So we’ve had a jobless recovery because our economy grew 2.2% last quarter. Unfortunately, as Anthony Randazzo points out in Reason Magazine, most of that “growth” is based on temporary government programs:

“Consider that 37 percent of the third-quarter GDP growth was due to motor vehicle purchases, which were stimulated almost entirely by the Cash for Clunkers program… Another 20 percent of third-quarter GDP growth came from new residential investments, propped up largely by the First-Time Homebuyer Credit… Overall, government support accounts for roughly 77 percent of economic growth in the third quarter of 2009, according to my analysis of Commerce Department statistics. This means that non-Washington GDP growth was closer to 0.34 percent from July to September 2009, instead of 2.2 percent.” (2)

He concludes, “This is not real growth. It’s the national equivalent of a credit-card buying spree, with the bills—in the form of debt service and unfunded liabilities—to be paid off later. It is a faux recovery.”

Still, 0.34 percent growth, and continuously shrinking job losses does, potentially, show signs the recession will be over soon. The key word is ‘potentially.’ Regrettably, the fundamentals of our economy are still way out of whack. Stimulating home purchases just prolongs the needed correction in the vastly overinflated housing market and stimulating car purchases is just a way to increase consumer spending when Americans desperately need to rebuild their savings.

These programs also add to our immense national debt. The deficit for 2009 alone was $1.4 trillion, which was put on top of the $12.6 trillion in national debt. Some have estimated unfunded liabilities at over $100 trillion. (3) Sooner or later, we are going to have to pay back these debts. Or even worse, foreigners may stop lending to us, or even start liquidating our debt, which would cause a run on our currency. Furthermore, the Federal Reserve has more than doubled the monetary base which could have massive inflationary consequences if lending and velocity of circulation ever pick up. (4) And if the Fed tries to stop inflation by increasing interest rates, it would surely throw the economy back into a recession.

As bad as all that sounds, it ignores the dire situation we are facing in a very familiar setting: the housing market. Contrary to popular wisdom, the ‘toxic assets’ have not been cleaned out. It is very likely we are heading for a second mortgage meltdown.

A fantastic website called DoctorHousingBubble.com, has compiled a vast array of data on housing trends and the future looks bleak. Most of this data is for California, but much of it illustrates a larger trend in the country. The following chart shows when California mortgages are timed to reset from a low ‘teaser’ rate to an actual adjustable rate. See if you notice anything disturbing:

Source: DoctorHousingBubble.com

California is moving straight into some very dangerous territory. While most of the subprime loans have reset, most option ARMs have yet to reset. Option ARMs are even more dubious than the infamous interest-only loans, which allowed homeowners to pay none of the principle and simply rely on appreciation (i.e. inflation) to gain equity. Option ARMs allow homeowners to pay even less than the full amount of interest due each month (called negative amortization), which then just pads the unpaid interest onto the principle of the loan. And these teaser rates are about to disappear en masse.

Given the recent fall in housing prices, it is no surprise that the vast majority of Option ARMs are attached to houses that are severely underwater (the owner owes more than the home is worth). 73 percent of Option ARMs are severely underwater as compared to 50 percent of subprime and 25 percent of prime loans. (5)

Given all that, it should be no surprise that the percentage of Option ARMs becoming delinquent is skyrocketing. The following graph shows the percentage of Option ARMs in California that are delinquent:

Source: DoctorHousingBubble.com

Fortunately, only four states have major exposure to Option ARMs; California, Arizona, Florida and Nevada. (6) Unfortunately, what happens in these states can reverberate throughout the country. And even more unfortunately, as far as properties being underwater, it’s not as if California is the only state facing this problem. Not by a long shot:

Source: DoctorHousingBubble.com

There’s another problem in the housing market looming beneath the surface. Banks are not clearing out bad debt nearly as fast as it is coming across their desks. Loss mitigators are overloaded with case files and can barely keep up with them. Stephanie Armour of USA Today concludes, “Banks dealing with a surge in refinancing, mortgage modifications and defaults are overwhelmed with demand, so it can take longer to initiate a foreclosure sale.” (6)

Furthermore, banks have at least a short-term incentive to not recognize losses. If a loan is not performing, the loan is still recognized as an asset on the bank’s balance sheet. However, if the property is brought to foreclosure, that asset disappears. And banks typically lose the majority of their investment in the foreclosure process. Thereby, taking a property to foreclosure may be the right financial decision for a bank, but it makes their income statements look worse, which in turn makes their stock look worse.

