Oprah Winfrey has announced that she is ending her show after its 25th season. You can see why she's doing it: one of the wealthiest people in America, with $2.6 billion to her name, Ms. Winfrey hardly needs to keep showing up for a job that must be getting a little repetitive by now. Moreover, she still has a massive media empire with properties like O Magazine to keep the money rolling in. And with the termination of her show, she'll be launching her very own cable network, OWN.
Of course, it remains to be seen whether her empire will remain intact after she leaves broadcast television. For all the complaints about the declining viewership of the Big Four, they have many times the audience of the Discovery Channel, which is helping Ms. Winfrey launch her new property. Memories are short in the media business. Will women continue to buy her magazine if they aren't spending their weekday afternoons watching her show?
Allegedly, Apple is declining to repair Macs owned by smokers on the ground that secondhand smoke is dangerous. This a gross misunderstanding of the science--theoretically, tobacco tar could be hazardous if applied to your skin, but you'd have to really slather it on, leave it there for an extended period, and reapply fairly frequently. But it also seems like a gross misunderstanding of who makes up their customer base on the East Coast.
Fox News seems to have a real problem with cutting old footage into new stories. The liberal theory is that this is some sort of concerted conspiracy to imply that 80 million Americans turn out for every Tea Party or Sarah Palin appearance. The conservative line is that they were simply trying to punch up an otherwise dull segment, and/or somehow ran out of footage of the actual event. The latter story makes marginally more sense to me, but only because I cannot imagine that anyone at Fox News--indeed, anyone with a pulse--is stupid enough to imagine that a few shots of excess protesters are enough to marginally improve the chances of Republican victories in 2010 or 2012.
I'm not sure it really matters. Fox News was, I think, justifiably angry when the Obama administration declared that they were not a real news organization. But if you wanted to be treated like a real news organization, you have to abide by the rules that real news organizations follow. One of those rules is that you do not imply that images of one event actually come from an entirely different event. You don't do this for any reason.
It's entirely true that other news organizations have been caught in sleazy tactics, like the infamous habit of wiring cars to explode during auto safety stories. But they were righteously yelled at, and since the advent of the right-wing blogosphere, they seem to do a lot less of it. Now the left-wing blogosphere is fact-checking Fox with the same ferocity, and that's a good thing. We all have a vested interest in better news organizations.
Shortly after it posted its analysis of the Senate health care bill, the CBO put up a letter to Congressman Paul Ryan (R-WI) analyzing the House's other health care bill: the $200+ billion dollar "fix" (aka repeal) of the Sustainable Growth Rate.
For those of you who haven't been following along at home, the Sustainable Growth Rate was a cost-cutting measure enacted as part of the Balanced Budget Act of 1997. Not to bore you with unnecessary details, it tied the growth in physician reimbursement payments to GDP growth. This worked for a few years, because we had unusually low cost inflation, and unusually high GDP growth. Then those trends reversed, and physicians screamed bloody murder. Starting early this decade, Congress has annually enacted a temporary fix that either holds physician reimbursements steady, or raises them slightly, rather than cutting them as the law demands. Over the years, compound growth means that getting back to the SGR mandated trendline would require massive cuts in reimbursement rates: 21% this year, and according to the CBO, approximately 2% every year thereafter.
Permanent fixes were originally part of the House bill. The problem is, those fixes are, as you can imagine, very, very expensive. They made the bill cost more than $900 billion, and also, not be so deficit neutral. So they took it out and enacted it separately, without any financing measures.
Paul Ryan asked the CBO the natural question: "So what would these bills look like if they were enacted together?" The answer, according to the CBO, is that together they'd increase the deficit by $89 billion over ten years. And those increases would be back loaded: by 2019, they'd be pushing the deficit upward by $23 billion a year. The House health care bill makes the physician reimbursement fix somewhat cheaper. But the physician reimbursement bill makes the house health care bill cost slightly more--which is to say, if it were already law, the estimate of deficit reduction would be about $3 billion lower over the next ten years.
Defenders of the decision to split the bills argue that there's no particular reason that the Medicare physician fix should be tied to the health care bill. I see what they're saying, but I think that's wrong, for a few reasons.
The provisions of the bills interact; passing them in parallel skews the cost estimates
Passing the physician reimbursement is the price of AMA support for the bill, which is why they were originally bundled together. The bills have to be passed in parallel--if they don't do the one, they probably can't pass the other. That argues for making them into one bill.
Failing to pass the cuts would devastate Medicare's GP provider network as physicians pulled out, making it hard to do the cost cuts in other areas.
Splitting them leaves the physician fix with no financing mechanism.
It would be one thing if they'd found some alternative financing mechanism to pay for the physician fix. But as I see it, they're passing a bill that increases the deficit by $200 billion in order to pass another bill that hopefully reduces it, but by substantially less than $200 billion. That means that passage of this bill is going to increase the deficit.
I suppose you could argue that there's no chance that we're ever going to reduce those reimbursements, so passing the new healthcare bill doesn't actually increase the deficit from what it otherwise would be. Only then you have to explain why we should believe that similarly structured payment cuts will work with all the other providers. Because if Congress cannot, in fact, stick to its guns and allow mandated cost cuts to stand, then the health care bill isn't deficit neutral, is it?
The list is here. The Christian Science Monitor has the back story, a dark tale of intrigue featuring a bunch of websites you've never heard of unless you're, well, obsessed with Black Friday deals. Me, I sleep late the Friday after Thanksgiving. Update: Amazon has a special website for their Black Friday deals. These two are now the Mothra and Godzilla of Black Friday; should be fun to watch them go head-to-head.
My father is a trustee of one of the New York State Laborer's union funds, and he pointed out something about multiemployer funds that I hadn't known--they're uniquely vulnerable to the proposed excise tax on health plans that cost more than $8,000 for an individual, or $13,000 for a family.
I don't know what percentage of the population is covered by multiemployer plans, but it's significant; they're quite common in the construction and manufacturing sectors. They enable union workers, in particular, to shift between employers while keeping their benefits intact.
The way they work, at least in the construction unions, is that you earn benefits every hour you work. The interesting wrinkle is that--at least in some cases--you earn those benefits whether you're single or married. You're giving up the same portion of your wages as a young single man as you would if you were 45 and had six kids.
Say everyone in your MEP is paying $20,000 a year in foregone wages. The single guys will all get hit by the excise tax, while the married guys won't.
This is important if you expect the excise tax to "bend the curve", because in this case, there's not much incentive to try to control costs--at least, as long as you have enough single workers to drag your average down below $21,000 a year, where the family plan excise tax kicks in.
Only a minority of your workers will be paying the tax, after all, and there's no realistic hope of getting your plan's average cost down below $8,000 a year, unless you either fire all the guys with families, or cut the policy to the barest bones. And the difference between $8,000 and the average cost of a family plan in your region is likely to be much greater than the difference between the average cost of a family plan in your region, and the cost of the benefits package you'd like to offer. That is, you would save some money by reducing your cost from say, $16,000 to $13,500. But that pisses off a lot of your membership, and it still leaves you paying a sizeable excise tax on every member who is single.
You can see a lot of ways to "fix" this problem, including dissolving the multi-employer plan, changing the way benefits are accrued, or telling your single members to buy their insurance on the open market. Or maybe the single members are helping you keep the average cost of the married folks down below $21,000, and so you're perfectly happy to get away with just paying the excise tax on their benefits. At any rate, few of these solutions involve bending the cost curve.
Here in DC, the housing market seems to be seriously heating up again. If houses sat on shelves, they'd be flying off of them--in the "transitional" neighborhoods that I keep my eye on, an easy majority of the new listings for homes under $500,000 last fewer than ten days.
