Extending and Expanding the Homebuyer Tax Credit

The new and beefed up homebuyer tax credit will likely help home sales continue to improve, but does it help in a temporary or long-term manner?  While a temporary boost makes us all feel warm and fuzzy, the real focus of any economic program needs to come back around to long-term fixes.

An area of the expanded program I have a real problem with is the extension of the credit to those that already have a home.  They need to have lived there for at least five years, but I don’t know how this matters much when you’re giving someone money to take one home off the market and put another one right back on.  This may stimulate home sales and inflate prices a bit, but it actually has a net zero effect on home inventory.

Another conceptual problem that I have had with the credit from the first time it rolled out is that we are trying to fix a market that suffered inflated prices due to outside manipulation by trying to stimulate inflated prices with outside manipulation, because we liked the higher prices better.  Higher home prices made us all feel wealthier and to the extent that you could take a loan on the inflated equity on your home and spend that cash, it truly did inflate your wealth.

The problem is that the wealth created by inflating home prices wasn’t real wealth, it was a glitch in the system that distorted the market with inflated, but unsustainable prices.  To the extent we are trying to restore that false market, the homebuyer tax credit only delays the day that we have to face the real market.

The long-term fixes to the market are the ones that are taking place on the lending side of the equation with tighening lending standards and honest loan evaluation.  More conservative valuation estimates for homes.  Making loans that will most likely be repaid, not making loans with the intent to refinance on a higher valuation in a few years.

The government throwing credit money around to help home sales will mostly leave us with temporarily inflated home prices and a bigger tax bill to pay in the future.  As if there weren’t plenty of other plans for spending all of our future income.

The market for health care

Health care marketThis graph demonstrates that while the health care market may as a whole find an equilibrium price, we suffer from few customers for health care.  The main customers for health care are major health insurance companies and the government.

If we were to segment the prices paid by those respective customers into private and government, we would necessarily find that the government pays below the market rate, while the private insurers pay above the market rate, and no one really pays the total market equilibrium.  It is a theoretical price that is somewhere between the two.

I would also anticipate that any small amount of cash customers in the market will be charged even more than the common private insurance rate, which is already above market, due to lack of bargaining power.  I suppose this based on my own billings that start with an artificially high price, and move down to a negotiated rate with the insurance provider.  Without the insurance negotiation, I would be charged the top line price.

Private insurers do not have the same incentives and motivations as their customers and are primarily driven in the health care market by what is needed to succeed in the health insurance market, covered in a forthcoming post.

If the health insurance market were to suffer a huge shift towards government plans, and future government plans also paid significantly below market rates in the health care market, care becomes necessarily rationed because of the gap in supply and demand caused by the price ceiling below the market rate.  If private insurers survive a large shift to government insurance, the disparity between the two prices paid will become greater, further affecting the competitive landscape of the health insurance market.

Health care reform that will work

I agree that health care reform is desperately needed.  I also agree that prices have spiraled out of control and we need to stop it.  I don’t think that the government running the health care system or being a larger player than they already are will help anything.  According to the Kaiser Foundation in 2004 there were 42 million people covered by Medicare and 52 million people covered by Medicaid. There are about 87 million total covered between the two programs as 7 million are dual eligible.  So with our population of 300 million people, almost a third already have access to an existing public option.

Another public option is not the solution, but systematic reforms could change the way consumers consume health care, reducing costs for us all.

  1. Front the money. If individuals had to front the money for their own health insurance, it’s more likely that they would consider the price of a procedure, and actually demand this information before moving forward.  Not that it will change their mind on the necessity of the procedure, but the awareness of price may lead to competition on price, delivering lower costs for us all.
  2. Extend tax benefits to individuals. Keeping the benefits of providing health insurance on the employer side has kept the policy in the employer’s hands.  Extend tax benefits to individuals the same way you would to the self-employed so that opting out of your employer’s group option can make cents.  This is especially true for young employees in aging organizations where the young may pay higher premiums than they would in the private insurance market to subsidize the older participants in their group.
  3. Encourage competition in insurance. This issue is so complicated that it’s hard to know where to start, but some common sets of regulations that allow competition to flow more freely from state to state would be a great place to start.  This should not come as a federal mandate, but as a cooperative of the states utilizing what is already working best in various parts of the country to make some uniform guidance and grounds for competition.