What we see is a massive glut of ‘shadow inventory.’ These are properties in the process of being foreclosed on or sold by short sale (when the bank agrees to discount a mortgage so a property can sell). The following graph shows that not only are delinquencies continuing to increase, but there has been a massive increase in shadow inventory:

Source: http://Mortgage.FreedomBlogging.com

As you can see, while the foreclosure-in-process rate mirrors the 90+ day delinquency rate, the REO rate does not. REO (real estate owned) are properties that were foreclosed on but did not sell at auction. These are properties the bank owns and must sell to recoup as much of their original investment as possible (usually a relatively small fraction). In essence, it means there is a large glut of soon-to-be-foreclosed properties, which haven’t flooded their way into the market yet. According to the Amherst Securities Group, another 7 million properties are set to be foreclosed (as compared to 1.27 million in 2005).(8) Furthermore, based on data from the Lender Processing Servicers database, 7.5 million loans are delinquent and another 1 million are REO’s. The number of delinquencies has risen by 25% from January of 2010 as compared to January of 2009, while 31 percent of delinquent loans have been delinquent for over six months without a foreclosure process being initiated and 22.8% over 12 months. (9)

Sooner or later, these properties will have to go to market. At that point, the additional glut of housing on the market will create an oversupply of homes. This, in turn, will further reduce housing prices and cause even more homes to go underwater, meaning fewer homeowners will be able to refinance or sell a home without doing a short sale.

Some would argue this requires government action to stimulate the housing market. I would say that is like treating a heroin addict with heroin. Housing was artificially inflated and it’s going to come down, whether we like it or not. Furthermore, attempts at re-inflating bubbles usually end up inflating other bubbles. For example, the attempt to re-inflate the stock market after the dot-com bust brought much more inflation into housing than it did into the stock market.

Policy prescriptions are a moot point here, however. The big point is it appears we are heading straight into a second mortgage meltdown. Of course, that’s assuming the first one ever ended.
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(1) George Stephanopoulos, “Summers: Job Growth by Spring,” ABC News, December 12, 2009, http://blogs.abcnews.com/george/2009/12/summers-job-growth-by-spring.html
(2) Anthony Randazzo, “The Myth of the Recovery,” Reason Magazine, March 10, 2010, http://reason.com/archives/2010/03/10/the-myth-of-the-recovery
(3) For the deficit, see Brian Faler and Julianna Goldman, “CBO Projects 2009 Deficit Will Reach $1.85 Trillion,” Bloomberg, March 20, 2009, http://www.bloomberg.com/apps/news?pid=20601103&sid=aA8lChe4zUQU, for debt, see “U.S. National Debt Clock,” Last update March 22, 2010, http://www.brillig.com/debt_clock/, for unfunded liabilities, see Pamela Villarreal, “Social Security and Medicare Projects,” National Center for Policy Analysis, June 11, 2009, http://www.ncpa.org/pdfs/ba662.pdf
(4) George Melloan, “We’re All Keynesians Again,” Wall Street Journal, January 13, 2009, http://online.wsj.com/article/SB123180502788675359.html
(5) “California Sending out Approximately 475,000 Notice of Defaults for 2009 yet Overall Foreclosures Declining, Shadow Inventory, Q3 Defaults, Toxic Loans, The State of the National Housing Market, DoctorHousingBubble.com, October 21, 2009, http://www.doctorhousingbubble.com/california-sending-out-approximately-475000-notice-of-defaults-for-2009-yet-overall-foreclosures-declining-shadow-inventory-q3-defaults-toxic-loans-the-state-of-the-national-housing-market/
(6) “Option ARMs Enter the Eye of the Hurricane: The $189 Billion Recast Problem Targeted Directly at the California Housing Market, Of $189 Billion in Securitized Option ARMS $109 Billion in California,” DoctorHousingBubble.com, October 30, 2009, http://www.doctorhousingbubble.com/option-arms-enter-the-eye-of-the-hurricane-the-189-billion-recast-problem-targeted-directly-at-the-california-housing-market-of-189-billion-in-securitized-option-arms-109-billion-in-california/
(7) Stephanie Armour, “Another wave of foreclosure looms, USA Today, 11/19/2009, http://www.usatoday.com/money/economy/housing/2009-11-19-shadow19_ST_N.htm
(8) Ibid
(9) “Lender Processing Services’ February 2010 Mortgage Monitor Report Shows Pace of Delinquencies Slowing, But Delinquency Rates At All-Time Highs,” Lender Processing Services, February 2010, http://www.lpsvcs.com/NewsRoom/Pages/20100315.aspx