It's now conventional wisdom that the causes of foreclosure have shifted dramatically over the last twelve months. The early foreclosures were usually due to some form of bad faith on the part of the borrower (or their lying, thieving mortgage broker): either they lied on their documents, and simply didn't have the kind of income they'd need to support their house; or they were investors who were speculating on the house, not planning to live in it, and they stopped paying the mortgage as soon as it became clear that they were simply throwing good money after bad. In other words, it was fundamentally a problem of excessive home values which have now fallen. Mortgage modifications were aimed at easing that problem.
Now, that wisdom says, "it's an income problem". One in ten workers does not have a job, and which for many means that their household cannot support any sort of mortgage payments.
This is true, so far as it goes. But the kicker is that income problems are price problems. In ordinary times, in most markets, you might see delinquencies . . . but someone who actually simply could not make their mortgage payments would have been able to sell the house rather than go into foreclosure, shred their FICO score, and possibly end up with a deficiency judgement.
A strengthening market should be preventing further foreclosures. But that's not even true in DC, where you see new short sales and bank-owneds coming on the market every day. Whatever the first-time homeowner's tax credit did, it didn't save the American homeowner from pretty deep devastation.
There is a brand-name frozen waffle shortage. No, seriously. Personally, I hate frozen waffles, at least for use as foodstuffs--they are very good for soothing teething babies. But apparently, this is causing pain and anguish across America.
I think it's pretty clear at this point that no bill from our Congress is going to meaningfully "bend the cost curve". Every time I argue that cost control seems unlikely, I hear that no, the Senate bill is going to make some serious inroads into delivery system reform. Well, according to the CBO, the savings achieved by Subtitle A, the main delivery system reform part of the bill, are trivial--not really distinguishable from zero, when you consider the uncertainties inherent in the estimates.
What passes for delivery reform consists mostly of slashing reimbursement rates to providers, and then putting Medicare Advantage on the same plan. There are two problems with this. The first is that there's no reason to believe that providers will find ways to efficiently provide care at the new, lower rates, rather than just stop serving Medicare patients. That was the core point of the recent report from the Centers for Medicare and Medicaid Services--and though a lot of bloggers developed sudden suspicions about the integrity of government reports, in fact, this pretty much jibes with the warnings that Doug Elmendorf has been issuing, and also, reality. There are already shortages of geriatricians which can be substantially attributed to the fact that Medicare has ensured it is one of the lowest-paid specialties. When the guy who oversees your provider payments says that your new payment scheme is probably going to lead to providers dropping out of your program, you need to take that seriously.
The second is that the treatment cuts--and any further cuts recommended by the cost effectiveness commission--can be undone by Congress. Not only can, but almost certainly will. There's some attempt to get around this by forcing Congress to do only an up or down vote on the recommendations. By bundling the really unpopular stuff with other reforms, the hope is that they'll be able to push them through.
Unfortunately, the commission's recommendations do not save much in any one year, which means it's not actually going to be all that difficult to vote "no" in any one year--and by the time it actually is hard to vote "no", we'll face the same problem we have with the Sustainable Growth Rate cuts for physicians--the cuts needed are so big that it has become impossible to vote "yes", because the providers can't deliver those kinds of cost savings.
So while the bundling might ease the passage of controversial cost-control measures, it might also ensure that no-brainers fail. There's also, as far as I can tell, nothing to stop Congress from passing the whole package--and then amending the health care bill in order to guarantee coverage of anything that gets voters excited.
The current brouhaha about the new mammogram treatment guidelines is very instructive. There are good reasons for doing as few mammograms as possible: they're uncomfortable; radiation causes cancer; and false positives take a huge toll on the patient with invasive procedures and emotional anguish. I follow this issue pretty closely, because I have a family history of breast cancer, and the new guidelines don't seem unreasonable to me.
But some of the criticisms of the guidelines are valid, particularly the fact that they don't take digital mammography into account. And they've activated a very real fear that people will die because they put off having a mammogram until they're fifty. It seems virtually certain either that the task force will revisit this decision, or that any agency or insurer actually acting upon their recommendation will be overridden by legislative action.
I expect that if we do get guidelines with teeth, we'll see this play out over and over.
I don't think it's any good to say, well, we have to hold down Medicare costs eventually, so we might as well hope. That's as fuzzy and dangerous as some of the thinking that got us into the Iraq war. If the mechanism for holding down costs is not realistic--and neither the head of CMS, nor the head of the CBO, seem to think that it is--then in all likelihood, you're planning to increase the budget deficit, whether you want to or not.
Aside from the panel recommendations, the only other substantial attempt at real delivery system reform is the excise tax on high cost plans, which the CBO and the Joint Committee on Taxation are projecting will reduce health care spending. In fact, it's projected to reduce health care spending so much that companies will save a bunch of money, pass that money onto their workers in the form of higher wages, and thereby generate a bunch of new tax revenue to help pay for reform. Maybe. Of course, if they're wrong, and it ends up just being a heavy tax on a random group of people who happen to have expensive health insurance, then it won't cut health care costs, and also, will probably end up being repealed.
Ultimately, the excise tax is just another version of the provider payment reductions: take some money out of the private sector, and hope that they figure out how to make do with less. If they can't, Congress probably decides to give them their money back.
None of these make any real changes to the incentives of either the providers of health care services, or the people who consume them. All they do is tinker with the level of the third party payments. That's not reform. It's wishful thinking.
Y'all well know that I really don't like Sarah Palin. In fact, more than one of you has yelled at me about this. And I find the whole schtick about how the media is just a bunch of elitist hooligans who are out to get her really grating.
That's why I really wish the media wouldn't act like, well, a bunch of elitist hooligans who are out to get her. I've coined a new phrase to cover the situation: Palinoia. It's when you think people are out to get you, and then they do their best to justify your erroneous belief.
The Newsweek cover was a sexist embarrassment. Hell, they wouldn't have highlighted an article about Hillary Clinton with that stupid nutcracker, yet there's apparently a photo of "Sarah Palin doll as slutty schoolgirl". This is enormously disrespectful to someone who, like it or not, was a vice presidential candidate, and deserves to be treated the same way that her predecessors were. If you wouldn't put a photo of Joe Biden in his running shorts on the cover, you should damn well extend the same courtesy to Palin, however much you dislike her.
Then there's the Associated Press, putting 11 reporters on the task of "fact checking" her book. I put the words in quotes because the CJR notes that much of this herculean feat is not checking facts, but quibbling with interpretations or sentimental boilerplate about the hearts and minds of Alaskans. But the deeper question is how come Palin's book gets a team of fact checkers, when books by other politicians get the standard gloss?
There seems to be an unhealthy obsession with tearing her down. And really, guys, if you'll just back off a little, she'll do the job for you. Have you seen that resignation speech? How about we all act like she's a former governor and vice presidential candidate, rather than Public Enemy #1?
It depends on how you define "work". Apparently only 6% of first-time homebuyers cited the tax credit as the driver behind their purchasing decision. I suppose that's plausible, given low, low interest rates--which are a far greater contributor to affordability. But I'd be surprised if a majority didn't factor the tax credit into the price they paid . . . which itself could have helped the market clear in a lot of places. If your goal was to inject purchasing power into the economy, and help unlock the housing market, I suppose it worked, at least somewhat. If your goal was to help people afford houses, less so.
Felix Salmon responds rather pungently to my post on debt. I certainly didn't mean to imply that Felix's position is unreasonable--it's not, and a lot of people hold it. I just think it's tricky.
I'll cover some of our disagreements in a minute, but I think this is really interesting:
McArdle is far too generous to the lenders here. For one thing, I
made it clear in my post that credit cards are very good for
transactional credit: if you need to pay the car-repair shop today,
using a credit card is a great way of doing so. But you should also
have a good enough relationship with your bank that by the time the
credit-card bill comes due, you can pay it with the proceeds from a
personal loan or line of credit.