These reforms would help to put market pressure downward on prices for both care and insurance as well as upward pressure on quality of care.  There are efficiencies under development in the health care market that are not being exploited because of the regulatory state of affairs and third-party payer system.  Telemedicine holds great promise to deliver care more efficiently, but may be held back if insurance companies do not give doctors a code to be paid for this service.

However, innovations such as this would take hold more quickly if the perception of health insurance were to change drastically in the marketplace.  Currently, health insurance is viewed as a way to avoid paying anything for medical care, so that the consumer can consume health care freely and let someone else pay for it, so long as they can ante up with the monthly premiums.

If health insurance were perceived more like homeowners insurance, where you take care of maintenance yourself and use the policy for major damages, doctors and patients would have more control over care than the insurance companies.  This would also drive down the cost of health insurance as much more of the health care spending would be cash from the patient to the doctor instead of from the insurance company to the doctor.

Government health care, learning from Medicare and Medicaid


What’s the real problem with health care?  Can HSA’s really help?  Will government intervention fix all of our problems so we can sing Kumbaya by the campfire?  The chart above may help us to uncover some of the problems by comparing some cases and seeing why differences exist.

Here I have indexed to 1996 as 100, the price of breast augmentation, liposuction, hip replacement, arthroscopy, and the overall CPI as a benchmark.  I consider the breast augmentation and liposuction in one group, and the hip replacement and arthroscopy in the other.  I know from the data that in 2006 67% of charges for hip replacement were paid by Medicare or Medicaid and the same was true for 74% of arthroscopy charges in 2006.

I don’t know these breakouts for certain in the breast augmentation and liposuction realms, but I do know that significant numbers of these procedures are for cosmetic purposes only and are not even covered by insurance, let alone Medicare or Medicaid.  I also know that there are open markets where consumers can shop by price and quality (BidforSurgery.com) rather than find a good doctor and get surprised by a mammoth bill.

However, a large portion of consumers are only concerned with the first part of my last statement “find a good doctor” because they are not paying firsthand the costs of many of the procedures performed and medicines prescribed.  When considering all hospital discharges, a little over 61% of charges were paid by either Medicare or Medicaid in 2006, so the examples I have are slightly higher than the total, but not significantly.

Some within the 30% of charges paid by private insurance may have little or significantly reduced exposure to firsthand payment for medical care as they sport the platinum plated Blue Cross/Blue Shield plan that is significantly subsidized, if not entirely paid for by the employer.  Some are heavily exposed to firsthand cost under an High Deductible Health Plan (HDHP) that is being marketed in conjunction with Health Savings Accounts (HSAs) as a cheaper alternative for small to medium sized businesses.

Now both the uninsured and those with HDHPs suffer from escalating prices for medical care in a market where significant numbers of consumers have little or no price sensitivity because they do not pay for their own care!  A significant portion of this lack of price sensitivity is from those on the Medicare/Medicaid rolls who may not even have the possibility of future cost exposure either.  Thus, a significant portion of the rising costs in medical care are generated by the government, not solved by the government.

HSAs don’t really help to solve the problem when so much of the consumer market has little to no price sensitivity and the only ones hurt are the ones that have the HDHP/HSA and have to pay the cost of care that others are receiving for free.  This may drive down demand for consumers on HDHP/HSA plans, but they are such a small portion of the market that the impact on price is not significant.  In the cosmetic surgery cases, price sensitivity rations care and controls prices because the majority of participants in that market pay the full cost first hand.  Even if all those covered by private insurance were on the HDHP/HSA plan, over 60% of hospital charges in 2006 would have been incurred by patients on the government plans, making up the majority of consumers in that market.

Data used was compiled from the Agency for Healthcare Research and Quality.

Sheridan WY Speech from Tom Hoenig

Although the Jr. Deputy Accountant was rather unimpressed with this speech from the Kansas City Federal Reserve President, I thought there were some excellent observations from the speech that I would like to call further attention to.  The first observation as an update to the often quoted John Maynard Keynes, “In the long run, we are all dead but our children will be left to pick up the tab.”