Source: Congressional Budget Office, www.cbo.gov

“Each year CBO estimates the budgetary impact of the proposals in the President’s budget using the same economic assumptions and estimating techniques that the agency uses to produce all of its analyses and cost estimates. Because CBO’s economic forecast and estimating techniques differ from those of the Administration, that “reestimate” of the President’s budget produces estimates of federal revenues, spending, deficits, and debt that differ from those presented in the budget itself.

This report compares CBO’s projections with those of the Administration and with the benchmark figures in CBO’s baseline, which shows the budgetary outlook if current laws and policies remained unchanged. CBO’s use of a consistent methodology for all of these analyses and estimates allows direct comparisons between the Administration’s proposals and other options that are considered by the Congress during the legislative process.”

The most frightening element of this ten-year forecast is that an estimated $5.6 trillion of the debt would be interest expense. (1) Yes, that’s right, interest. This is why rational, reasonable people, as much as they would like everyone to have health insurance (which by the way will never happen, even if government mandated everyone to obtain health insurance), reject the giant spending proposals of this president. Nothing against you, Mr. Obama. The same rational, reasonable people dislike the deficits of Reagan, Bush Sr., and W. just as much. But you’re at the end of a monster accumulation of debt. Stop the major spending plans. Try cost-effective, market-based ways of insuring more people in the health care arena. Put on hold the plans for major corporations to trade carbon indulgences in a “market-based” Cap and Trade system.

As an aside to Cap & Trade, wherever you stand on climate change science, you may be surprised to learn bigger problems exist in the world, if measured by uniform costs and benefits.

The idea that we’re going to continue to increase spending for the next 10 years, only at a slower clip, and make up for it by raising tax revenues is quite a gamble on its own. And that gamble is to get us to this projected fiscal outcome? Yikes.

And I leave you with a road map to reduced deficits laid out by the Obama Administration for the next four years:

Source: CNNMoney.com

Note the roughly $1 trillion increase in tax revenues over the next four years.

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(1) Congressional Budget Office, Preliminary Analysis of the President’s 2011 Budget, retrieved March 5, 2010, http://www.cbo.gov/ftpdocs/112xx/doc11231/index.cfm

There’s been a lot of discussion lately about a series of emails among climate scientists that were released after some hackers got into the computer networks of a top university. The emails, some of which you can see here, show that many of these global warming scientists had doubts, possibly manipulated data and attempted to censor skeptics. It’s certainly caused an uproar and is pushing public opinion against the cap and trade scheme that has made its way through Congress and is awaiting a vote in the Senate. But let’s ignore the emails and skepticism for now and simply assume global warming is man-made. Is a carbon trading system really the best we can come up with to deal with the problem?

The carbon trading concept seems very reminiscent to the history buff in me. Back in the Middle Ages, the Catholic Church and some other unaffiliated snake oil salesmen, sold what were called indulgences. These indulgences offered penance for a variety of sins and could either commute or completely eliminate one’s arduous trip through Purgatory.

Today, we have a similar situation; we have an entire market of carbon credit traders (even now, when in the United States, it is not mandatory). Basically, you buy offsetting carbon credits (for someone, probably in a third world country, to plant trees or something like that) to make up for your “carbon footprint.” This allows one to pollute conscience free and Al Gore has notoriously used these to “offset” his enormous personal “carbon footprint.” Hmmm, perhaps we should consider this for other “sins.” As Michael Kinsley of Time magazine analogized:

“What’s needed is a market in child-abuse credits. Somewhere in the world there is a parent who is slugging his kid every night. For a price, he would refrain for a night, or even two. By paying that parent not to slug his kid twice, you gain the right to slug your kid just once.” (1)

Maybe that’s going just a wee bit too far; regardless, carbon credits will hereafter be referred to as carbon indulgences. And now, the Obama administration is trying to institutionalize these indulgences throughout the entire economy, via cap and trade.