Secondly, I don't think for a minute that we should deny the poor credit; in fact I'm on the board of a non-profit institution which exists to provide credit to the poor, and I'm all in favor of that. It's credit cards
I don't like, with their high fees and interest rates (and there are
even exceptions to that rule, such as the ones provided by many credit
unions). And I really dislike payday loans, which are pretty
much universally predatory, especially when compared to similar
products from community development credit unions.
Megan's conceptual mistake here is clear when she says that "credit
extended to the poor carries high interest rates to cover the default
risk". But in fact the interest rates on credit cards are really not a
function of default risk at all. Mike Konczal
had a great post on this back in May, where he showed pretty
conclusively that credit-card interest rates were all about maximizing
profit for the issuer, rather than compensating for default rates. And
payday loans are even worse.
What earthly grounds does Megan have for saying that the number of
people made worse off by payday loans is smaller than the number of
people made better off by them? I suspect she considers the alternative
to be no-credit-at-all-nohow-noway. But that's not what anybody is
proposing. I, for one, think that credit should be available to the
poor, very much so. But not in the quantities and at the rates that
it's been available until now. There is such a thing as too much
credit, and we crossed that line long, long ago.
It's an odd fact that poor people shun bank accounts at an astonishingly high rate. Rather than pay $10.00 a month for a checking account, they'll pay more than that to a check cashing place. Of course, it's not like banks are going after those clients, because they're not very profitable--small accounts still have almost all the transaction costs and overhead of large ones. But why don't the customers go after the banks?
The plausible reasons I've heard:
Check cashing places give you the money immediately
Poor people are disproportionately subject to judgments and garnishments that make it preferable to operate in cash
People working off the books don't want a trail for the IRS to follow
For people with low incomes, the costs associated with a mistake--bounced check fees, for example--can be devastating. But if you don't have the fees, people will overdraw their accounts.
Check cashers keep longer attractive hours and have better service
As Felix could no doubt attest at great length, this problem has proven hella stubborn.
The problem of payday lenders and credit cards, however, is not a problem of the unbanked. If you don't have a relationship with a bank, you almost certainly do not have a credit card, and you definitely aren't using a payday lender.
So why are people using credit cards and payday lenders?
Credit cards have low transaction costs, which is why, as Felix argues, people use them for sudden emergencies. Many of them would be better off if they did go to their credit union for a personal loan to pay off the balance. On the other hand, if you're planning to pay off the balance in a couple of months, that's overkill--and the loan inquiry will ding your credit.
Payday loans are a different question. There's a lot of literature on them, but most of it agrees on a few points. For our purposes, the salient characteristics of payday borrowers are a) they have little-to-no money in the bank b) they have moderate incomes and c) they are fairly severely credit constrained. Virtually all payday borrowers use some other sort of credit (Stegman and Faris, 2003). At least 60% of them have access to a credit card (Lawrence and Elliehausen, 2008). 73% of them have been turned down for a loan in the past five years, or received less credit than they asked for. If they're turning to payday loans, it's because they have maxed out those other forms of credit, and they have some pressing cash flow need.
Payday borrowers do not necessarily turn to payday lending out of ignorance; a majority of them seem to be aware that this is a very, very expensive form of financing. They just have no better options.
The biggest problem with payday loans is not the one-time fee, though that is steep; it's that people can get trapped in a cycle of rolling them over. Paying $15 to borrow a few hundred bucks in an emergency is bad, but it's probably manageable for most people. Unfortunately, since payday borrowers are credit constrained, have little savings, and are low-to-moderate income, they often have difficulty coming up with the principal when the loan is due to pay off. The finance charges add up, making it difficult to repay the loan.
According to Lawrence and Ellihausen, about 40% of payday borrowers fall into that problem category: they have rolled over a loan five or more times in the past year. A hard core of about 20% had rolled over 9 or more advances.
Judging who is worse off is a pretty tricky task. Would payday borrowers be better off if they had no other debt, and could go to their credit union for a tidy personal loan? That's unquestionable. By the time they're at the payday loan stage, however, that doesn't seem as if it's usually an option. I'd say that the people who are rolling over 9 or more loans are definitely worse off, the people rolling over 5-9 loans are probably worse off, and the majority who are rolling their loans over no, or a few times are probably better off, given the circumstances they were in when the time came to get the loan. People who roll over loans only a few times are not trapped in a debt cycle, and (I'd guess) are unlikely to have been using the loans for ordinary expenses.
There's some experimental and empirical evidence to support this. Wilson, et al (2008) built an experimental model of credit-and-cash constrained households, and found that adding payday loans contributed significantly to household financial survival in the lab. Which seems to also be true in real life, according to their paper:
Georgia banned payday loans in May 2004 while North Carolina
banned them in December 2005. These two events provide the authors with an opportunity to
empirically investigate several effects of the removal of payday loans on household behavior.
Morgan and Strain find that relative to households in other states, households in Georgia
bounced more checks, complained more frequently to the Federal Trade Commission about
lenders and debt collectors, and were more likely to file for bankruptcy under Chapter 7 after the
ban of payday loans . . . The results for North Carolina, which the authors regard as preliminary, given the shorter period in which payday loans have been banned, are similar to those for Georgia.
But as Bart Wilson told me the last time I saw him, they also found a minority were made much worse off by the loans. Those were the people who took out ten or more--and just as Lawrence and Elliehausen found in the real world, those extreme borrowers made up about 20% of the group.
There is, of course, the question of what happens to people between the time when they had no debt, and the time when they need the payday loan. If we could constrain them during that period from maxing out their available credit, they'd never need a payday loan. People who have maxed out their credit and are getting turned down for loans could probably have used an intervention that would force them to match income to outflow.
But I'm not sure how you do that. Say we slap on a usury law that makes credit card lending to poor people unprofitable, so people use personal finance loans instead. Well, the people who are getting payday loans now would, in this alternative universe, have already maxed out this line of credit. How do we know that? Because they seem to have done it in this universe. I don't know whether that's because they're irresponsible, or because they had a string of really crappy bad luck. I'm not sure it matters.
The core problems we would actually need to solve to get rid of payday loans are first, that some people have marginal incomes and no capital, and second, that when credit is available, some of those people do not exercise the incredibly tight spending discipline which is required to achieve financial stability on such an income. Because their incomes are marginal, and the lives of the working poor are fraught with all sorts of extra problems, like cheap cars that break down constantly and landlords who turn the heat off, the people who do not keep very tight control of their money are fairly likely to end up in a place where they have exhausted all other credit lines, and are forced to pawn something, hock their car title, or take out a payday loan.
And those loans are jaw-droppingly expensive. Even non-profit payday lenders apparently charge about a 250% APR, because the loans have a 10-20% default rate, and the transaction costs on lending small amounts are very high. Of course, the profits are usually quite substantial, with APRs often double the non-profit rate . . . and even I have to wonder how a guy who made his fortune lending money at 600% o society's most financially unstable people, smiles at himself in the mirror every morning.
In principle, I agree that many poor people would be better off if they were able to borrow a lot less money at better rates (though even then, I always wonder if I'm not just imposing my monetary time preference on others). Only when I look at any given rule aimed at accomplishing this, it always hurts a lot of people, even as it helps others--I think the last twelve months have proven fairly conclusively that the supply and price of credit are not entirely unrelated to default risk. While it is absolutely true that credit card issuers maximize their returns through hefty stealth charges, and payday lenders charge absolutely rapacious interest rates, it is also apparently true that these awful loans often help avoid even worse fates. And I don't see any way to cut off the credit to people who are ignorantly or irresponsibly getting into trouble, without also cutting it off to a bunch of people who need it.
So I think focusing on the lender side is usually a mistake, though I can't say I'd be sorry to see caps on what payday lenders can charge. The lender side makes us indignant, because hey, they're getting rich by charging outrageous rates to those least able to pay them! But if we want to actually improve the lives of the borrowers, we need to intervene before they get to the payday loan point, rather than try to stop them from getting one once they're there. Felix is doing God's work on just that problem, as are many other people in many other ways. I think we'll be better off when payday lenders go out of business due to lack of demand, not prohibited supply.
