Category Archives: Financial

Articles relating to money and savings

Social Security — A Problematic ‘Entitlement’ Program

I don’t know about you, but I paid into Social Security for decades — amounting to tens of thousands of dollars over my career(s).  Hence, for some reason, I tend to believe that someone owes me some money back..!?  (Which by the way I am receiving, for now.)  Ah, but it would appear that our government types seem to believe that Social Security is actually an ‘entitlement program‘.

I got on this subject because of someone sending me a ‘chain’ email about how Social Security has been declared an entitlement.  Not to believe what I read immediately, I checked the topic via Google.  Unfortunately I came up with the links below verifying what was said in the email!!

“So why worry”, you ask?  Well, I guess my view is, if the feds wish to make it an entitlement, then I presume they will say at some point, “We don’t owe you anything.  It’s an entitlement!  If you need money old man, get a job!”  Information I’ve found points to around 2033 as the “we’re out of money” year.  Due to the program’s status they may shut down the program.  Or, they may apply a ‘needs’ clause to it and say that I make too much money already — once again, get a job!  Or maybe reduce my check size..?

If you think this is extreme, read some of the links below.  And while you do, consider this, that according to the Social Security department, you need to only have worked 1/4th of your working life (21-62) to apply for and receive checks.  Talk about entitlement?!

FactCheck #1

FactCheck #2

SOCIAL SECURITY ENTITLEMENT REQUIREMENTS — Note the algorithm they use to determine who is ‘entitled to receive benefits’.  

5 facts about Social Security — Note the graph at the bottom.  Although they are saying that Social Security will run out of money in 2033, they are also referring to it as an ‘unfunded liability‘ now!!

 

 

The Death Of The American Dream

Yes, more gloom.  But if you read these posts you know they are to inform, not make you feel good.  If you read my article on the media and how it is controlled, then you should question anything that you are told about our economy — it is unsustainable.

Although the story in the link below may seem hard to believe, the author includes a good number of graphs supplied by our federal government which tell a shocking truth — we’re in trouble.

I don’t write this article to scare people, but to warn them — prepare.  How do I prepare you ask?  I have a handful of suggestions.

  1.  Get out of debt — all debt.
  2.  Establish cash saving in your bank.
  3.  Stash some cash outside of the bank (not a savings box).
  4.  Have at least 30 days of food available to you at all times.
  5.  Build up a cadre of friends to establish a support team.

End Of The American Dream

Key information worth noting:

Unemployed works in America

People not in the workforce

Wage Statistics for 2012

And now today, because of world disorder, we are potentially facing an even worse scenario — world war.  No way you say?  Stay tuned for future reports on the world situation — preferably here and not MSNBC.

 

U.S. Economic Recovery by County

We listen to the news daily and hear how our economy is recovering fast and that our nation should be booming shortly.  Based on what you ask?  Jobs of course.  Or should I say a smaller number of people unemployed.

The question is, where are all of those jobs coming from?  Could oil drilling have anything to do with it?  Oh yeah.  Check out the chart below showing where the economic growth (recovery) is located in the U.S.  (The darker the color, the greater the growth — i.e., blue.)

(Image via NACo)

Oddly enough that growth just happens to be in the same areas where all of the oil drilling is currently located..?!  Imagine that!?  Now what happens if that growth were killed by a reduction in drilling?  Where would all of the U.S. growth be?!

Lower gasoline prices are nice, but there’s a cost of them being too low.  What I am hearing is that if this reduction in oil pricing continues for longer than six months, there will be a job price to pay for that lower pricing.  What a predicament.!?

 

 

 

3rd Quarter Economic Signs

The following article came from a newsletter I receive.  What is interesting in it is the author’s breakdown of the wonderful news on how our economy is on fire..?!  Let’s just say that the American public better start paying attention.


 

According to the newest version of the Bureau of Economic Analysis (BEA), the US economy is smoking hot. The BEA reported that GDP grew at an astonishing 5.0% annualized rate in the third quarter.

5% is BIG number.

The New York Times couldn’t gush enough, given a rare chance to give President Obama an economic pat on the back. “The American economy grew last quarter at its fastest rate in over a decade, providing the strongest evidence to date that the recovery is finally gaining sustained power more than five years after it began.”