Cap and trade works like this: carbon dioxide emitting industries will be given certain arbitrary quotas, which they cannot exceed. If they are above their quota, they must buy offsetting carbon credits from firms that are below their quota.

Cap and trade is undeniably a tax increase. Unless the carbon indulgences are set so high that no firm ever has to buy any (making the whole scheme pointless), firms will have to raise their costs to meet the expenses imposed by the new quotas. The Congressional Budget Office estimates that it will cost $175 per family, annually (2). The conservative Heritage Foundation estimates that the CBO has grossly underestimated this figure by not including the effect the bill could have on reducing the nation’s GDP, among other issues. According to their own estimates, by 2020, institutionalized carbon indulgences will reduce GDP by a $161 billion, translating to $1870 per household. (3)

It’s also not, as John McCain called it during the election, “a market-based solution.” Yes, there is a market, but it’s a market the government created at its own whim. It would be similar to calling the lobbying industry a free market system for political favors. As economist Robert Murphy put it, “the number of permits is an arbitrary scarcity imposed by government fiat” (4), i.e: not a free market.

However, it should be noted that there is some validity to a carbon indulgences trading scheme. First a little background, though. As shocking as it may be to environmentalists, one of the best ways to protect the environment is property rights. People always take better care of their own property than someone else’s (think used cars) and no one has the right to pollute someone else’s property without due compensation. Furthermore, the tragedy of the commons comes into play with collectively owned resources. Essentially, if land is not privately owned (or properly regulated), there is no incentive for people to use the resources of that land judiciously. Biologist Richard Dawkins explained it well when describing Port Meadow in 1987:

“Ecologically speaking we do have the makings of a tragedy here…ragweed is poisonous plant and cattle won’t eat it. And it’s an indicator plant of overgrazing…for the past fifteen years [ragweeds have] been taking over this meadow as there has been an increasing overgrazing problem… which is of the city government’s own making. Fifteen years ago they asked each commoner how many animals he would like legal rights to graze on this common land. Naturally each of them, being human, submitted his own selfish estimate of the most he could possibly want. All those bids got accepted. So even if each farmer is only grazing what he’s legally entitled to, there’s a huge overgrazing problem.” (5)

When land is either privately owned or regulated properly (which, given the influence of various special interests, is rare), maintaining the land increases its value. There is a natural, economic incentive to be environmentally conscious. But with the lack of either private ownership or proper regulation, that incentive is removed. Thus, it should be no surprise that the worst environmental degradation has taken place in communist countries and countries that lack de jure property rights. Contrary to popular wisdom, Stalin was not a tree hugger and Mao did not spend his nights drenched in patuli oil, singing “Kumbaya” around a campfire while smoking some dank ganja he picked up in Amsterdam. A 1970 article for Time Magazine entitled “Communist Pollution,” concluded, “[The environment] is often worse in Communist countries, where technocrats toil to boost industrial production with little thought to environmental consequences.” (6) And Chinese expert, James Kynge, assessed China’s state-run capitalism, without de jure property rights, effect on the environment as follows:

“Streams and rivers are drying up all over the northern half of the country… Acid rain falls over 30% of its territory…The U.S. Environmental Protection Agency recently reported that a third of the nation’s lakes and nearly a quarter of its rivers are now so polluted with mercury that children and pregnant women are advised to limit or avoid eating fish caught there.” (7)

Unfortunately, pure, unfettered capitalism runs into an environmental stumbling block with the oceans and an environmental roadblock with the air. How could you possibly privatize the air? Regulation is almost a must, assuming the regulatory burden is worth the cost it would impose to protect the environment. So government regulation is almost certainly necessary regarding air pollution. Furthermore, indulgence trading is also supported by the successful use of a similar program for acid rain in the early 1990’s.

However, air pollution and carbon dioxide emissions are not exactly the same thing. Set aside the fact that the European’s version of cap and trade basically failed: why are the only solutions being proposed government programs and tax increases? Carbon dioxide is harmless to people, the danger it poses is to hasten global warming. Compare a factory, bellowing out mercury or other toxic fumes, to a one bellowing out carbon dioxide. If it were the only factory emitting carbon dioxide, it would be irrelevant. It’s the grand total of carbon dioxide emissions, not individual ones which cause the problem. Given that distinction, as well as the large costs institutionalized indulgence trading would bring, why not look at some market alternatives that seem to have been mostly, if not completely, ignored. Five that come to mind:

1. Strictly enforce property rights. We’ve been getting away from this for years, but in obvious cases where a company causes significant harm to other people or property via pollution (be it air pollution or otherwise), they should be liable for those damages. In some ways, regulation can simply allow a company to violate other people’s property rights to whatever extent the regulation deems acceptable.

