Tuesday, September 25, 2007

Insurance, assurance and prosperity

The following is a position paper of The Jacksonian Party.

During the years post-WWI, the United States was undergoing the largest demographic transition it had ever experienced. This was not a transition by age group nor by ethnicity nor by religious outlook, instead it had a major driving force which would change the face of the Nation and the world. The following is taken from an Indiana Business Review article, Summer 2007, Vol. 82 No.2 by James Altmann, Professor of Economics Indiana University Southeast:

Economies start out as being almost exclusively agricultural in nature. The United States began this evolutionary process during colonial times when over 90 percent of all workers made their living in farming. As late as the Civil War, more than two-thirds of workers were still employed in agriculture. By the 1920s, more than one-fourth of U.S. workers were still in agriculture, but the percentage of agricultural workers has dropped to about 2 percent since then—with a corresponding massive reduction in the number of farms. States that held on to agriculture as their economic mainstay became economically depressed, particularly when compared to states that embraced the transition to manufacturing economies. By 1925, employment in the manufacturing segment of the economy surpassed employment in agriculture. Manufacturing employment peaked at 19.4 million in 1979 but has subsequently continued to decline to 14.2 million workers as of December 2006. New manufacturing jobs in the United States seem unlikely, with typical projections calling for another half-million or more manufacturing job losses in the coming decade. Such losses can be attributed to increasing automation, improved efficiency, foreign competition, and outsourcing.
That peak in manufacturing would start building in the early part of the 20th century and then go upwards until 1925 when it would surpass agricultural sector employment. The Nation that started as Jeffersonian landowners and farmers had reached a tipping point in mechanization, employment and working efficiency that could not have been imagined in the 18th or early 19th century, and was only first felt in the first industrialized war of the West, the US Civil War. From 1865 to 1925 some 20% of the US population would move from rural farm communities to urban settings for employment.

A reason the Great Depression was actually so deeply felt is that more than 50% of Americans were now employed by manufacturing and the stock market has a direct relationship to overall manufacturing health. Those that had moved in the early part of that transition, 1865 to 1900, had established themselves in cities and had families there. The continued demographic flux would point to a long term sustainment not only of manufacturing but of economically robust outlooks, even with intervening depressions, recessions and deflationary periods. That population mix, by 1929, now had a cross-section of the population, from older workers to new job entrants, and when the bottom fell out of the market, the problem was also across the board, demographically. If the United States had not shifted so heavily to manufacturing, the Great Depression would have not been that much of a shock, socially. Even with that economic shock, however, would come renewal of the Nation from its manufacturing sector. The following is from Wikipedia, but I have also seen it in historical analyses of that era and in history texts on the demographic shifts in the US:

Source: Wikipedia Great Depression in the US

There are a few things that are clearly evident from that graph:

1) The first being that the actual decline in the economy did not bottom out until mid-1933.

2) Economic recovery between 1933-37 would reach to the pre-Depression growth line and then secure the manufacturing sector's footing and suffer what we would then consider to be a normal recession due to other causes.

Notice that neither of these relates to World War II. Indeed, the Recession of 1937-39, would take place while NYC hosted the World's Fair, and that Fair was famous for the automobile industry's views of the future of Americans 'on the road', as seen in the General Motors works by Norman Bel Geddes:

Source: Columbia University Call it Home, Ch.10

Yes that is a *drawing* of how GM imagined the future would be back in 1939. That is not a world being imagined with soup kitchens, industrial poverty or with long-term economic depression. What is startling is how much that does look like a city of the 1960's-70's.

That does leave some Depression era questions, however.

The most primary being: As the majority of recovery legislation did not get in-place until mid-1933, and full enactment of even the most basic parts would take until 1934, what portion of the recovery is due to Federal Government influence?

The Reconstruction Finance Corporation was started by President Hoover, in 1932, but is typically rolled into the 'New Deal' programs. That said by 1934 it had dropped from nearly $2 billion/year in its starting years to approximately $350 million/year by 1934. While it would serve as the basis for the industrial coordination for World War II, and would see heavy financing then, that would only be in late 1941, well after the Depression had ended.

The Securities Act of 1933 would be the first major legislation in the financial arena, and was not passed until 27 MAY 1933, and would be followed the next year with the Securities and Exchange Commission, which lives with us to this day. By that point in time the US Economy was already on its rise out of the Depression.

