Shameless Sleight of Hand

New from the administration of 'hope and change'; sleight of hand in the hope that voters will change the channel from the Obamacare train wreck to the Senate and Iranian nuclear option train wrecks. Oh, and let's not forget the background diversion of immigration reform.

These guys are shameless.

As was predicted by conservatives like me, the paltry number of insurance enrolees (not including the enormous number of new Medicaid enrollees) is heavily skewed toward the 45-65 year-old crowd with a correspondingly lackluster enrollment of younger, healthier people (adverse selection in action). Even the tax of $95/year (or 1% of adjusted gross income) looks good compared to an average premium of $250/month to people unlikely to get sick.

This is happening even in states the liberals tout as huge success stories; California, New York and Connecticut. Of course this makes sense since blue states have a greater addiction to the government teat. It gives me the blues to live in one of them.

I suspect the red state legislatures saw this coming; at least someone read the law!

Although I did not predict the cancellations of millions of policies in the individual, private insurance market since they were to be grandfathered (albeit in a way that was, in hindsight, guaranteed to not apply), I did predict that many employers would use the law as political cover to dump employer-provided insurance plans. Again, the $2-3,000 tax is much less than the premium; at my last job, my employer paid $14,000/year for my wife and me.

This suggests that employers will shed billions of dollars in cost for which taxpayers will have to pay since the actual cost of health services continues to rise unabated. This is why the so-called employer mandate was postponed until after the mid-term elections. In 2017, the taxpayer cost will really kick in.

Given a workforce of 140 million, half of whom don't pay federal income tax, this amounts to more than a $2,000/year tax on those who do pay tax.

This is why the law is backed by many big businesses.

In addition, this paves the way for even higher consumer costs since employer-provided insurance was tax-free but insurance in the private/exchange market will be purchased with after-tax dollars. This, in addition to the other $500 billion in tax hikes that came with Obamacare.

This will, in turn, lead to more calls for minimum wage increases causing an even higher cost of living including health care costs. Need I go on?

So it's no surprise that the President's backers are trying desperately to focus our attention on the other stupid things the administration is doing. It's like they're doing them on purpose.

Of course, the Iran debacle makes Hillary's do-nothing stint at the State Department look excellent compared to rewarding Iran for its continuing efforts to destabilize the Middle East. Hillary looks great...except for Benghazi.

However, we're not all fooled.

I can see that last month's employment numbers were magically boosted by the number of Navigators hired by government to help consumers with the poorly designed website; we learned late last week that 30-40% of it has not even been built yet, let alone tested!

Yep, shameless.

Thanksgiving in Switzerland

Last weekend, my wife found an article in the NY Times Sunday Magazine that she thought I should blog about. I have to agree.

The article discusses proposed legislation for a minimum income law; income given to all, just for breathing!

This idea sounds horrible except that it comes from the Swiss, notably the most effective government in the European Union (EU) and, possibly, in the world. Good local education, local welfare, high employment. The lowest spending in the EU at 34% of GDP.

I have suggested a limited version of this as a means to get rid of government bloat. The limit is that only those in need would get it.

In the US, we spend about $1.2 trillion/year on the poor. The poor comprise about 21.8% of children under 18, 13.7% of adults between 18 and 64 and 9.1% of those 65 and older.

A total of 46.5 million people.

Divide it up and we get $25,806 per person or $39,344 per adult.

Even one third of that in direct payment would be a boon to the poor (the bottom 20% of earners) and a huge savings to taxpayers. If they ever get the Obamacare website's income verification software working, we can do this and eliminate 30% of the federal government and nearly half of all state governments.

Poor folks could buy their own health insurance (without subsidy) and have about $4,100 left over for food and housing. Not bad outside of New York and New Jersey.

Throw in Medicare spending of $536 billion on 49.5 million beneficiaries and we get another $10,828 for them, more than adequate for them to buy their own insurance in all but about 10 states; allow insurance to cross state lines and this goes away too because of bigger risk pools. Throw in private charity and this is free too, allowing seniors to relax.