2. Deregulate nuclear power. Nuclear power certainly poses the risk of a catastrophic meltdown, but no one in the United States has ever died from it. We had one accident 30 some years ago at Three Mile Island, and although no one died, and we’ve had 30 plus years of technological improvements, we haven’t built a new plant since. On the other hand, we hear stories of coal miners dying every other week. Nuclear power is very clean burning (it boils water), produces almost no waste and the little it does can be fairly easily stored away. 80% of France’s electricity is nuclear; they are a net energy exporter, have the cheapest energy in Europe and very low CO2 emissions. (8)

3. Reduce our military presence abroad. How much oil do we use funding two wars, one of which certainly did not need to be fought? In addition, how much unnecessary oil is used by having our military spread over the world with over 700 bases in 130 countries?

4. Eliminate subsidies to oil companies and corn-ethanol companies such as pork barrel champion of the world, Archer Daniels Midland. It’s obvious that we should eliminate the subsidies to oil companies; however, corn ethanol subsidies are even dumber. Corn ethanol requires an enormous amount of energy to produce and must be transported in trucks instead of pipes because it degrades. University of California Engineering Professor, Tad Patzek, wrote that corn ethanol requires 29% more fossil fuel energy than the ethanol contains. (9) Furthermore, by pushing resources into a faulty method of emission reduction, the government discourages capital from finding its way to an effective method, such as…

5. Legalize hemp. The government wouldn’t even have to legalize marijuana (although they should do that, too). Hemp ethanol, unlike corn ethanol, does significantly lower emissions. Hemp can produce a whole host of other products as well. Yet, hemp is illegal to grow in the United States, despite the fact we have a fertile climate for it. (10)

Furthermore, there are many cheaper methods that could be done with limited government involvement, if any at all. Environmental economist, Bjorn Lomborg discusses global warming in an almost unique way; namely, a purely rational way. He discusses proposed solutions in terms of costs and benefits. We have to remember that not only will cap-and-trade cost the industrialized world a lot, it will make development in the third world much more difficult, if not impossible.

Lomborg invited a group of eight top thinkers, including four Nobel Prize Winners (sorry, Al Gore and Barack Obama were not among them) to form the Copenhagen Consensus. They looked at 10 major problems in the world from malnutrition to government corruption to global warming. Their goal was to determine which areas would investment yield the best returns for humanity. They voted micro-nutrient supplements for children first and lowering trade barriers second. The first solution to global warming comes in at 14th; and it’s research into new technologies, not cap and trade. (11)

Salt Water 1, Global Warming 0

Indeed, technology seems to offer much more cost-effective solutions. We could go with nuclear power or hemp fuels like I mentioned above, or other technologies that have, for the most part, been ignored. Steven Levitt and Stephen Dubner, authors of Superfreakonomics, propose geoengineering to combat global warming. Levitt describes one possibility, we could implement today if we wanted to, as follows:

“[One possible solution is] a cloud whitening scheme. Dark things absorb a lot of heat and the oceans are very, very dark. There are not very many clouds over the ocean because there are not the nuclei that seed the clouds which is usually from dust. There’s not much dust over the ocean. Salt can also seed clouds. And so what you need to do is figure out how to spray some salt water up into the air and that can serve to make the clouds. The belief is, from the models, that if you can just have 10,000 little, solar powered dingies that just puttered around in the ocean and flipped up some salt water into the air, that that would generate enough cloud cover over the oceans that would reflect enough of the sunlight that through that channel you could also lower the temperature of the Earth to offset any effects of warming.” (12)

These projects could be government funded for sure, but they’re cheap and would require very little interference in the economy. They would also be more effective. The Kyoto Protocol for example, was expected to make very little, if any difference, even when it was enacted. By 2050, it’s supposed to reduce the mean temperature by perhaps 0.2 degrees Celsius, or maybe as little as 0.07 degrees. (13) Either way, it’s an irrelevant reduction. It would be just about as useful to simply burn money (as long as burnt money is carbon neutral of course).