While I was sick, I watched four seasons of Lost in five days. It's really quite good, and I'm looking forward to watching Season Five with Peter.
But then I saw this compilation of quotes from The Wire that everyone is linking:
(WARNING: Not even a little bit safe for work.)
And I'm reminded that while I've definitely enjoyed shows like Mad Men and Lost, there has not been a single show that approaches The Wire in quality. Most of the most intriguing elements of Lost in Season One are solved in ways that are much less interesting than the premise--if they're solved at all. But the Wire delivered consistently for four seasons, and even Season Five was better than most of what's on television. Will we ever see its like again?
I've gotten more personal email about my article on Dave Ramsey than any other piece I've written for the magazine, and several of you have asked me to blog about it here. I chose to write about him for a few reasons. First, I find him totally fascinating. Second, I got to go to Detroit. And third, we're in the middle of a vast national conversation about debt, and Dave Ramsey represents one of the most extreme views on the subject.
For those of you who don't know of Dave Ramsey (though I'm fairly sure a number of my readers are followers), he's an evangelical personal finance guru who has a syndicated radio show and a television program on Fox Business. Ramsey's program has a few basic pillars:
Cut up all your credit cards and promise never to use them again
Do not borrow money for any purpose whatsoever, with two exceptions:
You may take out a 15-year fixed rate mortgage where the payment is no more than 25% of your take home pay
You may take out a bridge loan to cover the underwater portion of a car, boat, or other asset loan, if you are selling the asset in order to get out from under the payment
Sit down at the beginning of every month and do a written budget in which you allocate every dollar you expect to earn
Take cash out of the bank and use it to pay for your non-automatic purchases: eating out, groceries, gas, parking, clothing, etc.
Pay off all of your debt as quickly as possible
Give ten percent of your income to charity
Save fifteen percent of your income
Don't declare bankruptcy unless they bailiffs are actually on their way to your house to evict you, seize your furniture, and put your family on the street
There are various wrinkles for people with irregular income and so forth; there is investment advice, some of it good and some of it not--but that's the core of it. And Peter and I tried the program in preparation for writing the article.
What did we think? Well, that's in the article. But the upshot is, we're sticking with the program, though the part where we pay off all our outstanding debt is on hold while we save for our wedding. I'd never done a detailed budget before, much less written it down, and forced myself to stick to it by doling out all the payments in cash.
It sounds unbearably tedious. But it's actually incredibly freeing. I have never before felt like I had total control over my money. And given all the economic gyrations, it would be awfully nice to know that I was on the road to a paid off house, and could cut my expenses to the bare bones if needed.
But it's odd. And it's really hard to do in a society where lots of people are willing to take on lots of debt, because their debt-laden lifestyle sets the standards for yours. It's hard enough when everyone has nicer stuff. But as I note in the article, in the case of housing, it actually makes it hard for people to, say, secure a home in a decent school district, if other people with similar incomes are willing to leverage themselves to the hilt in order to bid on that home.
A society run by Ramseyites would be a very different society. It would have very high savings rates--in excess of 15% of national income. Some goods, like cars, might be more expensive, because financing substantially smooths demand and allows larger manufacturing runs. People would probably live in smaller homes. Younger people would live poorer, and probably stay at home longer.
Would it be a better world? I thought about this recently, reading this Felix Salmon post:
Ezra Klein, on what he considers a vicious cycle in credit cards:
The problem is that the people who migrate toward debit cards are
the people who have enough money not to need much credit and are
responsible enough to not want it. The good risks, in other words. The
people left in the credit card market will be disproportionately bad
risks, which means rates will go up and standards will tighten, which
will in turn drive more people out of the market, starting the cycle
over again.
I'm not convinced that this is a bad thing. Credit cards are useful payment devices, but atrocious borrowing devices. (Steve Waldman
has a great post explaining the distinction further.) We want to move
to a world where people use charge cards for transactional purposes,
and personal loans for credit purposes. The way we're going to get
there is, essentially, by taxing the stuff we want less of -- and that
means increasing the interest rates and annual fees on credit cards.
This is a pretty common sentiment. In fact, I don't think personal loans are a very good substitute for the kinds of emergencies that frequently beset the people who this would most effect--if your car breaks down and you can't get to work, you don't really want to wait until the bank approves your personal loan to get the car fixed. But there are a lot of people who think we could make the poor better off by essentially denying them access to credit, because credit extended to the poor carries high interest rates to cover the default risk, and many people get themselves into big trouble with it.
The problem is, there are two sets of outcomes. There are people who are made better off by payday loans or credit cards, because they get the car fixed and don't lose their job. Then there's a group, which seems to be smaller but significant, who end up much worse off.
Personally, I look forward to the day when I have no debt. Would we all be better off if we decided to go that way? Probably. But would we be better off if we legislated that outcome? I'm skeptical.
I didn't realize Czechoslovakia's Velvet Revolution was literally started by a noble lie. A journalist and dissident leader who helped spread the lie calls it a "professional lapse" but says he's glad he did it.
This is the sort of thing for which you are supposed to be drummed out of journalism, but Urban's still working. Should he get a free pass just because he helped bring down an odious regime?
There was a lot of buzz yesterday about the report from the Centers for Medicare and Medicaid Services on the impact of health care reform. Conservative spin: the bill is an utter failure! Liberal spin: It shows that the bill is great, except for the cost control part, which we can totally fix later. Tim Noah, in a category by himself, spins a conspiracy theory about a dark plot by CMS to protect its budget from cuts. None of these is quite right.
First, the conspiracy theory: it's true that CMS would have a smaller budget under the House and Senate bills. And it is true that government bureaucrats will fight vicious turf wars to prevent their budgets from being slashed. But the part of CMS's budget that is being cut is the part that doesn't give it much power; the biggest savings come from automatic cuts to provider payments. As far as I can tell, HR 3962 actually increases the part of the budget that bureaucrats care about, which is the money to hire staff and expand their empire. CMS doesn't lose power, influence, or important capabilities under health care reform. It gains them.
Second, what does the CMS report tell us about health care reform, and specifically HR 3962, the bill it analyzed? For one thing, it tells us that the exchanges, the mandates, and the subsidies are mostly a complicated sideshow. The real action is in Medicaid. Expanding Medicaid to 133% of the poverty line accounts for most of the decrease in the number of uninsured. The exchanges are expected to cover only 13 million new people, or less than 5% of the population. We're not so much restructuring the health system as making one of its sectors much bigger.
Which accounts for another important finding: the bill is not going to control national health care expenditures. In fact, it's going to slightly increase them. Under current law, the CMS has a projection of 20.8% of GDP going to health care in 2019. The new bill will bring that up to 21.1%. That's not particularly surprising, since they think the bill will cover 34 million new people. Unless those new people weren't planning on actually consuming any health care--in which case, why are we bothering?--spending was bound to go up.
But the underlying message of the analysis was neither "We need to do a little better on cost control in the future" nor "The Democratic bill sucks". It was that we don't have any very good way of controlling costs--at least not within the parameters of the current US political and economic system. The only way we know to cut our health care spending is to stop consuming so much health care. And no one seems to want to do that.
For a while, politicians have been promising that the Fantastic Four of health care reform would save us: comparative effectiveness research, waste and fraud, prevention and wellness, and administrative streamlining. The CMS report indicates that those savings are pretty much utterly trivial, $2.1 billion out of a trillion dollar bill. When savings are the size of rounding errors, there's not much point in discussing them.
Substantial savings might be generated with a version of Britain's NICE, which could use CER to set global policies on coverage. But merely making the information available has virtually no effect. If we can't expect heartless private insurers to deploy CER in the name of cost control, how can we hope that our government will do so in the face of the inevitable backlash from angry voters who swear that their toe surgery changed their life?
