That Was Fast II

As I wrote in July, the Democrats' policies are so bad that in some instances the deleterious effects occur very quickly and clearly.

This isn't so with many government policies, where the negative consequences can take to manifest themselves and can be obscured due to the passage of time and the complexities of many economic issues.

So a policy whose negative effect is so clear and quick must really be bad to so qualify.

And Obama's healthcare debacle does so. This week, new regulations took effect requiring insurance companies to issue insurance for children without considering pre-existing conditions, known as guaranteed issue.

While that sounds nice, the result has been that most of the major insurers this week stopped issuing children's only health insurance policies.

Why would the insurers do this? Because if a person is guaranteed to be issued a health insurance policy without taking into account pre-existing conditions, nothing stops the person from getting the policy until a medical condition arises. So insurance tends to be bought only by sick people, with those needing the most expensive coverage most likely to buy, driving up medical claims costs per customer. The insurance companies then have to increase premiums to cover the cost, which provides greater incentives for people to wait until a medical condition arises worth paying the increasing premiums. This is a vicious cycle, and leads to the destruction of the market.

And it just did for children's only policies.

To make this point more clear, let's use a very simplified example. Health insurance in reality is more complicated than my example, since there are many possible outcomes beyond two that I use for this illustration, and there are co-pays and deductibles. But this demonstrates the essence of the problem.

Imagine there are two outcomes for consumers regarding their medical costs for the next year: they either have no medical costs for the year or they have a major medical condition that costs $100,000. And let's say for the overall population that there is a 10% chance the catastrophic problem occurs and 90% chance there is no cost. And let's add that there is no way to test or screen to see if customers have this medical condition before they buy insurance - in other words, you only know you have this condition when symptoms develop.

If the insurance company can sell insurance to a broad, representative sample of the population, on average it will incur $10,000 of medical costs per customer, since $10,000 is the expected outcome (10% chance of paying $100,000 and 90% chance of paying $0).

Let's also assume the insurance company needs to add 20% to its medical costs to cover its overhead and earn a profit. So in this case, the insurance company would charge $12,000 for an insurance policy. Customers would have a strong incentive to buy insurance, since if they went without insurance they would have a 10% chance of facing a huge medical bill of $100,000. So insurance serves its fundamental purpose, which is to protect against large, uncertain risks.

But now imagine that the law requires guaranteed coverage and prevents insurers from using pre-existing conditions to deny coverage.

Smart customers will realize they can avoid paying $12,000 when they have no major medical problem and can instead wait until the condition develops - and then buy insurance for $12,000 to pay $100,000 of medical bills. That's a great deal for the savvy customer.

So after some period of time, the behavior of savvy customers will change the sample of people buying insurance - healthy customers tend not to buy insurance and those who develop symptoms rush to buy insurance - so now 20% of the insured population develops the major medical problem. The insurer's expected medical cost per customer is now $20,000, and now charges $24,000 for insurance coverage - up from $12,000.

Now the initially unsavvy customers - people who are representative of the overall population in terms of having a 10% chance of developing this major medical problem - buy less insurance, since the cost is now $24,000 but there chances of paying $100,000 are still the same 10%.

As these customers drop insurance, the percentage of actual customers who have the major medical problem further increases. If the pool is now comprised 40% of those have or develop the medical problem, the expected medical bills are now $40,000 per customer. This leads to higher prices for insurance, which then provides more reason for customers to only buy insurance when the medical condition arises.

The result? The insurance company stops selling guaranteed issue policies since the market breaks down.

And this is why the health insurers stopped selling children's insurance this week.

We can thank ObamaCare for this and many more gifts to come.

Now They Tell Us

The Obama administration has proposed expanding the government's ability to wiretap emails and internet services like Facebook by requiring technology changes to allow the wiretapping to occur. This reflects the tremendous growth in communicating through the internet as compared to phone service in the past.

In principle it seems to be a reasonable proposal, since the government still has to go through the normal legal hurdles to obtain a wiretap.

But it is another about face for a Democratic administration, given the enormous abuse the Bush administration took from Obama and fellow Democrats for conducting surveillance, such as wiretapping, on potential terrorist communications.

A Fearful America

The Labor Department announced that the unemployment rate rose to 9.6% as the economy lost 54,000 jobs in August.

Normally at this time in a recovery, unemployment is declining and GDP is growing quickly.

