McCain: Inarticulate on Health Care

So by now I realize that the presidential election is all but over and my preferred (and I use that term loosely) candidate is not going to win, but I do want to comment on the health care issue at stake in this election.

In my view, the issue of how to reform health insurance is the most important domestic issue that will be decided in the next several years. Either we grant the state a bigger role health care or we allow individuals more freedom. We really cannot have both and I would certainly choose the later.

Unfortunately, as evidenced by my friend Rob's recent post, which compared and contrasted the candidates views on health care, McCain is doing a terrible job of articulating what increasing health care freedom means for Americans. So as it becomes less and less likely that anything that I want to happen is actually going to happen let me try to explain what McCain should have said.

The government creates two big problems with health care: Employer based insurance and minimum coverage requirements. Lets take a look at each of these problems and how the government can solve them.

Problem 1: Employer Based Health Insurance

Most Americans receive their health insurance as a benefit from their employer due to federal government tax policy. The policy states that if a business purchases health insurance for its employees, it can deduct the money it spends on health insurance from its taxes just like it deducts the money spent on employee salaries. The federal government does not allow individuals to deduct money spent on health insurance from their taxes. So when most companies and their employees do the math it works best for businesses to buy health insurance for their employees. However at least three problems with this situation have become apparent:

1. Companies have insurance options, but employees do not: If the company is the one purchasing the health insurance, they are the ones that choose which insurance to buy. They may choose to give their employees some limited options, but at the end of the day the business with likely look out for its own interests not necessarily those of its employees. Likewise, the insurance company looks at the business as their customer, not the employees. So when it comes down to making the business happy or making the employees happy the insurance company will try to please it the business, its customer. This contributes to frustration with "insurance".
2. No portability of care: When people get their health insurance through their employer, by definition if they change jobs, they have to change insurance. This creates a problem if someone needs to change jobs when that person or a family member is going through an illness. So the person is left with either not changing jobs or potentially dealing with denial of coverage due to the preexisting condition. Just like it does not make sense to change property, auto, or life insurance when changing jobs, it does not make sense to change health insurance when changing jobs either.
3. The Part-Time Cracks: The previous two problems make health insurance less convenient for the majority of people with a single steady job. However a significant percentage of people lack health insurance all together because they work at a part time job, or perhaps multiple part time jobs. When a business can amortize the cost of an employee's over 40 hours a week for 52 weeks per year, most times they can make the math work out in favor of supplying health insurance for their employees. When they look at an employee who works less than that, either per week or seasonal employment, they may likely conclude that the costs of health care is not worth it relative the employee's total annual salary. People in these situations fall through the cracks of the employer sponsored health insurance.
   

So what is the solution to all three of these problems? Easy, just shift the incidence of the tax deduction from employers to employees and make employer sponsored health insurance a taxable benefit. It takes both things not just one. The net result, at least via the back of the envelope calculations on McCain's website, is at least a push financially with the current system and has the added benefit of giving individuals increased control over their health care, which solves the three problems mentioned above.

The big open issue with this proposal is what happens if individuals choose to leave their employer sponsored insurance plan for a plan that they buy individually. The key assumption to this plan is that by taxing an employer provided health insurance benefit, employees will understand exactly what their employer is paying for health insurance and consider it an explicit part of their salary instead of a difficult to value benefit. So, an employee chooses to leave their employer sponsored plan, they should demand the full value benefit in extra salary, which would give them the extra money to buy that insurance privately.

Problem 2: State Mandated Minimum Coverage

The second government created problem with health insurance is not created in Washington D.C. but finds it genesis in each of the 50 state capitals where legislatures make rules about what types of procedures health insurance has to cover. The classic example is chiropractic care, which many states mandate health insurance cover, but few people actually have any desire to obtain. This is basically a special interest give away by making the majority of people pay higher premiums so that a minority of people can get their specialty care subsidized. Or so that the providers of that specialty care can make more money.

The simple policy change that this country needs is to allow people to purchase health insurance from a company in another state that may have fewer minimum coverages and lower costs. Personally I will never choose to visit a chiropractor, so I would prefer not to hold insurance coverage that covers chiropractic care because it is marginally more expensive and I neither need nor want it.

