as then, my friend noted that there are still areas that will continue to be profitable for insurance agents in 2015.  For insurance, policy service for the elderly.  (Showers of gratitude from the insurance agents to the unfunded, deficit-exploding Medicare Part D shall continue.)  Everything else will see the agents’s livelihood affected as the insurance companies try to protect their own share of the turf.

He has four years to prepare, and a roadmap for change that remains valuable. And for those interested in “bending the cost curve,” the first fruits of that effort are being realized.  And people are realizing they will have to change their lifestyle and practices to deal with the new world.

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