Moreover, this is the second revision to the third quarter GDP—1.1 percentage points higher than the first revision—and the strongest rate since the third quarter of 2003.

However, that 5% growth rate isn’t as impressive if you peek below the headline number.

Fun with Numbers #1: The biggest improvement was in the Net Exports category, which increased by 112 basis points. How did they manage that?  There was a downturn in Imports.

Fun with Numbers #2: Of the 5% GDP growth, 0.80% was from government spending, most of which was on national defense. I’m a big believer in a strong national defense, but building bombs, tanks, and jet fighters is not as productive to our economy as bridges, roads, and schools.

Fun with Numbers #3: Almost half of the gain came from Personal Consumption Expenditures (PCE) and deserves extra scrutiny. Of that 221 bps of PCE spending:

  • Services spending accounts for 115 bps. Of that 115, 15 bps was from nonprofits such as religious groups and charities. The other 100 bps was for household spending on “services.”
  • Of that 100 bps, the two largest categories were Healthcare spending (52 bps) and Financial Services/Insurance (35 bps).

The end result is that 85% of the contribution to GDP from Household Spending on Services came from healthcare and insurance! In short… those are code words for Obamacare!

While the experts on Pennsylvania Avenue and Wall Street were overjoyed, I see just another pile of white-collar manure and nothing to shout about.

Fun with Numbers #4: Lastly, the spending on Goods—the backbone of a health, growing economy—declined by 27 bps.

In a related news, the November durable goods report showed a -0.7% drop in spending, quite the opposite of the positive number that Wall Street was expecting.

Of course, Wall Street doesn’t want little things like facts to get in the way of their year-end bonus. As we close out 2014, the stock market marched higher and ignored things like:

  • The reaction of the bond market to the 5% number. Bonds should have softened in the face of such strong economic numbers, but the “adults” (the bond traders) on Wall Street saw the same manure that I did.
  • If the economy was as healthy as the BEA wants us to believe, the “patience” and “considerable time” promise of the FOMC should soon be broken… right?

I spend most of the year in Asia, including China, and I am seeing the same level of numbers massaging by our government as China’s. In China, the government leaders establish statistical goals and the government bean counters find creative ways to tweak the data to achieve those goals.

Zero interest rates.

24/7 central bank printing.

See-no-evil analysts.

Financial smoke and mirrors.

That’s the financially dangerous world we live in, and I hope that you have some type of strategy in place to deal with the bursting of what’s becoming a very big, debt-fueled bubble.

Tony Sagami
Tony Sagami

Well, that gives things a new light!!?

 

 

Effects of the Affordable Care Act

Previously I wrote on this subject, but recently found the article below which is written by an economics professor at the University of Chicago.  He writes in simple language why our country will be impacted negatively by the implementation of the ACA.

Most Americans do not know that the ‘total’ implementation of the ACA has been postponed!  Yes, since it was passed in congress, Obama has subsequently written ’38 presidential orders’ changing the ACA!  In spite of the fact that his orders are unconstitutional!  Only congress can write and/or change laws written for our country.

What’s your point, you might ask?  The point is that the ACA’s impact has not taken full effect yet!  Only a very few people have been impacted, and primarily via current higher premium rates.  When it ‘fully kicks in’ (January, 2017), then we will see serious impact to our entire economy!

Please read the following article submitted by Hillsdale College.


Effects of the Affordable Care Act on Economic Productivity

by Casey Mulligan – University of Chicago

CASEY MULLIGAN, a professor of economics at the University of Chicago, received his Ph.D. in economics from the University of Chicago in 1993. He has been a visiting professor at Harvard University and Clemson University, and is affiliated with the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He has written for the Chicago Tribune, the Chicago Sun-Times, the New York Times, and the Wall Street Journal, and is the author of three books, including Side Effects: The Economic Consequences of the Health Reform.

The following is adapted from a speech delivered on October 24, 2014, at a Hillsdale College Free Market Forum in Indianapolis, Indiana.

