Текст книги "101 Things Everyone Should Know about Economics: From Securities and Derivatives to Interest Rates and Hedge Funds, the Basics of Economics and What They Mean for You"

Автор книги: Peter Sander

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53. HEALTH INSURANCE PROTECTION: COBRA AND HIPAA

It’s no news that the cost of health care has skyrocketed over recent years despite relatively tame inflation. There are many causes for this—administrative costs, technology, and the separation of consumer and payer (usually an insurance plan)—and it’s too big a subject to tackle here. But when health care generates (or costs, depending on how you look at it) 17.6 percent of our GDP while manufacturing activities generate only 10 percent, something is off-center. Suffice it to say that the solution appears to be complex and far-off.

As a consumer, you will bear a greater burden for your health care costs. That’s bad because you’ll pay more. But in the bigger picture it may be good, because when you have to pay for something, you shop for the best value and hold providers accountable for what they deliver. That said, events that may severely affect your ability to get insurance coverage are out of your control—specifically, job changes and layoffs. If you are forced to transfer between states where an insurer may not provide benefits in both states, or you are forced to leave a job, your insurance coverage could be dropped “cold turkey,” leaving you worse off, or forcing you to prolong an unfavorable situation just to keep the insurance.

Congress recognized that and passed two laws that can help: the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, and the Health Insurance Portability and Accountability Act (HIPAA) of 1996. These laws were intended to provide personal health care stability, and stability for the economy as a whole. Then, in 2010, Congress and the Obama administration passed the widely known and somewhat controversial Patient Protection and Affordable Care Act, commonly known as “Obamacare,” (see #54 Obamacare) to deal with many of these issues, including availability to previously uninsurable individuals, and offering many other provisions to more widely mandate and reshape the availability of health coverage.

What You Should Know

Among other provisions, COBRA allows you as an eligible employee to keep your insurance for up to eighteen months after leaving a job (longer under some conditions, like disability). Now, “keep your insurance” doesn’t mean that it’s free—you’ll have to pay the premium. But it does save you from having to prove eligibility or insurability, and it allows you to maintain coverage at the group rate provided to your employer.

While COBRA helps, in practice it was found that only a small minority of ex-employees actually take advantage of it for the full eighteen-month period, as most employees opt for lesser and cheaper coverage than paid for by the employer. But COBRA can help you bridge the gap until you find this cheaper option.

The HIPAA act, in practice, has been more about the rules of privacy and transfer of medical records and information. But one of the key provisions allowed employees to transfer from one job to another without requalifying for insurance; that is, a preexisting condition was not to be grounds for denying insurance at the new employer. There are some wrinkles if an employee moves to a new state where the old insurer doesn’t do business, but in general, the law fixes what it intended to fix and, like COBRA, helps employees leave unwanted jobs.

Why You Should Care

Assuming you have health benefits with your job in the first place, if you have any inkling that your job might go away, or that it might be time for a change, it makes sense to learn about these two laws. Your health insurance provider or human resources department should be able to help you more.

54. OBAMACARE

“Obamacare” is the nickname given—mainly by opponents—to the landmark health care legislation more formally known as the Patient Protection and Affordable Care Act (PPACA) passed in March of 2010. The name “Obamacare” stuck after it was used and endorsed for use by the president himself.

What You Should Know

Obamacare, which had roots in some of the health care reform legislation attempted but not passed in the Clinton administration, brings sweeping changes to health care delivery and cost recovery over a period of eight years after its passage. The main intentions are to bring more affordable care to more people, and to increase access to certain segments of the population all but shut out of the current system. In numbers, the law intends to address the high cost of health care, currently consuming some 17.6 percent of GDP, and the estimated 45–50 million individuals not previously covered by health insurance or entitlements.