That leaves either cutting benefits, or cutting payments to providers. Except there's really no "or". The CMS, which is the agency in charge of implementing those cost savings, pretty much says that cutting provider payments means cutting benefits
Virtually all of the Medicare cost savings that Democrats are using to pay for their plan come from one of three things:
Ending "overpayments" to Medicare Advantage providers
Adjusting (downwards) provider payments based on productivity growth in the broader economy
Demanding a 50% discount from pharmaceutical companies for seniors who are in Medicare Part D's "donut hole".
Medicare Advantage "overpayments" are, in fact, payments for extra benefits. They almost have to be, because of the way that the payment mechanism is set up. The CMS report makes it very clear that cutting out the overpayments will result in a substantial loss of benefits by current enrollees. Now, maybe we shouldn't be providing those benefits--but cutting them is not going to be popular. It's not clear how long the benefit reduction will survive the political process.
And the productivity adjustments are even worse, says the CMS:
It is important to note that the estimated savings shown in this memorandum for one category of
Medicare proposals may be unrealistic. H.R. 3962 would introduce permanent annual
productivity adjustments to price updates for institutional providers (such as acute care hospitals,
skilled nursing facilities, and home health agencies), using a 10-year moving average of
economy-wide productivity gains. While such payment update reductions would provide a
strong incentive for institutional providers to maximize efficiency, it is doubtful that many could
improve their own productivity to the degree achieved by the economy at large.8
Over time, a
sustained reduction in payment updates, based on productivity expectations that are difficult to
attain, would cause Medicare payment rates to grow more slowly than, and in a way that was
unrelated to, the providers' costs of furnishing services to beneficiaries. Thus, providers for
whom Medicare constitutes a substantive portion of their business could find it difficult to
remain profitable and might end their participation in the program (possibly jeopardizing access
to care for beneficiaries). While this policy could be monitored over time to avoid such an
outcome, so doing would likely result in significantly smaller actual savings than shown here for
these provisions.
Footnote 8 goes onto note that because of a phenomenon known to economists as Baumol's Cost Disease, medical productivity doesn't improve as fast as most of the rest of the economy--basically, activities that are very labor intensive don't tend to have massive productivity gains. That's why it still takes just about as many teachers to teach 50,000 sixth graders as it did fifty years ago. Similarly, it still takes one person to give you a sponge bath and administer your pills.
Since productivity growth in the health care sector will presumably continue to grow more slowly than the rest of the economy, we will end up in the uncomfortable position of letting Medicare go the way of Medicaid (which many providers refuse to take because the reimbursements are so stingy) or losing the cost savings, and ripping an even bigger hole in the budget than we've already got.
Perhaps the most worrying item is tucked into the CMS's "caveats and limitations of estimates" section, which is well worth reading. They point out that they, like most other agencies, are assuming a sort of frictionless universe in which 34 million new people demanding more health services increases the supply of health services in order to meet that demand. That is not, notes the CMS, a very realistic assumption:
In estimating the financial impacts of H.R. 3962, we assumed that the increased demand for
health care services could be met without market disruptions. In practice, supply constraints
might interfere with providing the services desired by the additional 34 million insured
persons. Price reactions--that is, providers successfully negotiating higher fees in response to
the greater demand--could result in higher total expenditures or in some of this demand being
unsatisfied. Alternatively, providers might tend to accept more patients who have private
insurance (with relatively attractive payment rates) and fewer Medicaid patients, exacerbating
existing access problems for the latter group. Either outcome (or a combination of both)
should be considered plausible and even probable.
The latter possibility is especially likely in the case of the higher volume of Medicaid
services. Despite a provision to increase payment rates for primary care to Medicare levels,
most Medicaid payments would still be well below average. Therefore, it is reasonable to
expect that a significant portion of the increased demand for Medicaid would not be realized.
We have not attempted to model that impact or other plausible supply and price effects, such
as supplier entry and exit or cost-shifting towards private payers. A specific estimate of these
potential outcomes is impracticable at this time, given the uncertainty associated with both the
magnitude of these effects and the interrelationships among these market dynamics. We may
incorporate such factors in future estimates, should we determine that they can be estimated
with a reasonable degree of confidence. For now, we believe that consideration should be
given to the potential consequences of a significant increase in demand for health care
meeting a relatively fixed supply of health care providers and services.
In other words, while we are nominally increasing the number of "the insured", it's not clear we're increasing their access to health care very much. The supply of health care services is actually pretty inelastic, because it depends on relatively scarce labor. There's already a nursing shortage, and doctors already don't want to become GPs because the pay is mediocre, the work is routine, and the hours aren't particularly compelling. To some extent they can be replaced by nurse practitioners--but they are neither particularly cheap, nor in endless supply. And there's a limit to how much of our healthcare costs we can fix by replacing current workers with less skilled labor.
When you increase the demand for something without increasing the supply, you either get price increases, or shortages. Neither is what the authors are promising for their bills.
(Yes, yes, I know what you're about to say . . . end the AMA cartel's artificial restrictions on entry into the medical profession! That's a different post, but here's the short version: the constraint on the supply of doctors isn't the medical school slots, but the residency slots. And we're already importing a substantial number of doctors to fill our family practice slots, because about a third of them go unfilled during the "match". This does not suggest that there are hordes of eager potential doctors clamoring for a crack at family practice. There's a lot of demand for specialist slots. But creating more cardiac surgeons will not put much downward pressure on healthcare costs.)
But this is not an indictment of the bill's ability to control costs, as of the ability of any bill to control costs. Controlling costs means consuming less health care. There is no magic pot of money waiting to be painlessly seized from some undeserving wretch, preferably one that voters already hate. The only way we are going to cut costs is by cutting someone's benefits.
Perhaps we'd be better off, in some metaphysical sense, if we did. But no one wants to. That's why politicians are speaking euphemistically about Medicare Advantage "overpayments" and frantically promising that no way, no how, will they damage anyone's Medicare benefits. The CMS report says what Doug Elmendorf, the head of the CBO, hinted at in his letters to Congress: cost control will be painful, and Congress will almost certainly undo it.
That means that whatever bill we pass will undoubtedly blast a giant hole in the budget; conservatives are right that this bill is effectively grossly fiscally irresponsible, no matter how "deficit neutral" its stated intentions are. (But I would say that, wouldn't I?) On the other hand, it also means that Medicare is probably going to blow a giant hole in the deficit anyway, with the able help of political figures like Michael Steele. That's hardly reason to crow.
Slate ponders how to communicate the danger of radioactive waste to the far future. The problem is, if they can't read English, or recognize the radiation trefoil, anything you do sounds more likely to intrigue future anthropologists than to warn them off:
Even if future trespassers could understand what keep and out
mean when placed side by side, there's no reason to assume they'd
follow directions. In "Expert Judgment," the panelists observe that
"[m]useums and private collections abound with [keep out signs] removed
from burial sites." The tomb of the ancient Egyptian vizier Khentika
(also known as Ikhekhi), for example, contains the inscription: "As for
all men who shall enter this my tomb ... impure ... there will be judgment
... an end shall be made for him. ... I shall seize his neck like a bird. ...
I shall cast the fear of myself into him." It's possible that the
vizier's contemporaries took Khentika at his word. But 20th-century
archaeologists with wildly different religious beliefs had no reason to
take the neck-cracking threat seriously. Likewise, a scavenger on the
Carlsbad site in the year 12,000 C.E. may dismiss the menace of
radiation poisoning as mere superstition. ("So I'm supposed to think
that if I dig here, invisible energy beams will kill me?") Hence the
crux of the problem: Not only must intruders understand the message
that nuclear waste is near and dangerous; they must also believe it.