The rule used to be that nobody could pay more than five times as much as anyone else. Now it's three times under Obamacare so virtually everyone's rates have to go up to maintain the status quo; remember that Obamacare does nothing to reduce healthcare costs, it only addresses insurance.

The best part is that liberals could pay the whole tab and they'd pay less than they do now. Mean-spirited, greedy conservatives could give more to charities of our own choosing.

Correction
My old friend John found a math error in my Business as Usual post. I miscalculated the weight of a trillion pennies as 2,750 tons.

It should have been 2.75 million tons.

The Middle Class Myth

In my last post on the Minimum Wage Myth, I asked for comments regarding who the members of the mythic Middle Class might be.

Prior to giving it any serious thought, I would have thought that US wage income (not to be confused with total income) looked like the graph below with the top 1% earning about $560,000 with a linear distribution below that. The total area under the curve equals a bit over $8 trillion. A Middle Class between 25% and 75% makes perfect sense.

Additionally, this would lead to a Gaussian, or normal, distribution (see the σ=0.25 curve on the second figure below). Not unexpectedly, it isn't that way even though I thought so up until this year. I wonder why  this is not a well known fact.

Given the notion of a more serious inequality, I might have a wishful thought of a distribution like the one below. A Middle Class between 25% and 75% also makes perfect sense except that getting the same $8 trillion gives the poorest $220,000 in income; $110/hr for flipping burgers?

This is more of a log-normal distribution like the σ=0.5 and σ=1 curves below; my friend Jack calls these skewed Gaussians.

One difference is the way the curves are plotted (population percentage on the vertical with income on the horizontal) but the idea is that peak income densities are skewed to the low side. However, it doesn't happen that way.

The reality is shown below based on an average 1% earner income of $717,000. Here, the Middle Class might be between 5% and 15%; only 10-11% of the population of earners.

The top 4% earn $1.5 trillion (19%), the Middle Class (the next-highest 11%) earns $3 trillion (37%) and the bottom 85% earns $4.5 trillion (56%). The top 10% earn $3.3 trillion (41%).

This is a power-law distribution and it shows that we don't really have a Middle class, just a small group between the haves and the have-nots. These are the folks who do well but aren't rock stars, movie stars, Wall Street financiers or professional athletes.

You can see that the same thing happens in the countries of the European Union even though the 50% (of GDP) average government spending is 25% higher than the 40% of GDP in the US.

You can see that the top 10% in France, for example, receive a 25% share compared to 41% here. However, government spending (income redistribution) in France is 56.6% of GDP, 41% higher than here, it seems everyone gets 10% of the year off on vacation and our top 10% pays its own medical bills.

It's worth noting that the economy of the EU is still sucking wind 5 years after the meltdown, arguably because of their socialist tendencies.

We are recovering slowly, perhaps because businesses are worried about the the results of the left turn we took starting in 2009.

Total Personal Income
It's hard to account for income from criminal activity. Despite the fact that nobody was jailed, the fiasco in 2007 sure seems criminal to me. This cost trillions of dollars, easily 20% of GDP. But I won't count it even though I'm sure it continues as I type.

Again, my US examples comprise income from wages alone.

If we include government social benefits (Table 1 in linked document), this adds another $2.4 trillion (Social Security, Medicare, Medicaid, Veteran's benefits, unemployment benefits, etc.) predominantly to the bottom 40%. There's also another $1.7 trillion in employer private pension contributions that is similarly power-law-distributed among, say, the top 70% as is $2 trillion in investment income, $1.3 trillion in proprietor income and $574 billion in rental income for a total of about $14 trillion this year.

Presumably, the other trillion or two (GDP minus personal income) is income overseas including the $400 billion in national debt payments.

The net effect is that the left side gets taller and the right side gets flatter and higher.

For example, the bottom 40% (40% of the 140 million who work) rises by a factor of 4 ($43,000 each assuming a laughable 100% efficiency of government redistribution) and the rest rises by $59,500 each. The final result is about like the curve below.

This curve suggests that if Welfare and Medicaid dollars were more efficiently distributed like Social Security (except for the theft), our poor would be doing better than our mythic Middle Class. Even though this sounds nice to the do-gooder in all of us, it's totally wrong.