The primary mechanisms of Obamacare are:

Individual mandate. Most individuals will be required to purchase health coverage (and certain employers with more than fifty employees to supply it), else be penalized for opting out. That mandate comes with subsidies to help out low-income individuals and families with incomes up to 400 percent of the federal poverty level (currently $11,170 for an individual and $23,050 for a family of four). Those subsidies are paid on a sliding scale depending on income level. The intent of this provision is to broaden coverage and bring more “healthy” people into the insurance pool, lowering the costs for everyone, at least in theory.

Guaranteed issue. Health insurers will no longer (as of 2014) be able to deny coverage to anyone based on health, or cancel insurance for anyone who gets sick. No dollar limits can be applied to total lifetime coverage. Certain “essential” features like maternity coverage are compulsory, as are free preventive checkups after 2017.

Insurance exchanges. States are mandated to operate, or have access to, health insurance exchanges for individuals to compare and buy insurance, and to enact income-based subsidies.

New taxes and cost savings measures. To pay for subsidies, new and higher taxes are imposed on high earners for Medicare. Among the changes are a 2.3 percent excise tax imposed on medical equipment makers and importers, reduced tax benefits from medical expense deductions and flexible spending arrangements, reduced payments and increased audits of payments by Medicare to Medicare providers, and a “luxury tax” on so-called “gold-plated” health insurance benefits received by certain individuals (to take effect in 2018).

Why You Should Care

A major portion of Obamacare (individual mandate, subsidies, exchanges, and guaranteed issue) is set to take effect in 2014, so the long-term effects of this major policy change are yet to be felt. While more people will have access to coverage, and people will be less likely to be penalized for age or sickness, there is considerable concern that it will do little to reduce the overall cost of health care, except perhaps from some savings in Medicare costs (which may show up elsewhere as health providers “reallocate” costs). Higher demand from tens of millions more insured could drive health care prices higher. Additionally, if younger, healthier individuals choose to opt out of the individual mandate (by paying the penalty), the resulting insurance pools will be too small and overweighted with higher-cost, older, sicker individuals—and premiums will rise, not decrease as intended. Opponents of the legislation believe that driving costs down should have been first priority; if low enough, resulting insurance premiums would be more affordable, and people would subscribe naturally, without a mandate.

Whether you’re covered by an employer, Medicare, or are an individual health coverage purchaser, you should watch which way the winds blow on this one. There could be a lot more changes as certain provisions start to take place.

CHAPTER 6

Economic Schools and Tools

Just as Democrats, Republicans, and others have different views on politics and public life, there are also different “parties” and schools of thought on economics and the economy. These schools of thought, like the political parties, have their leaders and their followers, and many of them, like “supply-side economics,” work their way indelibly into the political vernacular.

Beyond such popular political panaceas, anybody who has spent time reading the papers or trying to understand this nebulous thing we call the economy has doubtless run into terms like “fiscal policy” and “Keynesian economics” and “monetary policy” and the “Chicago school.” It’s sophisticated stuff, most originating from the academic world, and hardly food for pleasant family dinner conversation, at least in most families.

But these schools of economic thought are interesting and important for anyone wishing to know how an economy works, and what “knobs and dials” can be used to control it. And the debate around which school works best or explains some kind of crisis can be interesting stuff—if you take it in small doses, like the summaries following. Otherwise, economic schools and their discussion can go into reams of articles and books and be about as dry as a southern Arizona zephyr.

Have no fear. As with other principles described in this book, the economic schools are presented on a “what you need to know” basis.

55. FISCAL POLICY

In the natural course of business and commerce, the economy may expand, contract, or linger in the doldrums, creating pleasure or pain for individuals, corporations, and society as a whole (see #8 Business Cycle). As a measured effort to provide some stability and reduce pain among certain individuals or sectors of the economy, governments try to influence the economy, and smooth out the down cycles in particular.

There are two primary ways the federal or any national government can influence the economy: fiscal policy and monetary policy. Fiscal policy is the use of government spending and tax policy (see #47 Tax Policy and Income Taxation) to put money into or take money out of the economy. Monetary policy (see #56), on the other hand, influences the economy through changes in the money supply and interest rates (see #17 Money Supply and #21 Interest Rates).