Furthermore, we have to ask whether dealing with the consequences of global warming would be a more effective than trying to prevent it. Despite the hysteria, many of the consequences could very well be manageable. For example, the International Panel on Climate Change estimates that sea levels will rise between 0.6 and 2 feet over the next century. (14) That sounds quite manageable.

Yet the solutions being discussed, such as indulgence trading, are all big government solutions. Despite the existence of alternatives, our wise leaders can think of little other than massive tax hikes and intrusive schemes. This makes me very skeptical of our noble politician’s goals. Could politicians be looking for a power grab? Or perhaps well-connected firms are looking to profit off the new system? Oh, there I go again, questioning our wise, benevolent leaders. I’m trying to break the habit… honest.

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Next: The Market For Global Warming: Green is the Color of Money
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(1) Michael Kinsley, “Credit for Bad Behavior,” Time Magazine, June 21, 2007, http://www.time.com/time/magazine/article/0,9171,1635840,00.html
(2) “Cap-And-Trade Costs,” Congressional Budget Office, June 19, 2009 http://www.cbo.gov/ftpdocs/103xx/doc10327/06-19-CapAndTradeCosts.pdf
(3) David Kreutzer, Karen Campbell and Nicolas Loris, “CBO Grossly Underestimates Cost of Cap and Trade,” The Heritage Foundation, June 24, 2009, http://www.heritage.org/Research/energyandenvironment/wm2503.cfm
(4) Robert Murphy, “Cap & Trade Is Not A Market Solution,” Institute of Energy Research, June 4, 2008, http://www.instituteforenergyresearch.org/2008/06/04/cap-trade-is-not-a-market-solution/
(5) Richard Dawkins, “Nice Guys Finish First,” copyright 1987, http://video.google.com/videoplay?docid=-3494530275568693212
(6) Author unnamed, “Environment: Communist Pollution,” Time Magazine, November 30, 1970, http://www.time.com/time/magazine/article/0,9171,904549,00.html
(7) James Kynge, China Shakes the World, pg 151-152, First Mariner books, Copyright 2007
(8) See “Nuclear Power Now,” NuclearPowerNow.com, http://www.nuclearnow.org/ and “Nuclear Power in France,” Wikipedia.org, http://en.wikipedia.org/wiki/Nuclear_power_in_France
(9) Robert Bryce, “Corn Dog,” Slate Magazine, July 19, 2005, http://www.slate.com/id/2122961/
(10) See “Pollution: Petrol vs Hemp,” Hempcar.com, http://www.hempcar.org/petvshemp.shtml
(11) See Copenhagen Consensus Center, http://www.copenhagenconsensus.com/CCC%20Home%20Page.aspx and “Copenhagen Consensus,” Wikipedia.org, http://en.wikipedia.org/wiki/Copenhagen_Consensus
(12) Steven Levitt, “Superfreakonomics with Steven Levitt and Stephen Dubner,” Commonwealth Club, Fora Tv, http://fora.tv/2009/11/04/SuperFreakonomics_with_Steven_Levitt_and_Stephen_Dubner
(13) For a 0.2 degree reduction from a proponent of Kyoto, see Niklas Hohne, “Impact of Kyoto Protocol on Stabilization of Carbon Dioxide Concentrations.” ECOFYS energy and environment, http://www.stabilisation2005.com/posters/Hohne_Niklas.pdf, from a skeptic claiming 0.07 degrees see “Kyoto Count Up,” Junkscience.com, http://www.junkscience.com/MSU_Temps/Kyoto_Count_Up.htm
(14) Parry, Martin L., Canziani, Osvaldo F., Palutikof, Jean P., van der Linden, Paul J., and Hanson, Clair E. (eds.), IPCC. 2007 – Climate Change 2007; Impacts, Adaption and Vulnerability, Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, United Kingdom, Pg. 1000, http://www.ipcc-wg2.org/index.html

Should the United States Sell Alaska?

So the debt clock in New York City ran out of digits to show our actual debt, and the Congressional Budget Office (CBO) estimates the deficit for 2009 will be $1.85 trillion. Furthermore, some estimates place the unfunded liabilities at over $100 trillion. And to make matters all the worse, tax revenues have dropped approximately 18% due to the weak economy, the biggest drop since the Great Depression. David Walker, the former Comptroller General of the GAO, has said the United States is on pace for bankruptcy. Fiscally speaking, things look really bad.