The
report's proposed solution is a layered message--one that conveys not
only that the site is dangerous but that there's a legitimate
(nonsuperstitious) reason to think so. It should also emphasize that
there's no buried treasure, just toxic trash. Here's how the authors
phrase the essential talking points: "[T]his place is not a place of
honor ... no highly esteemed deed is commemorated here." Finally, the
marker system should communicate that the danger--an emanation of
energy--is unleashed only if you disturb the place physically, so it's
best left uninhabited.
As for the problem of actually getting these essentials across, the
report proposes a system of redundancy--a fancy way of saying throw everything at the wall and hope that something sticks. Giant, jagged earthwork berms
should surround the area. Dozens of granite message walls or kiosks,
each 25 feet high, might present graphic images of human faces
contorted with horror, terror, or pain (the inspiration here is Edvard Munch's Scream)
as well as text in English, Spanish, Russian, French, Chinese, Arabic,
and Navajo explaining what's buried. This variety of languages, as
Charles Piller remarked in a 2006 Los Angeles Times
story, turns the monoliths into quasi-Rosetta stones. Three rooms--one
off-site but nearby, one centrally located, and one underground--would
serve as information centers with more detailed explanations of nuclear
waste and its hazards, maps showing the location of similar sites
around the world, and star charts to help intruders calculate the year
the site was sealed. According to 1994 estimates, the whole shebang
would cost about $68 million, but that's just a ballpark figure based
on very incomplete data.
Proposals for the "earthworks" component demonstrate that the whole
project of communicating with the future is really a creative
assignment, more dependent on the imagination than on expertise.
What'll really scare off 210th-century tomb raiders? The
report proposes a "Landscape of Thorns" with giant obelisklike stones
sticking out of the earth at odd angles. "Menacing Earthworks" has
lightning-shaped mounds radiating out of a square. In "Forbidding
Blocks," a Lego city gone terribly wrong, black, irregular stones "are
set in a grid, defining a square, with 5-foot wide 'streets' running
both ways. You can even get 'in' it, but the streets lead nowhere, and
they are too narrow to live in, farm in, or even meet in."
I know I'd want to get to the heart of the mystery if I came across any of those setups.
One of the most frequent complaints leveled against Timothy Geithner is that he let Goldman get away with murder when he allowed AIG to pay off its CDS counterparties at 100 cents on the dollar. Economics of Contempt, one of my favorite bloggers, had a great post on this a while back, dubbing this the "Immaculate Negotiation" theory of the crisis:
Let's go over this again. (The numbers are from a conference call
that Goldman held in March to discuss this very issue.) The total
notional amount of CDS protection that Goldman bought from AIG was
roughly $20 billion. But "exposure" in credit derivatives is equal to
the cost of replacing a credit derivative in the market, not the
notional amount of the transaction. Think about it this way: if you buy
a $300,000 homeowners' insurance policy on your house, and your insurer
goes bust, you're not out $300,000. The cost to you is simply the cost
of buying another insurance policy to replace the first one. In
Goldman's case, the cost of replacing its trades with AIG was about $10
billion. Against that $10 billion, Goldman held $7.5 billion in cash
collateral. It then hedged the remaining $2.5 billion of exposure with
CDS on AIG. This is why Viniar said that Goldman's direct exposure to
AIG was immaterial.
So what are Tavakoli's arguments? One is the Immaculate Negotiation argument:
The
government could have stepped in and renegotiated its contracts. ...
Goldman Sachs would have been out billions of dollars in collateral had
a bankruptcy‐like settlement been negotiated with AIG, and that is
material.
Saying that Goldman would've taken a material
loss if "a bankruptcy‐like settlement been negotiated with AIG" is the
equivalent of saying that Goldman would've taken a material loss if
they'd agreed to take a material loss. It's true, but there's no way
Goldman would ever have agreed to a "bankruptcy-like settlement" -- why
would they? As someone who has actually been involved in these kinds of
negotiations, let me explain how the AIG/Goldman negotiations would
have played out:
AIG: Would you be willing to accept, say, 70 cents on the dollar? Goldman: No.
THE END
Seriously,
what could AIG have threatened Goldman with? If they didn't accept a
haircut, AIG would file for bankruptcy? Fine, Goldman would've just
seized the $7.5 billion in cash collateral, and collected the remaining
$2.5 billion from its counterparties on the now-triggered CDS on AIG
(on which more below), covering Goldman's full bilateral exposure to
AIG. That's what it means to be "hedged."
(This is also why the
Fed paid Goldman and the other counterparties 100 cents on the dollar
to terminate their CDS contracts with AIG, which this Bloomberg article
portrays as some sort of gift to the banks. But the Bloomberg article
also relies on the Immaculate Negotiation argument -- how, exactly, was
the Fed supposed to get the counterparties to agree to take a haircut?
The Fed had just demonstrated to the entire world that it wasn't
willing to let AIG file for Chapter 11. How do you suppose those
negotiations would have gone? The Fed couldn't say, "You can either
take a haircut to 70 cents or AIG will file for bankruptcy and you'll
only get 50 cents," because everyone knew the Fed wasn't willing to put
AIG in bankruptcy.)
Despite the overtly political "conclusions" and "lessons learned"
sections (sadly, the only sections journalists read), the SIGTARP
report (finally) gets a lot of the real facts out in the public domain,
so we can finally talk about them now. The SIGTARP report confirms that:
1. First, AIG tried to negotiate haircuts on its CDS contracts, but counterpar ties refused (as was their right):
AIG
was attempting to resolve its liquidity crisis caused by the collateral
posting requirements by negotiating a cash payment to the
counterparties in return for terminating the credit default swaps. ...
While FRBNY was conducting analysis on alternative solutions, AIG's attempts to negotiate the termination of its multi-sector credit default swap book with its counterparties were failing. AIG requested FRBNY's assistance in securing these terminations.
2. Contrary to the constant claims of ill-informed pundits, the NY Fed did try to negotiate haircuts with AIG's counterparties:
On
November 6 and 7, 2008, FRBNY assistant vice presidents, vice
presidents, senior vice presidents, and executive vice presidents
contacted eight of AIGFP's largest counterparties (Société Générale,
Goldman Sachs, Merrill Lynch, Deutsche Bank, UBS, Calyon, Barclays and
Bank of America) by telephone. They described a proposal under which
each counterparty was asked to accept a haircut from par. Seven
of the eight counterparties told FRBNY officials that they would not
voluntarily agree to a haircut. The eighth counterparty, UBS, said that
it would accept a haircut of 2 percent as long as the other
counterparties also granted a similar concession to FRBNY. FRBNY
officials told SIGTARP that their concerns about credit rating
downgrades limited the time available for negotiation about reductions
in payments.
3. The
NY Fed tried to get the French bank regulators to help them negotiate
haircuts with SocGen and Calyon--two of AIG's biggest counterparties--but
not only did the French regulators refuse to help, they specifically instructed SocGen and Calyon not to agree to any haircuts (rendering UBS's conditional acceptance of a 2% haircut moot). From the report:
During
these negotiations, an FRBNY executive vice president and senior vice
president contacted the Commission Bancaire to inform them that the
FRBNY was conducting negotiations with Société Générale and Calyon, two
of the counterparties with the largest credit default swap contracts
with AIG, and was requesting their support. The Commission Bancaire
then contacted the firms. The
Commission Bancaire spoke again with FRBNY and forcefully asserted
that, under French law, absent an AIG bankruptcy, the banks could not
voluntarily agree to less than par value for the underlying securities
in exchange for terminating the swap contracts. Thus, the French
banks claimed they were precluded by law from making concessions and
could face potential criminal liability for failing to comply with
their duties to shareholders.
What could the Fed have done? It could have abused its regulatory authority: threatened the banks that wouldn't play ball with some sort of retaliation. But this would probablyhave created deep problems with the French. It would also have further devastated a shaken banking sector. Leaving aside the morality of using regulatory authority for unauthorized purposes, countries where the regulator arbitrarily uses its authority to secure sweetheart deals for the government do not have robust, thriving financial sectors.