What You Should Know

By congressional design or approval, governments can change the level and direction of spending quickly. As a first step in the recovery plan for what turned out to be the Great Recession, Congress passed the American Recovery and Reinvestment Act of 2009, providing more than $700 billion in new, “shovel-ready” spending programs across the country. This is the largest and one of the most quickly passed fiscal stimulus packages in history.

Fiscal stimulus programs like this are designed to provide jobs and thus stimulate aggregate economic demand by giving earners the ability to spend more money. Some stimulus packages are also designed to help certain parts of the economy (as opposed to the whole), or to strengthen or encourage specific sectors. The 2009 stimulus package, for instance, contained spending for alternative energy technologies. Some fiscal stimulus programs can help reduce the effects of poverty or accomplish other social or distribution-of-income objectives.

Stimulus may also be accomplished by reducing taxes, as was done several times since the beginning of the Reagan administration in the early 1980s. The tax rebate checks sent to most Americans during 2008 and the 2 percent “holiday” on payroll taxes in effect for 2011 and 2012 were more recent examples.

Fiscal policy can also be used dampen or attenuate an economy. This can occur either by reducing spending (difficult to do politically in the short run) or by raising taxes.

Economists are somewhat split on the effectiveness of fiscal policies. As recently demonstrated, tax reductions and especially tax rebates during tough times can simply be used for saving and thus don’t stimulate the economy (see #35 Paradox of Thrift). Government spending increases and decreases can be very political. They may not be allocated to the greatest need but rather subject to intense lobbying, resulting in waste and a significant loss of time before the benefits are realized (even the rapidly passed 2009 law wasn’t expected to have real effect for as much as a year). For these reasons, many believe that monetary policy is more effective, but it has boundaries too. Notably, Congress controls fiscal policy while the Federal Reserve (see #30 Federal Reserve) controls monetary policy. Most likely, a combination of the two works best, as has been deployed over the course of time (see #57 Keynesian School and #58 Chicago School).

Why You Should Care

Government is in place to use your tax dollars to make your country a better place to live; fiscal policy is one of the biggest tools it has to do this. How the government spends money is important, as are the size and nature of the budget deficits that may result (see #42 Federal Deficits and Debt). Fiscal policies, especially those involving tax changes, are likely to affect you.

56. MONETARY POLICY

While fiscal policy moderates economic growth and stability directly through government spending and taxation, monetary policy does it a bit more indirectly by controlling the supply of money and its cost through interest rates.

What You Should Know

When there is more money in the system, in theory and usually in practice, there is more economic activity. People have more money to make purchases or to pay off debts to enable more purchases later. The Fed can put more money into the system directly or by reducing interest rates through open market operations (see #32 Fed Open Market Operations).

Adding money to the system usually has a fairly rapid effect, for it stimulates lending and also sets expectations of easier money down the road; business decision-makers have more dollars to chase both now and in the future. But putting more money in the economy to chase the same amount of goods and services, especially when the supply of certain key goods is constrained, as happened in the 2008 oil market, can be highly inflationary—those additional dollars make all dollars worth less.

Monetary policy also influences exchange rates (see #92 Currency Policy and Exchange Rates), which in turn can stimulate or attenuate an economy. Lower interest rates make the dollar relatively less attractive because foreign investors will receive less interest on their holdings. This drives down the value of the dollar against world currencies, which also stimulates U.S. demand as prices for American goods become relatively more attractive to overseas buyers.

Over time, monetary policy has received greater emphasis as a tool to regulate the economy. One big reason is that it works quickly and largely without congressional approval. Policymakers feel they’ve learned how to moderate the business cycle quickly and efficiently with it, and have learned how to adjust all the knobs and dials (not just interest rates) to achieve desired outcomes. The quantitative easing bond-buying programs of the past few years are an excellent example.