The topic of my talk today is the economic side effects of the Affordable Care Act (ACA), sometimes referred to as Obamacare. Since most of the economy has to do with labor and work, that’s where I’ll start. But, first a caveat. I’m an economist, and I’m going to talk about some parts of this complex law that have an impact on the labor market. Other parts of it relate to health and medicine, and because I’m not a doctor or a biologist, I’m not going to speak to those parts. From an economic or labor-market perspective, I’m going to explain how the costs of the ACA outweigh its benefits. But I can’t measure or estimate its effects on health care. I leave that to others.

The key economic concept required to understand the labor market effects of the ACA is what economists call “tax distortions.” Tax distortions are changes in behavior on the part of businesses or households for the purpose of reducing their taxes or increasing their subsidies. We call them distortions because they don’t occur for real business or real personal reasons. They occur because of the tax code. A prime example of a tax policy that creates distortions is the ethanol subsidy—technically it is a credit, not a subsidy—whereby gasoline refiners are subsidized on the basis of how many gallons of gas they produce with ethanol. Because of this subsidy, businesses change the type of gas they produce and deliver, people change the type of gas they use—which affects engines—and corn is used for ethanol instead of as feed or food. Nor do the distortions stop there. Arguably, food prices are increased due to the reallocation of corn to different uses—and when food prices are higher, restaurants and households do things differently. There are distortions economy-wide, all for the chasing of a subsidy.

To be clear, just because taxes cause distortions doesn’t mean that we should never have taxes. It just means that in order to get the full picture when it comes to policies like an ethanol subsidy or laws such as the ACA, we need to take into account the tax distortions in order to ensure that the benefits we are seeking exceed the costs.

The Employer Mandate/Penalty/Tax

So what are the tax distortions that emanate from the ACA? Here let me simply focus on two aspects of the law: the employer mandate or employer penalty—the requirement that employers of a certain size either provide health insurance for full-time employees or pay a penalty for not doing so; and the exchanges—sometimes they’re called marketplaces—where people can purchase health insurance separate from their employer. The mandate or penalty is intended, of course, to encourage employers to provide health insurance. And the exchanges are where the major government assistance is provided, since those who purchase insurance in an exchange typically receive a tax credit. As I’ll explain, taken together, the penalty on employers and the subsidies in the exchanges add up to a tax on full-time employment—a tax that you pay if you work full time but not if you work part time or don’t work at all. And the problem with that, of course, is that by taxing full-time work—which is the same as subsidizing part-time work and unemployment—you get less of the former and more of the latter two.

How does this full-time employment tax work with regard to the employer mandate? As I mentioned, the penalty applies only in the case of full-time employees and only to employers that don’t offer health coverage, and it applies only in those months during which those full-time employees are on the payroll. If an employee cuts back to part-time work, the employer no longer has to pay the penalty. The dollar amount of the penalty doesn’t depend on whether the employee is rich, poor, or middle class—if he works full time, the employer must either provide insurance or pay the penalty. And the penalty is indexed to health insurance costs, so every year those costs increase more than the economy and more than wages, the penalty will increase more than the economy and more than wages.

The current penalty is usually described as $2,000 per year per full-time employee. But it’s really more than that, because the penalty, unlike wages, is not deductible from business taxes. So in terms of a salary equivalent, the penalty is closer to $3,000 a head. Needless to say, this penalty reduces competition in the labor market: It discourages employers from competing for full-time employees—which, if you’re an employee, is a bad deal. Also there are a lot of employers who are not going to pay the penalty because they don’t meet the size threshold of 50 or more employees, and employees are going to suffer because these small employers won’t want to become large employers and therefore subject to the penalty.

Furthermore, this mandate or penalty—and by this time it should be clear that we can think of it as a tax on having a full-time employee—disproportionately harms low-skill workers. Think about it this way: How many hours does a worker have to work each week to produce the $3,000-per-year of value to justify keeping his job or being hired? For a minimum-wage worker, that comes to eight hours a week, all year round—one day of work a week for the government due to the ACA alone. Higher-skilled employees can obviously produce $3,000 worth of value in less time, so the penalty will have less of an impact on them.