Unfortunately the overall political apathy among the youth will have them taking on this burden without much of a fight as it is assumed nothing can be done about it.  Alternatively the next generation may be assuming that the actions of today will not cause catastrophic consequences tomorrow and all will be worked out with some political wizardry.

In our efforts to fix the oversight process for our financial system, we should not misdiagnose the patient. Unfortunately, I’m afraid we are witnessing some regulatory malpractice now. The emphasis on reform at this moment is to change the structure of the regulatory system rather than address the fundamental weakness of that system.  Leading to this crisis were a series of steps that eliminated or compromised financial standards that had served to support sound financial practices for generations.  For the most part, these rules were simple in form, understandable and enforceable.  They served to constrain excessive leverage and undisciplined growth using simple leverage ratios, and focused on fundamental underwriting standards such as limits on loan-to-value.

It seems that he’s saying we are taking a sledgehammer to a thumbtack.  Essentially the problems that got us into this mess were not gaping regulatory loopholes, but rather small cracks that were widely exploited.  Whether he is right or wrong about this, a proper understanding of the problem is necessary before a solution can be appropriately prescribed. We have huge symptoms to treat, but the underlying problem may not be so large as the symptoms imply.

Capitalism is a process of success, failure and renewal, and for it to work properly, institutions must be allowed to fail, no matter their size or political influence. [emphasis added]

Amen.  This has been stated before, but it’s nice to see it coming from the inside rather than the outside.  He goes on to talk about the “implied subsidy” of institutions that are too big to fail and how they will suffer “moral hazard” from this implication.  Going on to talk about the problems with our trade imbalance there is another learning point for the country.

At it’s peak [the annual trade deficit], this equates to almost $900 billion that the U.S. has borrowed from the rest of the world on an annual basis.  If this were being used to finance productive investment, I would not be overly concerned because the returns we earn could finance the cost of borrowing.  Unfortunately, however, a large share of U.S. imports is for consumption.

So here we draw the good debt/bad debt distinction.  Do we have anything to show for all this money we spend or is it frittered away on cheap trinkets and improved national distractions?  This combined with a nearly nonexistent savings level shows that for the most part we have run up huge debts to fund an expensive lifestyle, not debts to fund entrepreneurial activities or innovative endeavors.

We’re funding safety nets and busy work while the less developed world invests heavily to catch and overtake our position.  If we continue to kick this can down the road there will be a tipping point where our national credit dries up and there won’t be enough cash flows to tax it out.

Please sir, may I have some more?

To: Hank P.

CC: US Congress

BCC: US Taxpayers

Subject: Financial Crisis


Dear Hank,

My balance sheet is starting to look like an investment bank as my debt to equity ratio dives into negative territory, because the market value of my assets is neither higher than the historical cost nor the leverage used to purchase them.  I have invested heavily in human capital through education generating some additional long-term liabilities with no recognizable intangible asset as these costs are expensed as incurred.  However, I am sure you understand that my current dilemma is mostly due to the under-exuberance in the current market and not a fundamental change in the intrinsic value of my personal enterprise.

I know it seems my main street issues are miniscule compared to those you are dealing with on Wall Street, but really they are the same issues with scale being the main difference.  I will not get rewarded or even have a safety net for the poor decision making I have exhibited leading to my negative cash flow, and I will learn to make better decisions next time.  Regardless of scale, this is the lesson of the free market.

Finally it was interesting to see how your financial emergency turned into an oinking good time on capital hill as they padded an extra 15% onto your already generous figure to raise the votes needed for passage.  I guess these are just some ‘brokerage fees’ needed to get the deal done.  I am sure my grandchildren will look back on this event fondly when they are still trying to make the interest payments on an increasing Federal debt load and still have enough money for the freeloader programs.

Thanks for your consideration,

Personally upside down taxpayer that’s not getting bailed out

Charting Value

One of my teachers told me to draw a picture to better understand a problem.  So this crude chart is my attempt at making an economic depiction of the value pricing proposition compared to the hourly billing model.  Your service generally has a set value to the client, which is the maximum price they are willing to pay for your work.  If your price is based on hours worked as shown by line P, then as your hours increase, your price increases according to the rate. 