Critics feel the overuse of monetary stimulus has left the door open for serious inflation problems in the future as money supply increases have hit all-time records. Many now advocate slow and steady monetary growth—not harsh expansion and contraction cycles tied to big increases and decreases in the Fed funds rate—as the proper way to achieve economic prosperity and stability.

Why You Should Care

Monetary policy will affect your daily life. Most of the effect is indirect, via a healthy and more stable economy. If you’re in the market for a mortgage or a short-term loan, monetary policy will have some effect on the interest rates you’ll pay. Since monetary policy takes aim mostly at short-term interest rates, however, the effect on longer-term mortgage rates is not direct. Monetary policy will also affect the amount of interest you receive on savings. Finally, we all should be aware of the potential long-term effects of monetary growth on inflation (see #18 Inflation and #59 Austrian School).

57. KEYNESIAN SCHOOL

The Keynesian school, often referred to by other names like Keynesian economics or even the somewhat haughty “neoclassical synthesis,” is a school of analysis and thought about the greater economic environment and the role that government should play in that environment. Essentially, the Keynesian school believes strongly in the theory and practice of capitalism but holds that government intervention, in several forms, is necessary to smooth the bumps and keep capitalist societies on a healthy, steady, and prosperous course.

What You Should Know

Keynesian economic theories went public during the Great Depression, and were the basis for British economist John Maynard Keynes’s 1936 book The General Theory of Employment, Interest and Money. At that time, economists and policymakers were intent on finding causes and cures for the depression under way, which many attributed to a complete failure of the capitalist model. Keynes set out to prove that capitalism was okay, it just needed some government intervention occasionally, and that intervention should never be mistaken for government control—that is, a planned economy.

The Keynes view holds that without intervention, the economy will function, but not optimally. Businesses and business leaders can make suboptimal decisions based on incorrect perceptions or lack of information. This leads to underperformance, or in some cases “overperformance,” a boom led by unrealistic expectations. These decisions and overreactions lead to suboptimal demand, loss of output, and unemployment, which of course then serve to make the situation worse. In this view, government policies, including fiscal and monetary stimulus, would be used to increase aggregate demand and economic activity. That stimulus would travel through the economy several times, creating a multiplier effect directly proportional to the velocity with which it traveled.

Monetary stimulus, to resolve the Great Depression at that time, would be accomplished through massive government investments and by lowered interest rates. Both were done, most particularly the government investments through WPA and other programs. Ironically, the theory was really proven effective by the economic boost given by World War II. Keynes also went against the grain in maintaining that deficits were okay, governments didn’t need to balance budgets in the short run, and increased economic activity would fill budgetary gaps later. It should be noted that Keynes did not advocate deficit spending per se, but rather as a necessary investment to smooth economic cycles.

The details of the theory and the effects on wages, prices, and so forth are much more involved and complicated. Over time, U.S. government policy has embraced Keynesian economics, although elements of the Chicago school (or Monetarist school) are also deployed. The Austrian school, favoring little to no government intervention as a way to remove inefficiency more quickly, takes an opposing and intellectually enticing point of view. These are covered in the next two entries.

Why You Should Care

In your normal life you won’t be confronted with having to decide whether you’re a Keynesian, or with the task of implementing Keynesian policy. But it’s helpful to understand the underpinnings of government policy, and why the government does what it does. Those actions do affect you.

58. CHICAGO OR MONETARIST SCHOOL

While John Maynard Keynes favored government intervention to smooth supply and demand for goods and services as a way to achieve economic growth and stability (see #57 Keynesian School), another school of thought claimed that stability was a matter of equilibrium between supply and demand of money, not the goods and services themselves. This school of thought, largely held by members of the University of Chicago faculty, most notably Dr. Milton Friedman, is known as the Chicago or Monetarist school.

What You Should Know

Monetarism focuses on the macroeconomic effects of the supply of money, controlled by the central banks. Price stability is the goal, and policies like Keynesianism, which can lead to excessive monetary growth in the interest of stimulating the economy, are inherently inflationary.