Subsidized Health Insurance Exchanges

What of the tax distortions that come from the subsidized health insurance exchanges or marketplaces? To begin to think about this, imagine paying full price for your health care. How does full price work? Well, you pay the full price. The health care provider doesn’t look at your tax return and adjust the bill accordingly. So we would never call paying full price for health care an income tax of any kind. Or imagine there is a discount on the full price—for instance, 30 percent off for everybody, regardless of income. In that case it’s still not an income tax. No matter how much you earn, you pay the same price. But what if the discount (or subsidy) is tied to your employment situation? Not to your income, but to your employment situation. That’s how the exchanges work. If you have a full-time job with an employer that offers coverage—which is the case for most employees in our economy—you don’t get the subsidy offered through the exchanges. If you want to get the subsidy, you need to become a part-time worker or spend time off the job. In other words, this discount, too, is a tax on full-time employment. Of course, no politician ever calls it a tax. But when you are in a group of people that doesn’t receive a subsidy that people in another group receive, that’s a tax.

So far I have oversimplified things, because there isn’t just one subsidy for everybody in the exchanges. The subsidy depends on your income. So there’s also an income tax built in. The more you earn, the less of a discount you get. Indeed, if you earn enough, the discount disappears. The folks analyzing this law in Washington made the mistake of focusing only on the income-tax aspect of the subsidy. There will be only eight million people in the exchanges, they figured, so eight million people now have a new income tax. That’s no big deal, they thought. They were oblivious to the fact that they were implementing a full-time employment tax on the majority of American workers. In all of the economic analyses of the ACA, there was no mention of this full-time employment tax—despite the fact that it’s the single biggest tax in the law.

In describing the size of this tax, again I find it useful to think in terms of how many hours per week somebody has to work to create enough value to replace the government subsidy he is losing because of his full-time status. There are a number of full-time workers who may have to work ten, 20, or even 30 hours a week to create the value they would get for free if they worked part time or didn’t work under the ACA. In the old days, working part time meant you earned less, and your family had less to spend than if you worked full time. Under this new system, on the other hand, if you have a family of four and make $26 an hour, dropping to part time can actually improve your financial condition by qualifying you for well over $1,000 per month in subsidies through the health care exchanges—an amount that exceeds what you would make by working the extra eleven hours per week. This is an economically perverse situation.

We have decades of research showing that when you tax something, you get less of it. So if you tax labor, you get less labor. By that I mean on average—I don’t mean that every worker responds to every labor tax. That’s obviously not the case. But on average, if you tax labor you get less labor. As a result of the ACA, then, we are going to have fewer people working and less value created overall.

Nor will the loss of productivity end there. As with the ethanol example, there will be more and more tax distortions from the ACA as it continues to roll out. Businesses will change the way they do business, whether it’s by bending over backwards to stay below 50 employees or by having more part-time employees and fewer full-time employees—not because these policies create value or satisfy customers, but because they avoid penalties or enhance subsidies. The Chicago Cubs baseball team changed over to more part-time employees this past summer, and as a result there was a day when the grounds crew couldn’t handle the weather—reducing the value of the game for the fans in general. Incentives and disincentives in the tax code ripple through the economy in unimaginable ways.

This has not been well understood. Some analysts, for instance, have argued that not many employers, relatively speaking, are going to end up paying the penalty, so the harm of the penalty will be limited. And that’s just wrong. Adam Smith pointed out in The Wealth of Nations that if there’s a type of employment that’s evidently either more advantageous or less advantageous than other types of employment, so many people would crowd into it in the former case, or desert it in the latter case, that its advantages would soon return to the level of the other types. In terms of the ACA, whereas only some workers will experience the penalty directly, it will be felt across the economy because workers will move out of the penalized businesses—and customers will do the same, since those penalties are passed on to them in the form of higher costs. We’ll all experience it. Economists and politicians who looked at this law made the mistake of basing their analyses on models in which nothing matters except what happens directly to the individual worker and his employer. That is not how economics works.

*****

In summary, the ACA has three major taxes in it. Two are taxes on full-time employment and the other is a tax on income. They may be implicit, they may be hidden, politicians may not call them taxes, but that’s what they are. Their economic impact on workers varies widely, affecting low-skill workers the most. They create all kinds of productivity problems and will have visible and permanent effects on the economy. I have estimated that employment will be three percent less over the long term because of the ACA, and that national income—or GDP, if you like to think of it that way—will be two percent less. If you look at the productivity costs alone—forgetting the fact that there will be a number of people not working anymore—they come to $6,000 per person who gets health insurance because of the law. And I’m not beginning to count the payments needed for health care providers.