So long as your total hours keep your price under the value line, you will easily collect what you bill, as the client knows they would have paid more and feel they have received your services at a discount to their value.  However, if your hours put you at a price point above the value line, the client will either pay grudgingly or attempt to negotiate back down to the value line.  If you are consistently over this value line, you will encounter haggling with clients who don’t want to pay your price.

If you are consistently under this value line, then you are always leaving money on the table that the client would have given to you if you had asked for it.  This scenario is why value pricing increases profitability.  The efficient service provider is punished in an hourly pricing model (same profit margin with less total revenue), but will be rewarded in a value based model with a higher profit margin and higher total revenue.

Good economics dictates that firms wish to maximize profit, not billable hours.  Be efficient, deliver great value, and make obscene profits by pricing for value.

Taxation from our representation

Apparently we do not have high enough taxes to finance the wealth of social programs that the Congress would like to propose to the nation.  It seems that there has been an unholy appeal to the poor to vote themselves raises on the backs of the ‘rich’ or the corporations who have too much and share too little.  Our nation, once a highlight of individualism and the achievements of rather free capitalism, slips further into socialism as big brother rocks the cradle and the populace drifts to sleep.

Economic crises bodes well for making promises of ‘free’ medical care for all and other ‘free’ or increased entitlement programs to those who feel they are in need.  It’s easy to sell boogieman insurance when people believe there are monsters in the closet. 

It is becoming increasingly clear that regardless of who becomes the next president of the United States, there will be higher taxes, it is merely a matter of the type of taxes levied.  Let us not forget that no matter who the tax is levied against, it is the American people who will pay this tax either directly or indirectly.

National sales tax

I have been contemplating the idea of a national sales tax for some time now.  As an accountant, this would definitely decrease our workload with regard to income tax filings if we were to replace the income tax system with a consumption tax.  However, I can see some real benefits from a national sales tax:

  1. Decreased administrative burden on the taxpayer (just like with state and local sales taxes, the administrative burden would be on the business, not on the consumer).
  2. Increased dollars for consumption in the economy as the cost of tax preparation is decreased (filing additional sales tax reports would likely be much less costly than the enormous number of income tax returns filed now).
  3. Increased efficiency in funding the government (the government is inefficient enough the way it is, they way it collects revenue should not be so inefficient as it is now).
  4. More transparency (a sales tax is rather up front when you purchase goods rather than being buried in how one defines income and deductible expenses in an income tax system).
  5. Reduced favoritism (there may still be favoritism based on what is defined as a taxable sale).
  6. System is still effectively progressive in actual dollars as the wealthy consume more than those with less means.
  7. Encourages citizens to save rather than spend (instead of penalizing earning more).
  8. May help differentiate between luxuries and necessities (American consumers are confused about the difference between what the ‘want’ and what they ‘need’, progressive rates on luxury items could help clarify this to some).

At the end of the day, the purpose of taxation is to fund the government in a way that does not place undue burden on the citizens.  I do not think it matters much to the citizens the way the government is funded.  However, it seems the government likes to be funded in the way that allows it to exert the most control over it’s citizens.

America, we can’t handle the truth

I was amazed at the grilling Phil Gramm took for observing a fact about the American public.  Tossed under the bus so quick he hardly saw it coming at him.  The fact that Phil Gramm had to be tossed aside so quickly is a testament to the degree of truth in his comments.

The financial hardships being felt by Americans around the country are in no way comparable to those suffered during the great depression.  The metrics on our economy are not great right now (especially if you change the way we calculate a few things), but the wheels have not fallen off yet and we are not suffering a great detriment to our way of life.  Thus I agree that we are over-whining and under-solving with regards to the problems at hand.

We are told by financial advisers to diversify, but we have put all our transportation energy eggs in one basket, and those eggs and the basket come from countries that don’t care about us and may even harbor resentment and hostilities towards us.  We need to diversify our energy portfolio and not look for one magic bullet to solve all the problems.  In interests of national security, we should make sure that this diversification also leads to energy independence so that we can act for what is right in the world rather than for what keeps us moving.