Monetarists hold that authorities should focus exclusively on the money supply. Proper money supply policy leads to economic stability in the long run, at the possible expense of some short-term pain. Monetarists are more laissez-faire in their approach—that is, the economy is best left to its own actions and reactions. To the monetarist, money supply is more important than aggregate demand; the pure monetarist would increase money supply (in small, careful increments) to stimulate the economy rather than take more direct measures to stimulate aggregate demand. The Great Depression, in the Chicago school, was caused by a rapid contraction in money supply, brought on in part by the stock market crash, not a contraction in demand per se.

To the monetarists, the more direct approaches to stimulating aggregate demand are considered irrevocable (once the government intervenes, it is difficult to disengage). Worse, they crowd out private enterprise as government thirst for borrowed money to fund stimulus makes it harder and more expensive for the private sector to borrow. Monetarists also suggest that Keynesian stimulation changes only the timing and source but not the total amount of aggregate demand.

The monetarist point of view has always been embraced by policymakers who endorse a tight vigil over money supply in addition to more traditional fiscal stimulus and interest rate intervention. Fed Chairman Paul Volcker, and later Alan Greenspan, were monetarists, although critics are quick to point out that Greenspan got carried away and created too much growth in money supply, which led to strong boom and bust cycles in stocks and later in real estate. It did not lead to the expected inflation, thanks in part to the availability of inexpensive goods from Asia. We got lucky, but this attenuation of inflation may be unsustainable, particularly with the recent growth in money supply used to mitigate the Great Recession.

Why You Should Care

Unless you aspire toward a degree in economics, you don’t need to be too familiar with the details of the Chicago school, nor its many proponents from the Windy City. The greater interest is in knowing where policy comes from and why.

59. AUSTRIAN SCHOOL

The Austrian school, while founded in Vienna long ago, has largely emigrated to the United States. One of its strongest proponents, Friedrich Hayek, a University of Chicago faculty member, popularized many of its teachings in the mid-twentieth century.

What You Should Know

The basic premise of the Austrian school is that human choices are subjective and too complex to model, and thus it makes no sense for a central authority to force economic outcomes. Like monetarism, but to a greater degree, it is a “laissez-faire” economic philosophy.

The Austrian school takes the contrarian view that most business cycles are the inevitable consequence of damaging and ineffective central bank policies. Government policies tend to keep interest rates too low for too long, creating too much credit and resulting in speculative economic bubbles and reduced savings. They upset a natural balance of consumption, saving, and investment, which, if left alone, would make the consequences of business cycles far less damaging.

The money supply expansion during a boom artificially stimulates borrowing, which seeks out diminishing or more far-fetched investment opportunities (like Florida real estate in 1925–1928 and again in 2005–2007), and more recently an outsized interest in high-yield bonds and other riskier fixed-income securities. This boom results in widespread “malinvestments,” or mistakes, where capital is misallocated into areas that would not attract investment had the money supply remained stable.

When the credit creation cannot be sustained, the bubble bursts, asset prices fall, and we enter a recession or bust. If the economy is left to its natural path, the money supply then sharply contracts through the process of deleveraging (see #9 Deleveraging), where people change their minds and want to pay off debt and be in cash again. If governments and policy get involved to mitigate the pain of the bust by creating artificial stimulus, they delay the inevitable economic adjustments, making the pain last longer and setting us up for more difficulties later—harsher cycles and more inflation. Furthermore, so-called “creative destruction”—the weeding out of inefficient or uneconomical businesses and investments in favor of efficient ones—is delayed or avoided entirely, much to our long-term detriment.

The recent boom and subsequent Great Recession had many of the footprints of the Austrian scenario. A credit-stimulated overexpansion led to a bust; the government didn’t know what to do about it; bad businesses and business models, like many banks, were propped up. In the Austrian school such businesses should be allowed to fail, for the economy will return to health more quickly, and a patient once on medicine will always require medicine.