Yes, yes, I know--ours isn't so hot either. It's pretty galling how little pain the remaining banks have suffered as a result of the crisis.
But really, you'd like living with a third world banking system, and the slow economic growth it tends to generate, even less. Banking, more than any other industry, is built on trust in the future. If people think their savings can at any time be diverted into government coffers by the will of the regulator, they move them elsewhere, or stop saving entirely.
The day after Culture11 went under, Peter and I had a budget meeting where we agreed to slash our expenses fairly radically. If there's one thing I learned from living through the 2001 recession, it's that I'd rather have missed out on a few vacations or dinners out that I didn't need to give up, then have to give up eating because I didn't cut expenses fast enough. Our initial plans cut our grocery bill, eating out, and so forth. But we also set drop-dead dates for further cuts if his unemployment span stretched out--when we would cut out the cable he was using to write reviews, when we would sell the car, when we would move to a cheaper place, and so forth.
This was maybe a little extreme, but something like it strikes me as the only logical reaction to a job loss in the middle of a recession. There's no telling how quickly you'll be able to find a job, so you want to err on the conservative side. I'm totally mystified by people like this:
After working for more than a decade in New York ad shops, Chuck
Hipsher moved to Detroit in 2005. He took a position at the
Campbell-Ewald agency, where he helped launch the Chevrolet Silverado
campaign. Raised riding in the back of his grandfather's Chevy pickup
in Iowa, Mr. Hipsher, 50, says he was "elated" at the opportunity.
He
met his wife at the ad agency, and the two had a $40,000 wedding. Kelly
Hipsher, 32, was laid off in October 2007 and found out she was
pregnant in February 2008. A week later, Mr. Hipsher's pink slip
followed. Two months after that, the out-of-work couple moved to
Greenville, S.C., to be closer to family and get a fresh start.
Together, they had received about $60,000 in severance. "Now we have
$600 to our name," says Mr. Hipsher.
Although their rent was
cheaper, Mr. Hipsher says the family continued to spend like before.
They moved with three cars -- two BMWs and a Chevy Silverado. They
continued to buy cases of $36-a-bottle wine. They spent $250 a month on
a cleaning lady, and Mr. Hipsher dropped $50 a week on flowers for his
wife. The couple still dined out regularly.
"We were stupid," he
says. "You become accustomed to a certain lifestyle. When your world
changes and things dictate that you change, you're pretty stubborn to
give things up."
He sold the BMWs and voluntarily turned in his
beloved Silverado to avoid the repo man. "It was heartbreaking," he
says. He replaced the fancy wheels with a Chrysler minivan.
Before
the layoffs, the Hipshers had no debt. Today, they owe about $70,000 --
including money borrowed from family members and $31,000 in credit-card
debt. To hold off the collection companies that call daily, Mr. Hipsher
says he is doing his best but is also considering filing for personal
bankruptcy.
After a stint selling new and used BMWs on a lot in
Greenville, Mr. Hipsher recently began consulting for free for a small
marketing firm, "to stay busy."
In September, a Web solutions
company hired him as a marketing director. Between salary and
commission, he thought he could match half his old income. But so far,
he says he's only received about $1,220. Tight for cash recently, he
pawned his wife's $12,000 wedding ring for a $2,000 loan. He has until
Dec. 28 to pay back the principal, plus $500 in interest -- or else he
forfeits the ring.
Looking back, he kicks himself for failing to
enforce financial discipline right after losing his job in Detroit.
"That precious nest egg is gone," he says.
I get a panic attack just reading it. What psychological quirk makes you maintain three expensive cars, flowers, and fine wine when you're both out of work?
Apparently Rush Limbaugh has called Sarah Palin's book "truly one of the most substantive policy books I've read". Personally, I thought it was the finest spy novel since Tinker, Tailor, Soldier, Spy.
Alongside the various nonsensical efforts to convince people that
KSM is too scary to be put in trial, the right objects to bringing him
to justice on the grounds that this represents a problematic "law
enforcement" approach to terrorism. I think it's pretty clear that
international terrorism has some dimensions that go well-beyond
ordinary law enforcement, but if you have to put the whole thing in
either the "crime" box or the "war" box, there's a pretty strong case
for erring on the side of crime.
In political terms, the right likes the war idea because it involves
taking terrorism more "seriously." But in doing so, you partake of way
too much of the terrorists' narrative about themselves. It's their
conceit, after all, that blowing up a bomb in a train station and
killing a few hundred random commuters is an act of war. And war is a
socially sanctioned form of activity, generally held to be a legally
and morally acceptable framework in which to kill people. What we want
to say, however, is that this sporadic commuter-killing isn't a kind of
war, it's an act of murder. To be sure, not an ordinary murder--a mass
murder--but nonetheless murder. It's true that if al-Qaeda were
something like the "blowing up train stations" arm of a major country
with which we were otherwise at war, it might make the most sense to
think of al-Qaeda as fitting in with spies and saboteurs; criminal
adjuncts to a warrior enterprise.
In terms of the risk they pose to Americans, people like Khalid Sheikh Muhammed are closer to a drug lord than an enemy general, and treating him like a criminal rather than a terrifying military genius denies him a valuable propaganda tool. We have tools for dealing with organized crime. Perhaps that's a more useful model than the Nuremburg Trials.
On the other hand, it seems like there are a lot of problems the civilian model just isn't set up to handle. Was KSM Mirandized? Did the people who captured him have a warrant for any evidence they secured at the time? How do we subpoena witnesses from other countries? Were any wiretaps obtained in accordance with the US rules of evidence? Do we grant him the right to confront his accuser if doing so would compromise other US operations, or intelligence methods? His right to a speedy trial has already been badly compromised--do we let him go? What's the statute of limitations on being a terrorist kingpin?
That's not perfectly true, but it's close enough. We tax
professionals are able to legitimately help taxpayers reduce their
exposure to income taxes, but we cannot eliminate income taxes (unless
the taxpayer decides to quit making money). However, the tax code is so
complex and enforcement is so lax a lot of tax myths are able to
flourish. For example, a few years ago my brother-in-law asked if he
could "hire" his wife and kids and funnel most of their wages into a
401(k) plan. (This would allow whatever he paid them to escape current
income taxation while giving his business a tax deduction.) I said,
"Sure. What are they going to do to earn their wages?" He was shocked
that there might be some requirement his wife and kids had to actually
do something to earn the money that would be salted away into a 401(k)
account. He was even more shocked to learn the money, once in the
401(k) plan, could not be used by him for his own business and
investment purposes. Why was he shocked by these rather obvious (to a
tax professional at least) requirements? He has friends who claim they
were hiring family in their businesses and doing precisely what he'd
described to me. So far, his friends have gotten away with it (not
surprising given the low audit rate). Eventually, those friends will be
audited and the IRS hammer will fall -- hard! In the mean time, a tax
myth has been created that this kind of thing is appropriate tax
planning.
The same thing was true, only on a much larger scale, with the tax
shelters of the late 1990s and early 2000s. Lots of individuals and
businesses participated in the shelters because they'd heard that
everyone else was and the IRS had blessed the transactions. It was an
easy thing to believe. If you'd heard of dozens of people selling their
business who'd avoided tax on several million dollars of gains and none
of those people had gotten in trouble with the IRS, why shouldn't you
believe that you, too, could avoid the tax on your large transaction?
In this case, silence from the IRS was not the same as permission. It
just took the government a decade to catch up with what was going on.
Much grief and anguish followed.
I don't know what to make of the "pneumonic plague" that is supposedly evolving in Ukraine--I suspect it's just H1N1, but then, I don't know what the hell I'm talking about, so all I have is a sort of folk belief that three different viruses probably didn't just happen to somehow glom themselves together into one superbug.