In conclusion, I can make you this promise: If you like your weak economy, you can keep your weak economy.


I know you just can’t wait to see when evil lurks in our future..?!  As I’ve stated several times before…

PREPARE

Future Jobs in America

Sometimes we search for information and get quite a surprise when we find that the answer we found is not what we expected.!?

Having heard that the jobs market may be dim in our future, I looked for projections to tell me what we should expect.  I was once again surprised to see what some of the answers were.  Below I have included a PDF URL link with a report on the 2013-2017 time frame.  What really surprised me is where jobs would be located — a LOT.

Please read the the following report.  (You need not hang on every word.)  But for those of you locals out there, you might find the two top cities in America to be somewhat close to you..!?  I would especially focus on pages 7-8 (tables).  I guess the good news is, things will be looking up locally.  But the bad news is, we shouldn’t get surprised when a whole bunch of people flock into our cities and they grow exponentially.?!

Job Forecast for 2017 Timeframe

Maybe this will get my daughter here.?!

 

 

America’s Financial or Economic Forecast

I wrote in an earlier article (Preparing for 2015+) about our projected economy and referenced a few websites talking about the financials in our near future.

Allow me to share information on a few charts I obtained this week to demonstrate that we are ‘in’ a downturn cycle economically.  Although the (expert) authors have generated their projections based on different but related factors, they have come to the same basic conclusion — we are headed toward an economic downturn.

First, there are four popular economic cycles (all named after their authors):

  • Kondratiev’s Wave
  • Juglar Cycle
  • Kitchin Cycle
  • Kuznets Cycle

Kondratiev’s Wave is a ‘super cycle’ based heavily on commodities.  That wave (cycle) was originally defined to be a 54-56 year cycle.  Although today it is described as a 35-40 year cycle.  It is often referred to as the K-wave.  This theory defines periods of high economic growth, contraction, recessions, and depressions.  We are currently in the fifth K-wave since its inception defined as the 1982-2025 period with the bottom (worst) being in 2025 (earliest projection).

The Juglar cycle was first identified in 1862 by a French doctor and economist.  His cycle is defined as a 7-11 year cycle.

The Kitchin cycle is a 40 month cycle related to the inventory cycle of commercial business.

Kuznets cycle is an 18 year swing which shows the rhythms of ‘income inequality’ in American society.  I found this one very interesting and was surprised by its conclusion.!?   According to Kuznets’ cycle, we are at the low point on his cycle.  That means that the inequality between rich and poor is near its smallest point!  By 2025 it will be the biggest spread according to his chart.  If people are complaining about ‘Wallstreet’ now, imagine 2025?!

Regarding the above cycles, this is the extent of my memory and what I retained on those cycles.  I wish I could elaborate more.

In addition to the above economic models, there is a ‘War Cycle’.  That cycle is an 8.8-17.7 year cycle with major war cycles (e.g., WWII) of 53.5 years.  The last ‘bad’ war cycle dip was in the 1840’s.  We are at the bottom (beginning) of the current 53.5 year war cycle.  According to this cycle, we should be near its peak by 2020.

Of import, all of these cycles coincide in their timing!  They all indicate that we are at the ‘beginning’ of a downturn financially and with regard to war, we are at our safest point.  I would have posted some of those charts below for your review, but due to technical issues it was not easy.  Suffice it to say, they are classic line charts with their current valleys defined in each at approximately the same time frame.

If asked, my point is that the reader should prepare.  Myself, I am doing what I can to prepare for a ‘not too friendly environment‘ and have made sure that my investments are as safe as they can be.

As I’ve said before, “Prepare for the worst and hope for the best”.  Er go, I refer to myself as an optopest.

I would be interested in your opinion on this post.  Please replace the values in the boxes below with your own and chose the answer that you believe depicts your view.

← Back

Thank you for your response. ✨

 

 

Effects of the Affordable Care Act

I would venture to guess that the vast majority of people in America today really don’t understand the real impact of ‘Obama Care’.  There are, in my opinion, two key reasons for this lack of understanding.

First, people are too often caught up in their lives (work, family, etc.) oblivious to current events.  They are often too engaged in light entertainment or some other form of feel good diversion.

