Sunday, January 26, 2014

On Income Inequality - What Is a "Fair" Maximum Tax?

Income...And Wealth...Inequality
President Obama's latest State of the Union speech is upcoming (a bit of a tired constitutional requirement in the modern era, but still an important speech) and it is widely believed that one of the central themes of his speech will be about rising income inequality in the United States.  Liberal commentators have been all over this theme of late, especially with the outright gluttony on display at the Davos conference last week (essentially that conference has devolved into rich people talking about being rich.)

One of the big pieces of data that has been repeated over and over again is that the 85 richest individuals in the world have as much wealth as the bottom half of the world population.  While this story is slightly misplaced in the context of an income inequality discussion - income and wealth are two related but distinct concepts - it is certainly a jarring reminder of how the other half lives.

In the United States, income inequality looks like this (all figures are adjusted for inflation):
The 20th percentile in the US have household incomes averaging $20.3K per year, essentially flat to 20 years ago (up 0%)
The 50th percentile have household incomes averaging $50K, also essentially flat to 20 years ago (up 3%)
The 80th percentile have household incomes averaging $101.6K, up 11% from 20 years ago
The 95th percentile have household incomes average $186K, up 20% from 20 years ago

So, essentially 80 percent of the population has about the same income level that it did 20 years ago, whereas the further up the chain you go, the more you have benefitted from the past 20 years.

A couple of very big caveats to these numbers.  Measures of income exclude social benefits received from the government such as food stamps.  They also exclude the impact of changes in tax policy.

However, in many ways social benefits have become less generous in the past 20 years (welfare reform in the 1990s, for instance) and tax policy has become a little more friendly to the top of the house (Clinton-era reductions in capital gains taxes and the components of the Bush tax cuts that were extended by Obama), so if anything, these numbers probably understate how much the problem has grown.

So should we care?  One could make an argument that in a free-market system, by definition you have winners and losers.

Major league income inequality, however, is socially destabilizing.  In addition to the potential moral aspects of having a rich country with a lot of poor people, it is a political mess when the majority doesn't control much of the wealth - it leads to all kinds of punitive actions by governments and it leads to a lot of social unrest from people who feel excluded from the system.  A large, vibrant middle class is therefore the key to maintaining a stable economy and stable democracy.

So, what are the good and the bad solutions to this problem, if, in fact, you agree with me that it is a problem.

Good Solution - Reward Work
Solutions which encourage participation in the economy are always my first choice for solving the issue.  Those include hiking the minimum wage (which now seems to be gaining momentum, but regular readers know I have been talking about for years) and supporting and expanded the Earned Income Tax Credit, which is essentially a federal subsidy for those working at low incomes.

Bad Solution - Redistribute Wealth
Redistribution can be politically appealing.  And I'm certainly not saying that the rich shouldn't pay more taxes than the poor - they can afford to after all.  But simply transferring money creates class warfare and creates poor economic incentives - the poor aren't encouraged to work and the rich aren't encouraged to innovate.  While I've supported some tax hikes on the rich in the past, the top marginal rates on earned income are getting scary.  In California, the top tax rate is 12.3%.  Combined with a top federal rate of 39.6%, the Medicare Tax of 2.4% and the Obamacare tax of 0.9%, top earners in California pay a top rate of 55.2%.  Taking more than half of the money someone earns is getting to a dangerous level.

Good Solution - Increase Workforce Skills
One of the major drivers of income inequality has been the globalization of the workforce and the automation of manufacturing processes.  In the 50s and 60s, one could earn a nice middle-class lifestyle with a High School diploma and a job in auto manufacturing.  These days, there are a lot less of those jobs, partly because of the globalization of labor markets but more importantly because of automation.  You need about 10% of the people that you needed 50 years ago to make an equivalent number of cars.  It is therefore imperative that more people have skills beyond a High School Diploma, since I'm not sure that this can ever be a path to a middle-class lifestyle again.  Supporting post-secondary education, be it technical trade skills or degrees in science, math and engineering is a essential part of building a 21st century workforce that can be middle class.  Support should be targeted - majoring in Art History isn't going to give you the skills to compete.  Post-Secondary education should be viewed as job prep not some humanist period of discovery.  If you want discovery, that's fine, but we'll only PAY to support things which will build your job skills.