What happened? Businesses and investors have become very cautious about making new investments, whether in the form of spending capital on new factories or increasing expenses to expand operations or develop new products lines. With tax increases looming, the further socialization of the healthcare industry underway, an unprecedented monetary policy that stokes the fears of future inflation, the assault on the financial services industry through new legislation and its demonization by politicians and the media continuing, non-defense government spending running at unprecedented levels, the increase in the minimum wage pricing some workers out of jobs, and previously negotiated free trade agreements stalling in Congress, businesses and investors have many good reasons to be nervous about the future.

One manifestation of this fear is the mountain of cash that American companies are keeping on their balance sheets, at over $2 trillion in aggregate. In more optimistic times (i.e., during other recoveries from recession), companies would be rushing to invest that money, or return it to their shareholders to invest, which would be the most effective stimulus plan of all.

But that requires a confidence in the future that is lacking. Another "change" that we can thank Barack Obama for.

Repentant Sinners

If Barney Frank doesn't waffle, his recent statement that Fannie Mae and Freddie Mac "should be abolished" may be the best thing a Democrat has said in a long time.

If Canada can have home ownership rates above those of the U.S. without their equivalent of a Fannie Mae or tax subsidies for mortgage interest, so can we.

And then we can avoid a housing-led financial crisis in the future.

An "Honest" Politician

New York City councilman Jumaane Williams made an interesting admission the other day: he said he favors allowing elected officials in New York City to serve three four year terms, instead of two under term limit restrictions, so they could receive a pension - which requires 10 years of service.

Of course, Williams' admission is a damning indictment of a political class that seeks money through the political system - and speaks to a significant motivation behind many people's interest in politics: the hope to secure money for oneself through the political system.

In the late 1990's, a former Democrat from Oklahoma said that what many people don't realize is that a critical motivator behind many Democratic politicians' support of further government spending is the desire for them personally to benefit from that spending - in the form of more jobs for elected and appointed officials.

Councilman Williams makes that point crystal clear.

Misplaced Priorities

A federal judge ruled that six Somali pirates can't be charged with piracy under U.S. law. The six are accused of attacking a U.S. Navy ship off the Somali coast.

While it may seem like a bizarre ruling, the judge appears to have made the correct legal ruling. The controlling case is a U.S. Supreme Court ruling from 1820 that defined piracy as "robbery at sea". Prosecutors tried to expand this definition of piracy to includes any violent acts at sea, since the pirates were thwarted in completing their attack so no robbery occurred.

But the judge didn't bend to political expediency or use today's norms to decide the case: his decision rests on the law as it stands.

The pirates do face other charges with lesser penalties, but what this case illustrates is the need for a new, revised law to govern piracy in the U.S.

So while the Obama administration has been in extremely active in promoting legislation to reorder our economy, they have dropped the ball on promoting new laws to protect us from modern threats.

The More Things Change, the More They Remain the Same

Fannie Mae and Freddie Mac, the two government-sponsored entities that were designed to promote home ownership, have been the biggest drain on the government's coffers by far in the TARP bailout. The government has poured $148 billion into them so far, on top of guaranteeing trillions of dollars of their debt.

These staggering losses are a manifestation of their seminal role in fueling the housing bubble and ensuing financial crisis. The government used them to subsidize housing, and in Democratic Congressman Barney Frank's words, he wanted to "roll the dice" with Fannie and Freddie to promote home ownership among low income people.

That "role of the dice" led to our catastrophic financial crisis.

So you might think, in a rational world where the Obama Administration claims it wants to prevent future financial crises, that the government would recognize that subsidizing the housing industry and mortgages should end, so bubbles are less likely to develop and so taxpayers are no longer on the hook for bad mortgage loans.

But the power to influence and control the housing industry, and to direct subsidies to favored constituents, is to tempting to the Obama crowd. Treasury Secretary Timothy Geithner has kicked off the administration's discussions of "housing reform" by saying that ther government should retain a role in the the mortgage finance business. Moreover, Geithner says one reason for this need for a government role is that 90% of new mortgage loans made over the past three years have had government support - suggesting that the private market can't provide sufficient mortgage lending.

What it really means is that it is hard for private mortgage lending to compete with government subsidized lending. Canada, which despite its left-oriented government policies has no equivalent to Fannie and Freddie, has no problem providing private mortgages with home ownership rates at or above those of the United States.

The government needs to end its myriad of subsidies for housing: it needs to wind down Fannie Mae and Freddie Mac and other government-sponsored mortgage supporters; it needs to repeal the Community Reinvestment Act which promotes non-economic lending; it needs to end the mortgage interest deduction to reduce the incentives to borrow; and it needs to end the favored tax treatment of capital gains on housing vs. other investments.