But secondly, and more importantly, many are unaware that the Affordable Care Act (ACA) has not really been fully implemented yet.!!  Because our current emperor has chosen to pass ‘38 presidential orders‘ since the bill has passed in the senate, most of the real bad news has been postponed until January of 2017!

Currently most conventional citizens of this country work for a living.  As such, they mostly receive health insurance from their employers.  Although they may think their premiums are high now, they haven’t seen anything yet!!?

When the ACA is fully implemented, insurance rates will ‘necessarily skyrocket’ due to the ‘Cadillac tax’ defined in the ACA.  (And like all other taxes, this one will also go up, not down.)  That tax is approximately 40% on top of whatever your coverage is defined by the federal government.  (A very scary thought indeed.)  Why?  Because they believe anyone who has ‘better’ insurance than most (the poor and/or unemployed), they need to subsidize those unfortunate people.

What this will mean is two major changes in our society — loss of jobs, and loss of exceptional health care.  Both will be a detriment to our current way of life.  If you do not believe me, please read what professor Case Mulligan has to say on the subject.

And by the way, no we won’t get a mulligan on this issue.  We will be stuck with an eight on a par 3.


 

CASEY MULLIGAN, a professor of economics at the University of Chicago, received his Ph.D. in economics from the University of Chicago in 1993. He has been a visiting professor at Harvard University and Clemson University, and is affiliated with the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He has written for the Chicago Tribune, the Chicago Sun-Times, the New York Times, and the Wall Street Journal, and is the author of three books, including Side Effects: The Economic Consequences of the Health Reform.

The following is adapted from a speech delivered on October 24, 2014, at a Hillsdale College Free Market Forum in Indianapolis, Indiana.

The topic of my talk today is the economic side effects of the Affordable Care Act (ACA), sometimes referred to as Obamacare. Since most of the economy has to do with labor and work, that’s where I’ll start. But, first a caveat. I’m an economist, and I’m going to talk about some parts of this complex law that have an impact on the labor market. Other parts of it relate to health and medicine, and because I’m not a doctor or a biologist, I’m not going to speak to those parts. From an economic or labor-market perspective, I’m going to explain how the costs of the ACA outweigh its benefits. But I can’t measure or estimate its effects on health care. I leave that to others.

The key economic concept required to understand the labor market effects of the ACA is what economists call “tax distortions.” Tax distortions are changes in behavior on the part of businesses or households for the purpose of reducing their taxes or increasing their subsidies. We call them distortions because they don’t occur for real business or real personal reasons. They occur because of the tax code. A prime example of a tax policy that creates distortions is the ethanol subsidy—technically it is a credit, not a subsidy—whereby gasoline refiners are subsidized on the basis of how many gallons of gas they produce with ethanol. Because of this subsidy, businesses change the type of gas they produce and deliver, people change the type of gas they use—which affects engines—and corn is used for ethanol instead of as feed or food. Nor do the distortions stop there. Arguably, food prices are increased due to the reallocation of corn to different uses—and when food prices are higher, restaurants and households do things differently. There are distortions economy-wide, all for the chasing of a subsidy.

To be clear, just because taxes cause distortions doesn’t mean that we should never have taxes. It just means that in order to get the full picture when it comes to policies like an ethanol subsidy or laws such as the ACA, we need to take into account the tax distortions in order to ensure that the benefits we are seeking exceed the costs.

The Employer Mandate/Penalty/Tax

So what are the tax distortions that emanate from the ACA? Here let me simply focus on two aspects of the law: the employer mandate or employer penalty—the requirement that employers of a certain size either provide health insurance for full-time employees or pay a penalty for not doing so; and the exchanges—sometimes they’re called marketplaces—where people can purchase health insurance separate from their employer. The mandate or penalty is intended, of course, to encourage employers to provide health insurance. And the exchanges are where the major government assistance is provided, since those who purchase insurance in an exchange typically receive a tax credit. As I’ll explain, taken together, the penalty on employers and the subsidies in the exchanges add up to a tax on full-time employment—a tax that you pay if you work full time but not if you work part time or don’t work at all. And the problem with that, of course, is that by taxing full-time work—which is the same as subsidizing part-time work and unemployment—you get less of the former and more of the latter two.