While a number of attempts to regulate wage and prices were struck down by the US Supreme Court, one piece of legislation aimed at providing old-age, survivors and disability (OASDI) would stick: Social Security. What is fascinating is that Social Security, itself, may have been the cause of the 1937 Recession by raising taxes just as industrial expansion was reaching its pre-Depression base with growth. At the time this was not expected to turn into a permanent fixture on the landscape, that it is today. However, by fixing a 'retirement' date in the mid-1930's for individuals based on life expectancy, one obvious problem could not only be foreseen, but predicted.

US Life Expectancy

Source: CJ Seymour, The Coming Great Depression

Global Life Expectancy

Source: Working Paper on Inequality and Mortality: Long-Run Evidence from a Panel of Countries
By Andrew Leigh and Christopher Jencks
Harvard University

That upwards trend of increasing life expectancy, after the Spanish Influenza pandemic, continues the previously rising line of pre-WWI. In other words, outside of war and pandemic, US life expectancy, along with many other Nations, has been increasing steadily since 1900 and setting an age retirement date in the 1930's is a problematical attempt to determine when individuals should retire from the workforce. By giving assured income to anyone retiring at that age would ensure that more people would be drawing benefits for longer periods of time and thus causing a long-term sustainment problem. Even with population growth due to births, there will be a population growth due to individuals not dying and living longer. The move to sequester skills and active working life at a set age outside of the economy, those individuals become an economic drain to it.

I cannot speak to the possible causes of the Recession of 1937, and while SSN taxation surely plays a part, by removing economic power from working individuals, there are other causes such as some infrastructure over utilization and lack of adding capacity that can also be viewed as a problem. The money sent to SSN is not in a 'trust fund' to gather interest but is, instead, immediately paid out to those under SSN. While this might give some short-term stimulus to the workforce, to retire older workers, any shift in demographics by the overall population either in lengthening life, reducing infant mortality or decreasing birth rates would all play key roles in changing the economic sustainability of this system. Each of those have, indeed, happened, with the post-WWII baby boom, removal of some infectious disease from the normal landscape of childhood mortality (polio and smallpox come to mind), and a shift to have smaller families for multiple causes.

Clearly this is not 'insurance' but some sort of 'assurance' by the government. Insurance is payment to plans that will pay out if something happens: you are paying in the bet that something will happen to you, and the insurer takes such payments in the bet that they will not. Those that live in the modern, industrialized United States have some great expectation that they will live to see 'retirement age' and then live for a decade or even two after that. If one lives to be 85 or so, 20 years can be expected at the end of not doing much in the way of work. Add that to the 18 years or so of education to get to High School level, and nearly 40 years of one's life is spent not working at a job, about 45%. Compare that to the 20 years spent (approx.) and retiring at age 63 and that is only 20 years or 31% of one's life spent in learning and 'retirement'. At this point in time, via SSN, the Federal Government is mandating that an individual, to be eligible for payout from the system, is to spend 14% more of their life in leisure than their grandparents. Great work if you can get it, which you can in the US.

There is a problem that happens after the New Deal era, and that is in the wartime era, where some of these workers must be convinced to *work longer*. One of the prime ways to do that was to use actual insurance to offer non-wage benefits from companies. That insurance is medical insurance, and is now becoming a major point of misunderstanding for the population as it is *not* an 'assurance' by the government but actual 'insurance' paid to companies. In an article Bad Medecine of 21 SEP 2007, John Stossel takes a look at the roots of this 'insurance' and what it does:
America's health-care problem is not that some people lack insurance, it is that 250 million Americans do have it.

You have to understand something right from the start. We Americans got hooked on health insurance because the government did the insurance companies a favor during World War II. Wartime wage controls prohibited cash raises, so employers started giving noncash benefits like health insurance to attract workers. The tax code helped this along by treating employer-based health insurance more favorably than coverage you buy yourself. And state governments have made things worse by mandating coverage many people would never buy for themselves.

Competition also pushed companies to offer ever-more attractive policies, such as first-dollar coverage for routine ailments like ear infections and colds, and coverage for things that are not even illnesses, like pregnancy. We came to expect insurance to cover everything.
These non-wage benefits were meant to be used as an 'incentive' and the tax code was adjusted so employers could write off part of it. By doing that, the Federal Government interevened in the health care insurance market *against* the consumer and *for* companies. This has had a multiple, compounding effect as more 'coverage' is offered that is not even 'insurance'. And this system is not a good one as Mr. Stossel looks at a bit further on:
But insurance is a lousy way to pay for things. You premiums go not just to pay for medical care, but also for fraud, paperwork, and insurance company employee salaries. This is bad for you, and bad for doctors.