Bad Solution - Cut Taxes on Investment
A popular conservative solution to income inequality is that if you cut taxes on investment income, it would encourage more investment which would in turn create more middle class jobs.  This is belied by two inarguable facts - the first is that corporations have TONS of cash already on their balance sheets that they could deploy if they saw attractive uses for it.  The second is that the ways to generate the highest returns on capital are often not the same things that create middle-class jobs.  The key is making investments in US jobs pay off better, not simply taxed less.

Good Solution - Build Better Infrastructure
Our transit infrastructure needs a lot of work - bridges, roads, tunnels, mass transit are all dated and many in poor condition.  Our electric grid and power generation is also out of date - our grid is inefficient and vulnerable and we need to build capacity to make less power with coal.  All of these investments are a two-fer - they provide middle class, blue collar jobs now to construct the infrastructure of tomorrow and they have a huge multiplier effect that will make private investment more attractive in the future.

Let's hope President Obama proposes some common-sense solutions in his SOTU speech and not simply a bunch of initiatives aimed to divide the classes.  And let's hope the GOP is willing to work with him on this issue - shunning every one of Obama's initiative is a bit tired since the GOP will never have a chance to defeat him at the polls again.  We'd just as soon see everybody work on solving problems.

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Monday, January 20, 2014

Chris Christie - Scandal or Unholy Media Alliance?, What Does Obamacare Success Look Like?

Chris Christie, New Jersey Politician
Just as the narrative was going the way Chris Christie wanted it - a resounding re-election of a relatively conservative Republican in the blue state of New Jersey, bipartisan praise for his efforts around Hurricane Sandy, the national media beginning to talk about him as the presumptive frontrunner for the GOP nomination in 2016, things took an ugly turn.

It started with the Fort Lee bridge scandal.  Christie crony David Wildstein, who had been appointed to a senior role at the Port Authority has been revealed to have intentionally caused traffic jams in Fort Lee by closing lanes on the George Washington Bridge in order to get back at the Democratic Mayor of Fort Lee for not endorsing Christie.

This story has several complex dimensions, so let me lead with some of my major observations:
First, that Wildstein intentionally took action to harm Fort Lee for political reasons is unquestionable based on the communications that have gone public.  It is also unquestionable that Wildstein is a close ally of Christie and that the role in the Port Authority was created for him as a reward for his loyalty.

What is not clear - and may never be clear - is whether Christie himself was aware of the actions being taken at the Port Authority.  Christie had a very well run press conference where he apologized, expressed embarrassment, fired Wildstein and promised full disclosure and reform.  All correct actions.

If all that is ever proven is that Christie appointed Wildstein as a political appointee and that Wildstein went rogue ordering the bridge delays, then it is a small mark against Christie for choosing poor friends, but hardly a major scandal.  That Wildstein was a political crony may be blown up, but the fact is, most political appointees are loyalists to the politicians that appoint them, so this is nothing new.  Some Democrats have argued that Christie created an environment where such actions were viewed as okay - this may or may not be true but it is a pretty thin argument absent any evidence of Christie's involvement in these types of operations.

So, by itself, Fort Lee as it stands will probably not have legs into the spring and summer.

The allegations made this weekend by the Mayor of Hoboken are a different animal.  Her allegation was that she received a direct message from Lt. Governor Kim Guadagno that Hoboken would not receive promised Hurricane Sandy relief unless she supported a private development deal supported by the Governor.

Mayor Zimmer's allegations have not yet been proven, but if true, are much worse than the Fort Lee mess for a few reasons.  One, she is claiming direct involvement of the Governor.  Second, what she alleges would essentially mean the Governor's office was leveraging public funds to support private investments of his friends, a far more serious allegation than simple political payback.  Third, it strikes at the heart of one of Christie's signature achievements, Hurricane Sandy restoration.

We have much to learn - as things stand now, there is no direct evidence of the Governor's involvement in either scandal.  Absent some form of proof, these allegations carry little more weight than conspiracy theories.  But rest assured, every media outlet in the country is looking for such proof.

The most fascinating angle of these stories is the amount of national attention that has been paid to these stories - they have been lead stories for national news outlets across the political spectrum for weeks.  Why?

One of the reasons is journalistically reasonable - that Christie is the presumptive front-runner for the GOP nomination and therefore scandals involving him elevate from local to national news.  But there is something else going on here - an unholy (or holy, depending on your point of view) alliance between the hard right and the hard left.  You see, Christie is a target from both sides of the political spectrum.  The right wing dislikes him because he is a relative political moderate in the party these days and doesn't want to see him get the 2016 nod, favoring more conservative candidates such as Rand Paul or Ted Cruz.  The left dislikes him because he is the presumptive frontrunner for the GOP nod in 2016 and they want to take him down a peg for a potential national election - particularly since they fear his chances of success a lot more than the far right candidates that they feel confident they can beat.  So both MSNBC and Fox News have been pounding away relentlessly at these stories and the more mainstream press has followed suit.