Hayek himself criticized Keynesian policies as collectivist and never temporary. Perhaps Austrian school economist Joseph Schumpeter, who coined the term “creative destruction,” summed up its point of view best in 1934: “Recovery is sound only if it does come of itself.”

Why You Should Care

The Austrian school may seem radical, perhaps radically conservative, and almost antigovernment in nature. That said, many of the symptoms proponents talk about, and much of their analysis of the Great Depression, resonates. It should help you maintain a healthy skepticism of government action, though most economists don’t go this far in condemning the role of government. As an individual, it helps to have a balanced view of what’s going on, and to understand the upsides and downsides of any government intervention. By the way, Austrian school disciple Murray Rothbard’s America’s Great Depression, Sixth Edition (CreateSpace Independent Publishing Platform, 2011) is a fascinating read if you enjoy this sort of thing.

60. SUPPLY-SIDE ECONOMICS

Capitalism is founded on the notion that people produce goods and services under their own free will, and that they earn the appropriate rewards for their achievement. Supply-side economics extends this fundamental school of thought by arguing that the best way to achieve economic growth is by maximizing the incentive to produce, or supply goods and services. That’s best done by reducing taxes and regulation, allowing the greatest rewards, and allowing those goods to flow to market at the lowest possible prices.

What You Should Know

The term “supply-side economics” is relatively recent, coming into the language in the mid 1970s. Supply-side economics spawned close cousins in the form of “trickle-down economics” (see #61) and Reaganomics (see #62); all three members of this happy family got a good test in the 1980s in the administration of Ronald Reagan.

Supply-side economics attempts to optimize tax rates—that is, marginal tax rates, or rates paid on the highest dollar earned. The optimization is achieved by setting the tax rate low enough to avoid discouraging individual production and earning, but high enough to encourage enough production and earning to maximize total tax revenues. That in turn offsets the potential loss in tax revenue by lowering the tax rates. Stated differently, the tax rate matters more to individuals, total taxes collected matters more to government.

The relationship between tax rates and total tax revenue is illustrated in Figure 6.1. The Laffer Curve is named for economist Arthur Laffer, the supply-side proponent who created it.

Figure 6.1 Laffer Curve

Source: Wikimedia commons, free license

The contrast between supply-side economics and other schools is illustrated by comparison with the Keynesian school, which contends that tax cuts should be used to create demand, not supply. The Keynesian school, by implication, would target the tax cuts toward lower-income earners who are most likely to spend, while the supply-sider would target them toward the higher-income earners, and especially business owners and leaders paying the highest tax rates. Doing so would stimulate the greatest increases in production; if these individuals faced 50 or even 70 percent tax rates, they would be less inclined to produce more and earn more (see #47 Tax Policy). The other end of the supply-side equation holds that the resulting economic growth from stimulated supply would make up for the loss in tax revenue.

The jury is still out on the effects of the supply-side “test” in the 1980s. Significant decreases in marginal tax rates were enacted and production did expand through the 1980s; the economy emerged from the Reagan administration far healthier than when he took office, even with the 1987 stock market crash. However, sufficient revenue was never generated to cover the tax decreases; the deficit grew persistently. That may have been caused more by increases in defense spending and other government programs than a failure in supply-side economics. Additionally, increased income inequality (the rich get richer, etc.) has also been a nagging criticism of supply-side policies.

More recently, supply-side economics has definitely been in the minds of the so-called “Tea Party” and other tax conservatives who believe even a slight increase (from 36 percent to 39.6 percent rates for top earners) tips the balance, but in effect through raises in Medicare taxes, capital gains taxes, and income taxes in many states, tax rates for the wealthy are going up anyway. Revenues have gone up considerably since the Great Recession, but still not enough to offset economic stimulus, spending increases, and growing entitlements (Social Security and Medicare). As such, the supply-side school has yet to fully prove itself, but there is a general feeling that things would be much worse if it had never come into play.