What is the concern with this? It is not like we are outsourcing health insurance decisions to some third world country. Health insurance would still be regulated by some state and states and insurance companies would have an incentive to make insurance policies more relevant to the individual's needs. That is a good thing as far as I can tell.

Unfortunately we will not get get it because McCain cannot articulate it.

Things I Didn't Know About Subprime

Yesterday I read a fascinating paper, The Panic of 2007, by Gary Gorton (via Tyler Cowen) that describes the factors that contributed to the problems in the financial sector. I learned a bunch of interesting things about subprime mortgages, RMBS (the securities used to fund subprime mortgages), and the more arcane financial structures (CDO's and CDS's) that have contributed to this crisis. The following is a list of the interesting things that I didn't previously know:

1. Subprime mortgages short term loans - This was a little surprising because I had always thought about mortgages as long term investments that could possibly expire early i.e. refinancing or prepaying principle on a 3o year fixed rate mortgage. It seems that when banks made subprime mortgages, they intended force the borrower to refinance after two or three years. Page 12 starts an interesing discussion of subprime mortgage design. In short the banks intended to make a mortgage loan that would need to be refinanced in just a few years, which they assumed would be possible due appreciation on the home value. Gorton argues that this is tantamount to holding a call option on home prices.
2. Subprime backed Residential Mortgage Backed Securities (RMBS) were meant to be short term investments - Again I had usually thought about these bonds as long term investments that might expire early and hence carried prepayment risk. Pages 32 and 33 show a comparison of two subprime backed RMBSs, one issued in 2005 and another issued in 2006. The first thing to strike me about these two deals is that the 2005 deal has already seen prepayments of $836 m on the original $1.2 B of mortgages (70%). In fact the vast majority of the original highest rated (AAA) bonds had been paid off. I would not have thought that less than two years after issuance the so much of this debt would be paid off.
3. The problems with RMBS may have more to do with increased duration than market illiquidity - In contrast to the 2005 deal, the bonds associated with the 2006 deal are not seeing anywhere near the amount of prepayments - $518 m on the original $1.3B (40%). So investors and banks are now apparently stuck with bonds on their books that they originally expected to prepay. So it may not be so much the lack of trading as the lack of prepayment that is hurting the credit markets.
4. The highest rated bonds (AAA) are still highly rated - My initial impression of the subprime mortgage crisis was that the underlying mortgages were performing so poorly that even the highest rated bonds were losing their AAA ratings. Looking at these two deals, that does not seem to be the case. Only the A4 tranche of the 2006 deal has been downgraded and even that bond still gets a AAA from Moody's. I also took a brief look at an subprime RMBS index mentioned in the paper, the ABX.HE index. Just browsing through the various AAA rated indices shows that many of the original AAA rated bonds still held their rating and many of the ones that didn't still held investment grade ratings. The real carnage appears to be in the mezzanine tranches.
5. CDO complexity exposed - I guess that I pretty much understood what was going on with RMBS's being restructured into CDO's but this paper really illustrates how complex the payoff structure is. With multiple checks and tests per layer trying to model the cash flow from these investments is basically impossible. Of course if your expectation is that housing prices will keep rising and that you will get your money back in just a few years it may make sense to invest in something that you do not really understand. I guess that is the thought process.

I may have a few more thoughts in a subsequent post.

Big Surprise

After all of the cost overruns and incompetent management it should be no surprise that the Boston Globe reported yesterday that the cost of the Big Dig has ballooned to $22 billion from the previously reported $15 billion:

Massachusetts residents got a shock when state officials, at the peak of construction on the Big Dig project, disclosed that the price tag had ballooned to nearly $15 billion. But that, it turns out, was just the beginning.

Now, three years after the official dedication of the Central Artery/Third Harbor Tunnel, the state is reeling under a legacy of debt left by the massive project. In all, the project will cost an additional $7 billion in interest, bringing the total to a staggering $22 billion, according to a Globe review of hundreds of pages of state documents. It will not be paid off until 2038.

It is not completely clear to me from the article how the accounting works here - are they just adding back all of the interest costs until the principle is completely paid?