What all of this means for Chris Christie's political future is uncertain.  It all depends on what facts come out about his involvement.  At the very least, it momentarily halts his momentum towards 2016 and opens the air for other credible candidates to emerge.  Somewhere, Jeb Bush is smiling.

Obamacare - How Do You Measure Success?
When President Obama set out to do health insurance reform, his goal was to cover uninsured Americans.  His original goal was to cover everyone through a combination of public plans, including Medicare, an expanded Medicaid, SCHIP and a "public option" on insurance place markets and private plans through a combination of employer provided and privately purchased plans.

It was clear from the outset with the compromises made to secure passage of Obamacare that the bill would not cover 100% of Americans.  First, the public option was taken off the table.  Second, the penalties for not holding insurance were made modest enough that everyone knew some would not participate in the market.  Third, the medicaid expansion was made optional for states, meaning that in Republican-controlled states that chose to reject the expansion, there would be an automatic gap in the market.

So how are we to measure the success of Obamacare?

The internal benchmark set by the Obama administration was the coverage of 7 million people in the marketplaces by the close of open enrollment at the end of this March.  Additionally, 9 million new people would be covered by Medicaid, adding 16 million in total to the rolls of the insured.

By that measure, Obamacare is gathering steam.  Marketplace enrollment through December reached 2.2 million people - short of the internal benchmark set by the Obama administration of 3.0 million by that point in time, but a huge boost from the early months, when major issues with the website plagued enrollment.  Medicaid enrollment is up 3.9 million for the year so far, although it is impossible the way the numbers are reported to tease out how much of that is due specifically to Obamacare and how much is due to other factors like economic changes.

By these benchmarks, Obamacare certainly doesn't look like a disaster - it looks like a piece of governance that is building steam and covering more people.

The initial reactions of sticker shock also seem to be fading.  I did a quick search for insurance policies in Las Vegas, using the Nevada exchange (I picked Nevada because they have an easily searchable exchange, are a mid-sized state and have a sizable number of uninsured, so they are an ideal target of Obamacare), reveal the following unsubsidized rates for a 40-year old non-smoker:
Cheapest "Bronze" Plan - $182.50/mo
Cheapest "Silver" Plan - $237.13/mo
Cheapest "Gold" Plan - $259.97/mo
Cheapest "Platnium" Plan - $320.27/mo

These rates, to me at least, are astoundingly cheap.  The Platnium plan that is $320.27/mo plan provides primary care doctor's visits for $5 apiece and specialist visits for $25 per visit, both with no coinsurance.  Generic prescriptions have a $0 copay, formulary brand name has a mere $15 copay.  The calendar year deductible on the plan is $400 and coinsurance on things like major surgery is only 10% after the deductible, with preventative and prenatal care carrying no deductible and no coinsurance.  Best of all, the out-of-pocket maximum is only $2,000, meaning that beyond the cost of the premium, you are never going to pay more than $2,000 for health care.  Those rates assume that you use the provider network, there are higher rates for going out-of-network, very typical of all insurance policies.

In short, for $320.27/mo, if I lived in Las Vegas, I could get a phenomenally better insurance policy than the very good policy that I current get from my employer.  And keep in mind that if my income is less than 400% of the poverty level, I would get a subsidy against this rate.

By this measure, Obamacare plans seem phenomenally good at cost and benefit.

I picked a middle-of-the-road scenario - a tobacco user would pay a higher premium (although such premiums are capped at a 50% premium to the non-user) and if I lived in a smaller state, there might be less competition and higher prices.  If I'm 60, that same policy shoots up to $680/mo, if I'm 25 it is only $251/mo.

The ultimate success will not be measured by my view of the value of the policies, however.  I think the best metric, which we won't know for some time, is the NET change in the number of uninsured people.  Critics have rightly pointed out that the raw enrollment numbers don't tell us how many people who would have bought insurance anyway from private companies are enrolled.  It also doesn't account for the impact of policy cancellations.

It is WAY too soon to judge the success of Obamacare one way or another.  But we are definitely way past the point where it is about a non-functioning website, which I always believed was a short-term question.

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