On the other hand, having just survived what looks like a case of swine flu, well, H1N1 is really bad enough. I have been sicker with the flu, a couple of times--during a memorable infection in college, my temp spiked briefly to 106, hallucination territory, before my nursing student roommate brought it down with baths and tylenol. But I've rarely had an infection with such staying power. If you've been wondering why blogging has been so desultory, it's because since last Saturday night, I've been pinned to my couch, alternately coughing, sniffling, and sleeping. Even now that the respiratory symptoms have abated somewhat, I'm having trouble standing up for longer than it takes to do a few of the backlogged dishes and make a sandwich. Whatever it was also delightfully comes with persistent nightmares that wake me up a 4:30 am. I'm back to a full workload today, but I confess I'm spending a lot of time looking forward to 7 pm, when I can go back to sleep.
H1N1 hasn't yet turned out to be the New Spanish Flu, but it's certainly created a memorable flu season. Thankfully, I already got a seasonal flu shot, so at least I don't have to go through this twice.
Suggest eliminating the corporate income tax, and you are immediately beset by people claiming that this would just let people dodge all their tax obligations by becoming corporations. Not a few of them intimate that this is, in fact, my goal. Let me reprise my answer from a couple of years ago:
Every time I suggest eliminating the corporate income tax, I am
beset by horrified people saying "But . . . what's to stop me from
becoming a corporation and evading taxes that way?"
Well, what's stopping you now? Your rent is money thrown to the
winds; a corporation's rent is an expense deductible from income. Your
car payment is a millstone around your neck; for a corporation, it's
another deduction. Your travel is an expensive pleasure; corporate
travel just further ratchets the amount Uncle Sam collects at the end
of the year. Even at a 35% corporate income tax rate, this would be a
big net win for most people. So why don't you become a corporation and
take advantage of this fact?
Because the IRS won't let you, that's why. When the "corporation"
buys things that are clearly for your consumption, that's taxable
income to you. People who have thriving businesses and report very
little income get a long, hard look from the audit department, and
usually walk away with a hefty penalty for tax evasion.
There's no reason that it would be any harder to keep people from
evading taxes this way if we eliminated the corporate income tax. The
IRS would catch you the way they catch most tax evaders: comparing your
alleged income to your bank accounts and zip code. This is why you
occasionally see bewildered live-in housekeepers on television
surrounded by a squad of auditors.
If you are not a tax professional, and you think that you have discovered some novel way to avoid paying taxes, you haven't. Any obvious dodge you can think up has already been tried by some clever chap fifty years ago, and frustrated by the IRS and the tax courts long since. As I understand it there is often minor chiseling at family businesses, but if it goes beyond giving your daughter a summer job she doesn't show up for (and has to pay income tax on), you are near-certain to be caught. When you are, you will pay for your tomfoolery many, many times over.
This is, incidentally, why your employer pays you in cash and not in kind. Corporations can take all sorts of things as expenses that people can't: housing, cars, power boats, etc. If the IRS allowed this sort of thing to go on, you and your company could work out very lucrative deals where they paid your rent, bought your car, refinished your dining room table, and so forth. But since those things are also taxable to you as income except in narrow circumstances (cars used mostly for work, corporate housing near distant consulting sites), there would be no net benefit. So you usually only get benefits that have specific tax exclusions: retirement accounts, insurance, educational assistance.
The American government loves debt. It offers special tax breaks to interest payments-mortgage interest, if you're a person; all interest, if you're a firm. This has a number of pernicious effects. On the personal level, it's a gift to home sellers--as we've seen with the homeowner's tax credit, any special break you give to home buyers tends to end up in the pockets of home sellers, as the buyers bid up the price to their maximum affordable net monthly cost. On the corporate side, it privileges debt over equity financing. In both cases, it adds considerable risk, since the fixed debt payment schedule may not match up with the flow of income.
Virtually all economists, aside from David Lereah and his successors, think that the mortgage interest tax deduction should be eliminated, using some sort of sunset combined with a grandfather clause so that we don't suddenly push millions of more American homeowners into foreclosure. Equalizing the treatment of dividends and interest payments is also popular. But I don't usually hear people advocating, as Felix Salmon does, eliminating the deduction for corporate interest payments. In a post titled "What are the arguments for privileging debt?" he says:
The weird thing for me is that when I start banging this particular
drum, I always get exactly the same answer: "yes, great idea, not gonna
happen". But is there any intellectual justification whatsoever
for making corporate interest payments tax-deductible? I can see an
argument for a carve-out for highly-regulated banks, since their entire
business is based on making profits from the spread between the rate at
which they lend and the rate at which they borrow. But banks aside, why
should companies pay lots of tax on dividends, and no tax at all on bond coupons?
In a way it's depressing: if this were a real debate and Paul Volcker
had a remote chance of making interest taxation happen, then surely
there would be no shortage of academics and corporate lobbyists making
the case for keeping the status quo. The fact that they're not even
bothering is all the evidence we need that this isn't even going to
reach trial-balloon status, let alone get signed into law.
But still, the question remains: if they were to start taking this
seriously, what arguments would they use? After all, as Surowiecki
notes, the likes of Brazil and Belgium seem to do perfectly well
without giving debt this artificial advantage
Maybe I was brainwashed by the infamous Chicago School, but I can think of a lot of reasons for the tax treatment of debt. After all, let's think about why corporate debt is deductible, while personal interest largely isn't. Personal income is defined for tax purposes, broadly, as what you were paid this year. But corporate income is defined as what you were paid (revenue) minus what you had to pay others.
That's because government generally assumes that the operating expense and capital requirements for an individual are roughly the same from person to person--you may think you need a 5,000 square foot McMansion and a power boat, but Uncle Sam disagrees. On the other hand, companies differ greatly. Firms like Apple or Kelly Services really do have very different operating and capital structures from Alcoa or Caterpillar for good reason. Heavy industrial companies need more capital to make new investments, and it can make good sense to match the duration of the financing to the expected life of the asset. That's accomplished by borrowing money, not floating a new stock issue or trying to accumulate enough retained earnings to keep up with your competitors. On the other hand, service and software companies basically need some computers and an office lease--their assets are mostly brands, patents or copyrights, and what economists call "firm-specific human capital", which is to say, processes and know-how.
There are two core problems with simply eliminating the tax deduction on interest. The first is conceptual: the corporate income tax is supposed to tax, well, corporate income, which is to say, profits. I doubt Felix would advocate treating debt payments on the financial statements as something other than an expense--replacing net income with EBIT, say. Money that has gone to lenders or the taxman is actually gone; shareholders don't get it. It would be grossly misleading to tell shareholders, "We made $100 million this year" if you've left out the $120 million in debt and tax payments you had to make.
The second is that this would make companies that do use debt finance much more risky. Companies with big capital requirements could find that in a downturn, they suddenly had large debt payments, negative cash flow, and a sizeable tax bill. As a first principle, the tax code should aim to avoid unnecessarily pushing vulnerable firms into bankruptcy.
There's actually a third problem: it's possible to create debt-like instruments that are deductible--complicated lease arrangements, for example. We really don't need any more rules for companies to game.
This seems to me like a better argument for making dividends deductible, or capping the amount of debt that's deductible. But to drag out my regular hobby-horse, it's an even better reason for getting rid of the corporate income tax entirely, along with the special tax rates for capital gains and dividends. Tax income once, when it's distributed to the owners, and then tax that income just like any other kind of income, regardless of source, so that Paris Hilton pays a higher rate on her corporate-derived income than your middle-class grandmother. Then let companies decide which mode of financing makes the most sense for their capital structure, rather than their tax bill.
It's true that this would discourage dodgy LBOs and other temptations to inappropriately load up your company on debt. The problem is, it would also discourage appropriate debt. I think there are better ways to skin this cat.