Regardless the Massachusetts Turnpike Authority, the agency responsible for maintaining the Mass Pike (I-90) and also the Central Artery (I-93) portion of the Big Dig, currently faces a huge budget deficit due to the interest expense on the Big Dig debt. To deal with this, the agency plans to cut the only discretionary expenses they have - road repairs:

Alan LeBovidge, the turnpike's new executive director, estimates a yawning deficit next year in the authority's operating budget, $70 to $100 million. The capital budget for construction, paving, and inspection for the Big Dig and the 137-mile Massachusetts Turnpike, meanwhile, has been slashed to $22 million, about 19 percent of the debt expense.

So this is really great. A good portion of the tolls collected on the Mass Pike are currently being used pay down the debt on the Big Dig, which has almost nothing to do with the Mass Pike. At least one member of the MTA board makes a sensible statement

"It's outrageous that toll-payers wind up footing the bill when others get a free ride," said Mary Z. Connaughton, a Turnpike Authority board member.

Yes it is outrageous and there is no end in sight if we continue to leave it to the State to deal with this. In my view the state needs to take two steps to deal with this budget issue:

1. Institute tolls on I-93 north and south of the city - the majority of the debt on the MTA books is associated with the Big Dig construction project, but none of the tolls that the MTA collects come from this portion of road. Instituting tolls that are directly related to the construction will at least end the free ride for the commuters who benefit from the construction but have not paid any of the costs.
   
   
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2. Look to the private sector to take on the management of the MTA. Tapping private capital to pay down the debt will immediately bring increased efficiency to the operation and decision making process on I-90 and I-93. When both the Mass Pike and the Central Artery have tolls in place the firms operating will have the opportunity for financial gain by bringing their maintenance costs in line with their revenues. Since these firm will, no doubt, be highly regulated when they try to raise tolls drivers will actually be in a better position because today the regulators are the ones raising tolls.
   

Future posts will delve more deeply into the financial aspects of my proposals. For readers interested in the MTA finances a here is a link.

Human Error and Traffic Jams

I had to post a link to this article and video about research that some Japanese Universities are doing on how traffic jams are created. In the video below a bunch of cars driving around a track at 30 miles an hour created their own traffic jam. We need to find a way to apply information technology to alleviate these spontaneous traffic events. The payoff in terms of time money saved (especially at $3+ /gal gasoline) would be incredible.

Hulu

A few days ago I got an invitation to the Hulu Beta. Hulu is a joint venture between NBC and Fox for internet distribution of their current programs. My favorite feature is the ability to display clips of shows my own web page. Below is a funny clip from Kitchen Nightmares and also shows what the interface looks like:

Web 2.0 Stuff

So it has been awhile since I have posted and part of the reason is because much of the energy that I had been putting into blogging has gone into other Web 2.0 applications. Here are some of the interesting applications that I have started using over the last few months:

Over the summer my friend Rob invited me to join the Facebook revolution so I signed up not really expecting much in particular. Now I really enjoy using the application especially due to all of the 3rd party gadgets that are available to add into the site. I have used LinkedIn for a few years to manage my business connections, but I don't really like LinkedIn as much for personal friends. At this point I still think it is reasonable to manage two social networks one for business and one for friends, but it would be great if some of the widgets could span both networks. More on that later.

Dopplr is an interesting service that I signed up for a few months back but am only recently began actively using. The service is a way to share your travel plans with acquaintances so that you can meet up with people when you happen to be in the same city. I think that this is really more about passive communication in that instead of having to remember who lives where and start sending out emails, Dopplr will do the matching for us. Doppler recently added a Facebook application, which is great because duplicating my Facebook network would seem to be a little pointless. Next up, I would love to see Dopplr use OpenSocial to create a LinkedIn application.

Grand Central bills itself as the new way to use your phones. I am not sure about that, but it is a nice service that will allow people to dial a single number that will ring all of my phones at the same time so that I can choose the one that I want to answer. It also has some great features that allow callers in my address book to be treated in different ways based on my address book entries. The only problem that I have with the service is that everyone already has my mobile number and just uses that so it will be a bit of a pain to get all of my contacts to switch over to my Grand Central number, especially when my mobile number still works. Google recently purchased Grand Central so as a next step I would really like to see tighter integration between Grand Central and Gmail to manage all of my communications.