So what should we do? Well, real estate developer Aaron Biston has an idea, and a petition to back it up. Sell Alaska!

It’s certainly not preferable. I like Alaska; it has some kind folks, cool scenery and a bunch of oil. Unfortunately, it’s probably the best idea I’ve heard so far on how to address the debt (even though 49 states sounds stupid). At the very least, it would prevent Sarah Palin from running for president in 2012.

Apparently Dissent is Now Unpatriotic

Remember back when George Bush was doing all sorts of bad things (and they were bad), and liberals were saying dissent is patriotic. Our founding fathers even said so. Well, apparently that only applies when the Republicans are in office. Leave aside Joe Biden’s claims that paying your taxes, nay, enthusiastically paying your taxes, is “patriotic.” Now we have Nancy Pelosi, Steny Hoyer and Harry Reid jumping off the deep end.

In an op-ed in USA Today, Steny Hoyer and Nancy Pelosi wrote:

“These disruptions are occurring because opponents are afraid not just of differing views — but of the facts themselves. Drowning out opposing views is simply un-American.”

Yes Nancy and Steny, we all know how unpatriotic protests and free speech are, especially in this country. At least their verbal assault on free speech isn’t quite as bad as Harry Reid’s assault on the English language. He referred to the protesters at the president’s propagandistic town hall meetings as “evil-mongers.” Yes folks, evil-mongers. I guess that’s technically correct English, but I think there’s only so far we should allow hyphenated compound words to go before the English language simply collapses in on itself.

Cash for Clunkers Rant

OK, it’s no secret we at SwiftEconomics are not a fan of Cash for Clunkers (see here and here). However, Barack Obama lauded it as a success since the car industry has been “stimulated.” Of course if the government had just bought a bunch of cars and then blown them up like they were in a B action flick, that would “stimulate” the car industry as well.

Here’s my problem; see, I’m trying to sell my car. Thereby the government is competing with me by making it much more favorable for those seeking to buy a car to buy a new one instead of a used one. They have reduced the number of people looking for used cars! In the world of unintended consequences, this one seems obvious: help the car industry and hurt the little guy trying to sell his car (by the way, I thought liberals wanted to help the little guy, not giant corporations such as GM).

So anyways, if anyone lives in Oregon and wants to buy a car, I have a 2001 Hyundai XG 300 for sale. It’s got 89,000 miles on it and is in good condition. Only $3900! Here’s the Craigslist ad.

Screw you government…

Regardless of who supports the public option (which the Congressional Budget Office estimates will cost $100 billion annually and only cover an additional 16 million of the 47 million uninsured) (1), we should look at what the legislation will likely accomplish, what the real problem is with our medical industry and what alternatives are available.

The first question to ask is how did the medical industry get such a foothold on the government in the first place? Well the reality is much of government’s increased role over the years has been at the behest of corporations, not against their will. For example, Medicare Part D was lobbied for by the insurance industry. Congressman Ron Paul explained this phenomenon very well:

“We have been enduring managed care over these last 35 to 40 years. And what has developed from this is corporate medicine. The individuals who were best able to gather up the money that was passed out or mandated by the government became the chief lobbyists; so the drug companies lined up, the health insurance companies lined up, the health management companies lined up. And it turned out that they started running it… and made it less efficient… Too much money was going to these corporations that were the middleman. And the patients have suffered and the doctors [have] become unhappy.” (2)

Source: Zerodisease.com

And just how inefficient has this made things? Well, look at what has happened since the 1950s: First there was Medicare and Medicaid in the ‘60s, then HMOs in the ‘70s and then Medicare Part D in 2003. And the prices just skyrocketed!

Our current system is obviously a train wreck. So should we go with the public option? Well, Massachusetts tried something very similar and costs have gone up 28% since 2006! Thus, in my humble opinion, the current proposal is an embarrassingly bad idea. In that case, maybe we should just get it over with and go with a single-payer system. Admittedly, it would probably be better than what we have now, but a single-payer system means that medicine would have to be rationed: expect much longer wait times. Furthermore, eliminating the profit motive would eliminate the competition-induced incentive to produce new drugs and medical procedures. The United States is still responsible for a disproportionately large share of medical innovations, which under a single-payer system would almost certainly no longer be the case.

Removing government entirely from the equation is never discussed, but I think it’s a worthy proposal. If that were the case, medical prices would probably fall significantly like they have in other technology-dominated industries left untouched by the government, such as computers and cell phones.