How does this full-time employment tax work with regard to the employer mandate? As I mentioned, the penalty applies only in the case of full-time employees and only to employers that don’t offer health coverage, and it applies only in those months during which those full-time employees are on the payroll. If an employee cuts back to part-time work, the employer no longer has to pay the penalty. The dollar amount of the penalty doesn’t depend on whether the employee is rich, poor, or middle class—if he works full time, the employer must either provide insurance or pay the penalty. And the penalty is indexed to health insurance costs, so every year those costs increase more than the economy and more than wages, the penalty will increase more than the economy and more than wages.

The current penalty is usually described as $2,000 per year per full-time employee. But it’s really more than that, because the penalty, unlike wages, is not deductible from business taxes. So in terms of a salary equivalent, the penalty is closer to $3,000 a head. Needless to say, this penalty reduces competition in the labor market: It discourages employers from competing for full-time employees—which, if you’re an employee, is a bad deal. Also there are a lot of employers who are not going to pay the penalty because they don’t meet the size threshold of 50 or more employees, and employees are going to suffer because these small employers won’t want to become large employers and therefore subject to the penalty.

Furthermore, this mandate or penalty—and by this time it should be clear that we can think of it as a tax on having a full-time employee—disproportionately harms low-skill workers. Think about it this way: How many hours does a worker have to work each week to produce the $3,000-per-year of value to justify keeping his job or being hired? For a minimum-wage worker, that comes to eight hours a week, all year round—one day of work a week for the government due to the ACA alone. Higher-skilled employees can obviously produce $3,000 worth of value in less time, so the penalty will have less of an impact on them.

Subsidized Health Insurance Exchanges

What of the tax distortions that come from the subsidized health insurance exchanges or marketplaces? To begin to think about this, imagine paying full price for your health care. How does full price work? Well, you pay the full price. The health care provider doesn’t look at your tax return and adjust the bill accordingly. So we would never call paying full price for health care an income tax of any kind. Or imagine there is a discount on the full price—for instance, 30 percent off for everybody, regardless of income. In that case it’s still not an income tax. No matter how much you earn, you pay the same price. But what if the discount (or subsidy) is tied to your employment situation? Not to your income, but to your employment situation. That’s how the exchanges work. If you have a full-time job with an employer that offers coverage—which is the case for most employees in our economy—you don’t get the subsidy offered through the exchanges. If you want to get the subsidy, you need to become a part-time worker or spend time off the job. In other words, this discount, too, is a tax on full-time employment. Of course, no politician ever calls it a tax. But when you are in a group of people that doesn’t receive a subsidy that people in another group receive, that’s a tax.

So far I have oversimplified things, because there isn’t just one subsidy for everybody in the exchanges. The subsidy depends on your income. So there’s also an income tax built in. The more you earn, the less of a discount you get. Indeed, if you earn enough, the discount disappears. The folks analyzing this law in Washington made the mistake of focusing only on the income-tax aspect of the subsidy. There will be only eight million people in the exchanges, they figured, so eight million people now have a new income tax. That’s no big deal, they thought. They were oblivious to the fact that they were implementing a full-time employment tax on the majority of American workers. In all of the economic analyses of the ACA, there was no mention of this full-time employment tax—despite the fact that it’s the single biggest tax in the law.

In describing the size of this tax, again I find it useful to think in terms of how many hours per week somebody has to work to create enough value to replace the government subsidy he is losing because of his full-time status. There are a number of full-time workers who may have to work ten, 20, or even 30 hours a week to create the value they would get for free if they worked part time or didn’t work under the ACA. In the old days, working part time meant you earned less, and your family had less to spend than if you worked full time. Under this new system, on the other hand, if you have a family of four and make $26 an hour, dropping to part time can actually improve your financial condition by qualifying you for well over $1,000 per month in subsidies through the health care exchanges—an amount that exceeds what you would make by working the extra eleven hours per week. This is an economically perverse situation.

We have decades of research showing that when you tax something, you get less of it. So if you tax labor, you get less labor. By that I mean on average—I don’t mean that every worker responds to every labor tax. That’s obviously not the case. But on average, if you tax labor you get less labor. As a result of the ACA, then, we are going to have fewer people working and less value created overall.