Mankiw's Carbon Theorem

On his blog today Greg Mankiw posits the following theorem:

Cap-and-trade = Carbon tax + Corporate welfare

I this theorem just absolutely hits the nail on the head. Politically it looks like some sort of carbon tax or cap-and-trade scheme is coming both for national security and environmental reasons. The real question left is: where will the money from the tax or cap-and-trade scheme go? Will it go to corporations or will it go to the federal government? My favorite suggestion would combine a carbon tax with a reduction on income taxes. Of course I would also favor an increase in federalism in road construction.

More OCBP News Coverage

I just got back from a great week of working on the Ocean City Beach Patrol. I spent the week working with the Inlet crew which is always a fun experience both because that section of the beach offers some challenging surf conditions and many of the people who come to that section of the beach have limited swimming experience. Over the course of the week I made seven rescues and had to work pretty hard warning many other people about dangerous conditions.

While I was in Ocean City, the CBS Early Show ran a segment about the dangers of digging holes in the sand that featured the the OCBP. Every parent should watch this video because it highlights the dangers and potential deadly consequences of a seemingly safe activity. In addition to Captain Butch Arbin, the video features Lt. Wes Smith warning a kid that his hole was too deep.

The danger of digging holes in the sand recently gained a higher profile when Dr. Bradley Maron and his father published a study on the topic in the New England Journal of Medicine. Here is a Washington Post account of the story.

In other recent Ocean City News, here is a podcast featuring Jesse Houston, Ocean City's Planning Director.

Look at Your Neighbor!

This past Sunday's Liturgy, we heard the story of the Good Samaritan - the man who stopped on the road to help a victim of robbers when everyone else just passed by. Lori and I went to St. Clements so Fr. Peter gave the homily. I really admire the way that Fr. Peter just strips away all of the extraneous information and comes straight to the point in his homilies. This one was no different.

Fr. Peter began by relating a complement that he had received from a person in the neighborhood about why he is such a good gardener. The person said that Fr. Peter was a good gardener because he looked at his plants. He looked at them to know if they needed water or had too much. He looked at them to know if the soil was too hard or too soft. He looked at them to know if they had too much sun or not enough. Only by looking at his plants could he find out what they needed and fix it.

Now the point of the Good Samaritan, according to Fr. Peter, is that probably only the Good Samaritan bothered to look at the robber's victim. The other travelers on the road probably did not stop because they simply did not take the time to look at the victim. Since they did not take the time to look at him, they could not feel sympathy or compassion for him and thus it did not even occur to them to stop and help. Only the Good Samaritan bothered to look.

Living in the city, I think that this message really hits home for me. How often do I just blow by panhandlers on the sidewalk because I just do not take the time to look at them? How callus do we become when we do not take the time to look at our neighbor?

Cambridge at Dusk

Here is a neat picture that I took on Friday night from our roof deck. I was actually a little late snapping this picture and it should should have been exposed a little more, but I think that the lighting on the roadway came out nice.

"Feed My Sheep"

This is a nice story about a couple who created an innovative way to help others. Eight months ago they opened a restaurant with good food and no prices. Each of their customers pays what they think the meal was worth or if the cannot pay they do some work after they finish their meal.

"If Jesus ran a restaurant, would he use this model?" asked Brad Birky. "We'd like to think so. Not that we're comparing ourselves to Jesus or his work. We're just inspired by him and his work."

Dan Savage: Smokin'

I always get a kick out of reading Dan Savage's weekly Savage Love columns and his relatively new blog entries are usually pretty good as well. Today Dan goes off on the Seattle Times for running a cliche report on Federal Agents raiding a number of marijuana grower. Really Dan at his best.

Truth in Carbon Taxes

The other day the New York Times reported that that Representative John Dingell planned to introduce a bill to raise gasoline taxes to combat global warming. Apparently Representative Dingell, who is from automobile producing Michigan, wants to illustrate that the public and specifically Democrats in Congress will not support an increase in gas taxes.