A Real Middle Class
Instead, imagine the $2 trillion in state taxes from sales, fuel, sin and property taxes being used to fund the poor in a direct and efficient manner (not welfare & medicaid) where more than the current 30% goes to beneficiaries instead of middlemen (in the form of salaries, health benefits and retirement benefits), buildings, transportation and other government bloat.

This alone would boost the bottom 40% of earners by over 200% ($35,625 per earner). With this, they could buy their own health insurance and feed & house themselves. This is 56 million earners which more than includes the 45 million supposed Obamacare, Medicare, Medicaid and Welfare users when the dependents are added in.

Even though I'm opposed to government-run programs like Obamacare, I was hopeful that the automation promised for the health insurance exchange website would enable the long-sought efficiency of delivery I've outlined in previous posts. Instead, we got a typical social engineering outcome; no specification until 6 months before delivery of 5 million lines of code, a major spec change weeks before roll-out and obviously little or no testing. No one held responsible. Oh, and millions thrown out of what were perfectly fine insurance plans they were paying for themselves.

But I digress.

Also imagine being allowed to save your own 15.3% FICA in an interest-bearing account to save for your own retirement income and health insurance; no more pay-as-you-go nonsense.

Best of all, imagine the extra 14% or so of our income we'd be able to keep by cutting government spending from 40% to 10% and taking care of ourselves.

Here's how to get there.

The Minimum Wage Myth

I could have sworn that I had written about this but, having searched my posts, I can only find indirect references to the subject.

The subject came up in a Facebook comment thread started by Alison and continued by my childhood pal Ned.

The myth is that raising the minimum wage benefits low-wage earners.

The reality it that it really doesn't and here's why.

An excellent article in, of all places, the NY Times does a good job explaining what it does to employment and other wages. Essentially, raising the bottom wage causes all other wages to rise since not doing so would be an affront to those higher on the ladder.

In addition, these increased wages must be recouped so manufacturers and service providers must raise prices to account for the higher costs. Don't forget that prices reflect both costs and profit so prices increase (inflation) at a parallel but higher rate than costs. On top of that, there's the 15.3% FICA tax on wages.

The never-ending consequences include;

• Loss of competitiveness between states and countries.
• Contracts made by government on behalf of employers who foot the bill.
• Increased tax revenue due to conflict of interest in government.
• Decreasing employment.

To show the relationship, I plot inflation against the minimum wage. I normalized wages ($1.40/hr) and inflation to the year 1967 near the end of LBJs socialist blitz, the Great Society programs.

You can clearly see that the rate of rise of inflation was the greatest when the increases in the minimum wage were most frequent (1973-1982).  You can also see that it took a while for industry to catch on to the lost-profit problems of the early years. You can also see that the inflation rate decreases (in 1982) after the last minimum wage increase in 1981.

Interestingly, the direct correlation between minimum wage increase and inflation disappears around 1991 until the final boost in 2009. I tried to explain it with interest rates, deficit spending and printing of money but all to no avail.

What I found to correlate was the market; it was strong during those years. The uncorrelated upticks in the inflation curve (2002 and 2009) correspond to downticks in the market.

So, the market is up by a factor of 12, inflation up by a factor of 7 and minimum wage up by a factor of 5 in 2012 as compared to 1967; profit, income and costs, respectively.

Prior to 1991, increases in the minimum wage correlate directly to increases in inflation because the market was weak as also measured by the unemployment rate.

Of interest here is the correlation between increases to the minimum wage and increases in unemployment; 1975, 1982, 1991, 1996, 2007. We all know what happened in 2001.

As I've said, if we want to improve the lot of the poor then let them (and the rest of us) keep more of what they earn by abolishing regressive taxation by the federal government, states and municipalities.

Get rid of sales, sin, fuel and property taxes.

Milestone
Thank you readers; I'm up over 2,000 page-reads in 10 countries on my blog.

Question
In discussion about the Wealth Gap, a curious question came up.

The above graph is the approximate income distribution in the USA by percentile of earners.

Question: Where is the "Middle Class"?

Please leave a comment with your thoughts on this.