Nor will the loss of productivity end there. As with the ethanol example, there will be more and more tax distortions from the ACA as it continues to roll out. Businesses will change the way they do business, whether it’s by bending over backwards to stay below 50 employees or by having more part-time employees and fewer full-time employees—not because these policies create value or satisfy customers, but because they avoid penalties or enhance subsidies. The Chicago Cubs baseball team changed over to more part-time employees this past summer, and as a result there was a day when the grounds crew couldn’t handle the weather—reducing the value of the game for the fans in general. Incentives and disincentives in the tax code ripple through the economy in unimaginable ways.

This has not been well understood. Some analysts, for instance, have argued that not many employers, relatively speaking, are going to end up paying the penalty, so the harm of the penalty will be limited. And that’s just wrong. Adam Smith pointed out in The Wealth of Nations that if there’s a type of employment that’s evidently either more advantageous or less advantageous than other types of employment, so many people would crowd into it in the former case, or desert it in the latter case, that its advantages would soon return to the level of the other types. In terms of the ACA, whereas only some workers will experience the penalty directly, it will be felt across the economy because workers will move out of the penalized businesses—and customers will do the same, since those penalties are passed on to them in the form of higher costs. We’ll all experience it. Economists and politicians who looked at this law made the mistake of basing their analyses on models in which nothing matters except what happens directly to the individual worker and his employer. That is not how economics works.

*****

In summary, the ACA has three major taxes in it. Two are taxes on full-time employment and the other is a tax on income. They may be implicit, they may be hidden, politicians may not call them taxes, but that’s what they are. Their economic impact on workers varies widely, affecting low-skill workers the most. They create all kinds of productivity problems and will have visible and permanent effects on the economy. I have estimated that employment will be three percent less over the long term because of the ACA, and that national income—or GDP, if you like to think of it that way—will be two percent less. If you look at the productivity costs alone—forgetting the fact that there will be a number of people not working anymore—they come to $6,000 per person who gets health insurance because of the law. And I’m not beginning to count the payments needed for health care providers.

In conclusion, I can make you this promise: If you like your weak economy, you can keep your weak economy.

Preparing For 2015+

“To be forewarned, is to be forearmed.” — unknown

Although people today primarily focus on ‘feeling good’, they should consider things may not be the same tomorrow as they are today.  (i.e., the ‘normalcy bias‘.)  We here in the U.S. are changing… rapidly — economically as well socially.  And to prepare financially is a wise consideration for the near future.

I have read several articles on this subject and learned of numerous financial prognosticators’ projections for the 2015-2025 time-frame.  To say the least, none of them are good.  As such, I am including a few links here for your reading to hear what is expected.  Being safe is better than being sorry.  And being prepared for the worst and hoping for the best has served me well for several decades.  These are links you won’t typically see elsewhere.

Everything Is Just Fine…? — We hear things are good, are they?

The Last Gasp — What is happening globally?

The Seven Year Cycle — There are cycles in economies.

Economic Cycle Theorists — Economic cycles do exist, about four of them.

 

 

Living and Working in the U.S.A. — Part II

It is understandable that corporations have the motivation to survive, just like any other human.  However, like their human counterparts, they should consider the ‘other guy’ as well as themselves.

As a continuation of my recent article ‘Living and Working in the U.S.A.‘, I received an update from the friend who sent the email included in that article.  Just when you think you are totally shocked at how a corporation could be so calloused and impersonal, you see even worse behavior.

His update (paraphrased for security reasons) goes something like this:

After working a little more than 15 hours per week all year, they were told that their salary (hourly wage) would be cut by 30%, effective immediately, until January.

In their notification, they were told that this action was of a ‘confidential nature’ and that they could not share it with anyone inside or outside of IBM.  In short, if the tree falls in the forest and no one is told, I guess the tree really didn’t fall..?

I guess the main reason I enter this article is to inform the public that corporate America is really in trouble.  If one of the top bluechip corporations in this country behaves in this manner, one should ask who else takes such actions.  And, how much of a recovery do we really have?

And for those of you who invest in IBM, you should find the following article by Forbes to be of import.

Death Of The (IBM) Salesman