But Mr. Dingell, in an interview to be broadcast Sunday on C-Span, suggested that his goal was to show that Americans are not willing to face the real cost of reducing carbon dioxide emissions. His message appeared to be that Democratic leaders were setting unrealistic legislative goals.

“I sincerely doubt that the American people will be willing to pay what this is really going to cost them,” said Mr. Dingell, whose committee will be drafting a broad bill on climate change this fall.

Today the Wall Street Journal weighed in with an editorial praising Representative Dingell for his his honesty relative to others who would prefer to combat global warming through increased regulatory standards on fuel efficiency, but coming out as opposed to increased fuel taxes nevertheless.

Speaking for ourselves, we don't favor a carbon tax. In theory, such a tax might make sense if it were offset by lower taxes on income tax rates and capital investment--which would be a net plus for economic growth. However, there's not a chance in melting Greenland that the current Congress would offset any new carbon taxes; it would merely pocket the extra revenue to permanently increase the government's share of GDP.

Although I certainly do not trust anyone in Congress to immediately refund any additional gasoline tax revenue, I do support increased gas taxes, although I support them primarily on national security grounds. The Islamic Fundamentalists and the Iranian regime receive the majority of their funding from oil sales so reducing their revenues should be a key component to our strategy. While we cannot immediately cease all foreign oil purchases we can slow the rate of our oil consumption by imposing additional taxes and then use a portion of that money to oppose our enemies.

Of course we would also see some environmental benefits. Benefits that would be much more tangible than those obtained through increased fuel efficiency. Nonetheless, the reason to increase gas taxes is national security not the environment.

OCBP in the News

Here is an interesting article in the Washington Post featuring Butch Arbin who is the captain of the Ocean City, MD Beach Patrol. The article is apparently one of a series of articles about the interesting things that teachers do during the summer months. Before joining the beach patrol, I would never have guessed that so many teachers work as lifeguards during the summer months but it actually is a great combination.

Businesses Thank Government

Here is an interesting advertisement that I noticed the other day when spending a little extra time at Philadelphia International Airport. I love how these businesses are trying to capitalize on the restrictions that the TSA places on what travelers can and cannot bring with them on the plane. What do you think the chances are that these restrictions will ever be relaxed even if the terrorist threat abates? Not likely, especially now that the TSA has created a built in constituency to keep the restrictions in place.

Energy Honesty

Charles Krauthammer comments on how the Senate hopes to hide the true costs associated with increased energy efficiency in the recently passed energy bill. Money quote:

I have no objection to paying more to reduce our dependency on foreign energy. But it is hard to conceive of a more politically dishonest and economically inefficient way to do it than with mandates that make private industry do Congress's dirty work, hide the true cost of energy efficiency and perpetuate the fantasy of the tax-free lunch.

To me the really sad thing about the current debate on energy policy is the complete lack of discussion of the costs associated with increasing fuel efficiency the use of renewable fuels. Unfortunately, these costs will impact the poor the most because they represent a higher portion of a poor person's income than a rich person's income. In my view it is best to deal with these costs openly rather than to try to hide them in the hopes of appearing to offer a free lunch.

I Passed 8th Grade Science

Click on the picture above to take an online quiz to see if you can pass 8th grade science class!

June 24th 2007

On June 24th, I was exactly half as old as my Dad. I was 30 years and 24 days and he was 60 years 48 days. So we celebrated by playing golf at the Lake of Isles. The course is probably one of the most challenging that I have ever played, but some of the holes are absolutely breathtaking. We had a great day of golf! Take a look at the pictures below in the new Picasa slideshow embed.

Quote of the Day

"For my part, I believe Jesus had no politics, let alone the big government politics of our time. And the attempt of both right and left to coopt his truth corrupts faith and politics simultaneously." - Andrew Sullivan

Senators: Not Serious on Ethanol

A couple of days ago, the Club for Growth blog mentioned that the Senate had rejected an amendment to eliminate the 54 cent tariff on imported Ethanol. This strikes me as completely disingenuous at a time when the same Senators are concerned about price gouging for gasoline. Just for fun I used Google Maps to create this map showing how the Senators from each state voted. Now we have a visual representation of where the real price gougers live!

Update: A picture of the map is now included below.