Right now, our system charges everything off to a third party. This gives doctors, who are deathly afraid of malpractice lawsuits, the incentive to run every test and do every procedure imaginable (or at least every safe procedure). These third parties, namely HMOs and insurance companies, then have every incentive to try to nickel and dime these bills, so as to stick the patient with as much of it as possible.

The major problem here is that we have forgotten what “insurance” actually means. We insure our homes against fires, floods and hurricanes. We do not insure our houses against the neighbor’s kid throwing a baseball through the window, or paint peeling off in the hot sun. Insurance is for the big things, not the little ones. Yet in medicine, insurance will pay for even routine checkups. This creates mini-monopolies (mini, of course, being a relative term). Once you’re with an insurance company and they pay for everything, minus the deductible, both the insurance company and the hospital know the patient won’t go price shopping. Once a customer has signed up, there is little reason for firms to compete on price or even quality. The predictable outcome is that prices skyrocket.

Should we kick government out of the healthcare industry all together? I say no, despite the fact that supporting government intervention makes me nauseous. I’d prefer a system with health savings accounts, allowing people to save money, tax free, for medical expenses. This would bring back the competition. Unfortunately, insurance companies would still have an incentive to skimp on the big things. And while medical prices would fall, it could leave a significant part of the population in dire straights if they got sick. Is there a country out there that leaves the market be, but addresses these problems? In fact, one does, (as the title of this article might suggest).

We should not be looking to Europe for insights into how to build our economy; they’ve been stagnant for decades. Instead, we should look to the Asian tigers. Everyone knows Asia is where it’s at these days. And the small nation of Singapore has a fantastic healthcare system that everyone should consider emulating.

First the facts:

Source: Rowan Callick, The Singapore Model

How is this possible? How could the citizens of Singapore spend approximately 1/5th of what Americans spend, have fewer caregivers, yet live longer and have only 1/3rd the infant mortality rate? Before I answer, let’s build up some more anticipation. Singapore does just as well with much less than those countries with universal healthcare, too, as the following charts show:

Source: John Tucci, WatsonWyatt.com

The key is that, unlike the United States, Singapore allows the market to work; Almost 70% of the medical expenditures are private. Singapore encourages their citizens to price shop and thereby push the price of healthcare down. Singapore’s Health Ministry explained it as follows: “Patients are expected to co-pay part of their medical expenses and to pay more when they demand a higher level of service. At the same time, government subsidies help to keep basic healthcare affordable.” (3)

The government side has four primary components. The first is Medisave, which pays a portion for hospital expenses and some outpatient care. It does not replace private insurance, merely supplements it. The second is Medishield, which covers the costs of extremely serious health problems (the main purpose for insurance). The third is Medifund which provides a subsidy for the poorest of the poor. And the final is Eldershield, which provides a subsidy for the elderly. (4)

Aside from the ridiculously cheesy names they’ve given these programs, Singapore has set up a system that uses “the public option,” mainly in the case of an emergency. Otherwise, it simply supplements private insurance, instead of replacing it (like Medicare), or setting up a third party to manage it (like HMOs). They have created a system that incentivizes saving, price shopping and competition. These things push prices down and force hospitals, insurance companies and drug companies to be lean and innovative. Singapore has successfully created a system that marginalizes both the corporations (listening Republicans?) and the government (listening Democrats?). And it works marvels!

Journalist Rowan Callick, who wrote a great piece on Singapore’s system, put it best: “The reason the system works so well is that it puts decisions in the hands of patients and doctors rather than of government bureaucrats and insurers.” (5) Amen to that. Hopefully someone in the United States government is listening… I kinda doubt it though.

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(1) Congressional Budget Office, Preliminary Analysis of Major Provisions Related to Health Insurance Coverage Under the Affordable Health Choice Act, 6/15/2009, http://www.cbo.gov/ftpdocs/103xx/doc10310/06-15-KennedyLetter.shtml

(2) Ron Paul, “Congressman Ron Paul on Healthcare,” 6/18/2009, http://www.youtube.com/watch?v=foXQbmZxWYY

(3) Rowan Callick, “The Singapore Model,” The American, 5/27/2008, http://www.american.com/archive/2008/may-june-magazine-contents/the-singapore-model

(4) Ibid

(5) Ibid