The average American doctor now spends 14 percent of his income on insurance paperwork. A North Carolina doctor we interviewed had to hire four people just to fill out forms. He wishes he could spend that money on caring for patients.

The paperwork is part of insurance companies' attempt to protect themselves against fraud. That's understandable. Many people do cheat — lie about their history, demand money for unnecessary care or care that never even happened.
If you want to find out *where* giving private healthcare information to companies starts, do not look at the companies, but look at the system that has been promoted via the tax code. Also note that the 14% of your income spent is part of that percentage spent for healthcare, currently riding in the 16% range.

Or about 2% of your money goes to healthcare, the rest goes to overhead.

Before WWII most companies would rarely offer health care insurance, due to the size of the labor market. By putting a tax code marker in for it during wartime and not *removing it* the idea that one would 'let the insurance company pay for it' started to grow: individuals no longer worried about the cost of treatment or medicine. That tax code provision removed the individual from the health care decision process in many companies and the sticker shock that is seen when looking to get a private plan is the shock of the huge bureaucracy that you pay for.

Traditionally coverage for catastrophic care and early payer plans for long-term care were ways to address one's life, but even more used was the system known as: 'the extended family'. The demographic change and technological change for mobility of the modern world makes having a large family a cost burden. To get the benefits of childhood healthcare, most Americans see the cost of it and nearly faint. Most of that cost is: bureaucracy. And by putting forward yet *another* government assurance via SSN and Medicare/Medicaid, more money via taxation needs to be collected to sustain the government overhead for those systems as well as the long-term needs of those who retire. Retire and live longer without working.

There is one final piece to this puzzle, that very few like to address, and that is investment income. Prior to the computer age, the ability of individuals to own fractional shares in investment plans was limited. That infrastructure required high degrees of automation and were, traditionally, limited to the wealthy. By the mid-1970's the very first 'consumer oriented mutual funds' started to appear.

A part of the great loss of wealth in the Great Depression was in the uneconomical and concentrated wealth investment by investors. That is not only a limitation via knowledge but also one of structure as it would be very difficult and cost prohibitive to run such funds via manual accounting. Even more interesting is that some of those companies that 'died' during the Depression were purchased for assets and then those previous shares honored in the new company. One individual found that his grandfather had plastered stock on one wall and when he looked at the certificates in the 1970's he realized that he had millions of dollars plastered on his wall: those companies had been bought out by successful firms. Indeed, by 1939, even with the Recession ending, most portfolios had recovered to their pre-Depression era value.

Today, the ability to invest widely, not only within the US, but globally, allows individuals, via these consumer plans, to invest for long-term needs. Only something that would hit the entire planet financially, say a massive solar storm burning out all electronics, would effect it... and then the concept of 'survival' would be primary. Additionally, the computer age saw the very first 'consumer forecast' systems stand up in the way of this piece of software known as 'spreadsheets'. Suddenly the tools that are described in dusty economics texts could be put into formulas and examined for their actual economic correlation and *that* was given to the individual to use. The drop in the cost of computers and software, relative to income, plus the ability of mutual fund companies to offer wide ranging investment schema now puts tools that Rockerfellers and Carnegies of previous eras to shame.

It also means that there are many, many more eyes on the lookout for economic problems, which is why economic catastrophes are predicted every 30 seconds and arrive every decade or so. People are obviously using these tools and understanding the system a bit better than those reporting on it. This is creating self-made prosperity, that is being put in danger by Federally subsidized health care, both via payer system and via tax code. One's own personal wealth can no longer be applied directly to the market until the tax code is changed to remove the company based economic incentives.

Even worse the SSN 'assurance' system is hitting the end of the line as more of the population spends time in enforced leisure subsidized by the younger working class. Minor one or two year 'tweaks' to the retirement age are not enough to address the decade or so it needs to be adjusted upwards, and that is starting to press on the 15-20 year mark upwards for a sustainable system of any sort to be had. Then, if that were done, indexing the retirement age to life expectancy would help to keep things solvent a bit longer... for an ever shrinking part of the population that needs it as continued and strengthened investment in 'prosperity' will allow individuals to set their own course for retirement as a concept or even eliminate it.

That is where the full faith and trust in our system to create 'life, liberty and the pursuit of happiness' is invested: in yourself.

It seems that our attemtps to allow government to do this for us have put the Nation on a perilous path economically and socially, by creating an unsustainable system of 'entitlements' for those that should know better.

Giving a hand up to the poor and those in dire need is one thing.

Attempting to make this 'universal' or even 'fair' appears to be a road to, indeed, make all Americans 'equal': equally poor and sick.

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