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Wednesday, April 10, 2013

White House FY2014 budget differs little from the GAO Baseline

The Whitehouse FY2014 budget appears to differ little from the GAO unrealistic Baseline scenario in proposed spending as % of GDP  that this site addressed here in its analysis of more realistic long term debt projections. The differences would likely not  be  very noticeable in the graphs (it is  a tiny bit higher early on, a tiny bit lower at the end, likely to make the result slightly worse). The  existing page analyzing long term spending based on the GAO forecasts gives a useful picture of the financial mess the US may be in.

 Now that the public has become more worried  about the deficit, one concern regarding  budget proposals from  both Congress and the White House  is whether  their proposals might only be truly concrete for the next year or so and not for the decade afterwards. It may be they are becoming more adept at   rationalizing glowing figures for the future that will never actually appear . That is why the CBO and GAO do more realistic "current policy" scenarios and don't merely rely on the "baseline" figures.  The Chief Actuary for Medicare has called the official Medicare spending projections unrealistic in the past (they are provided to match assumptions they are required to use about future medical prices), and this site has shown the long range Social Security Administration estimates seem unrealistic, and seem to have become more optimistic over time.

All the White House and Congressional budget documents are based on more optimistic estimates of revenue as a % of GDP than is likely, and overoptimistic GDP forecasts.  It is not clear that the cuts proposed by the GOP's House budget will ever happen. They would reduce the deficit, but it wouldn't balance the budget if their optimistic revenue projections aren't met.  It is not clear without more research if those in the both parties in Congress are likely  providing entirely  too unrealistic "baseline" scenarios that are unlikely to happen, or to what degree they truly would be making any sustainable policy shits  in spending that would represent the core of a new  "current policy" scenario. In addition, it is not clear without more research if any of the budget proposals underfund anything over the next decade in a way that will lead budgets to balloon afterwards to make up for it.
 This site may plug   the Senate and House figures into a new analysis, time permitting (thought needs to be given to how they should be extended into future decades, among other issues like whether their spending categories match the GAO forecast used for this sites analysis). It would be useful to see their impact, but there are some other topics to get to first. A more realistic picture may not emerge until after the budget battles have gone further or until  future CBO or GAO long range forecast updates (or better entitlement forecasts) try to resolve what if anything  the proposals really imply for a "current policy" more realistic scenario (rather than just a "baseline") and for spending beyond the next decade.

It isn't very democratic to advocate more federal spending

A new site page has details here.

If you want a task to be performed by government, it is important to consider what level of government it should be entrusted to.  In most cases it isn't   appropriate  to assign a task to the federal government rather than local or state governments.  It is less democratic to have the federal government handle issues. Special interests have too much influence over out of control federal finances because people fail to think through this issue. Details here


Tuesday, April 9, 2013

The huge Obamacare problem almost everyone missed...

Those who haven't taken the time to read the  new site page on why medical prices rise  missed seeing this huge problem that hasn't gotten media attention:

Obamacare gave insurers reason to want medical prices to *increase*

The public was told  insurers spent too much on overhead and profit so the government needed to ensure that most of their revenue went to paying medical claims.  Obamacare requires insurers to meet a "Medical Loss Ratio" (MLR) which compares their spending on medical claims to the amount they receive in premiums. If they don't spend at least 80% of their premiums on  medical claims in the small&individual markets and 85% in the large group market they need to issue rebates to customers to meet that standard.  This provides incentive to restrict overhead&profit, but it also provides incentive for many to increase, or at least NOT decrease medical costs

 Another way of looking at it is they need to spend at least 4 or 5.7 times as much on medical costs as they spend on overhead&profit, otherwise they are breaking the rules and will lose money by needing to give a rebate. They are able to increase profit if they increase medical spending and raise premiums. They can't reduce medical spending much or they'll be punished by needing to give customers a rebate.  It is in their interest to applaud healthcare providers who raise prices, rather than trying to negotiate lower rates to gain customers through lower premiums and increase profit.

The Obamacare site brags there were "$1.1 billion in rebates" this year, which is around 0.1% of total premiums. That was in exchange for an approach which takes away  incentive to control medical costs, i.e.  "penny wise and pound foolish".  Challenge those who support Obamacare to explain whether those who passed it either don't know much about business, or were trying to help healthcare prices rise. The new page detailing the problems in healthcare is long, but challenge Obamacare supporters to read it and see if they can justify   Obamacare afterwards. The page includes some issues few if any  healthcare pundits have mentioned.

The claimed concern over health insurance profits is doubtful since they are one of the least profitable parts of healthcare. In 2008 its profit ranked "35th out of 53 top industries" and by another measure  "the profit margin for health insurance companies was [...] 87th out of 215 industries". A government report notes the "net cost of health insurance" (administration&profit) was the only part of the cost of premiums to  decrease between 2005 and 2009.

Note: the new healthcare page has been polished/updated slightly since its release last week.
See the  page  for details on how government limits competition and drives up prices.

Wednesday, April 3, 2013

Why medical prices rose as fast as disposable income per capita the last 50 years

A new site page details why medical prices rose as fast as disposable income per capita the last 50 years and why Obamacare isn't the answer (including some information not seen elsewhere re: MLRs)

"as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit"

Food is more critical to life than medical care.
You are guaranteed to die after not eating for a few weeks. Yet  most companies don't have "employer food plans" and there is no outcry for "single payer food". Concern over ensuring  the poor can eat  doesn't lead Americans to suggest the government grow   food and run grocery stores and restaurants. Those in poverty are helped to eat through either private charity, government monetary assistance, or   vouchers for food (aka food stamps). The same methods used to ensure the poor eat can be applied to healthcare. If the government is going to help it can provide vouchers for private insurance    rather than using the issue  as an excuse to benefit industry groups.
The former Soviet Union felt   competition was wasteful. They felt food was so important government had to produce it.  Obviously it turned out they were wrong and competition in a free market works far better. Healthcare policy in this country is more complicated than it needs to be since many don't apply that simple lesson.  That complexity hides favors for special interests that benefit at your expense. See the new site page for details on how government limits competition and drives up prices.

Monday, April 1, 2013

Within 25 years interest may be more than revenue

A new site page shows  government data indicates within the next decade the federal government may be spending more on entitlement programs and interest  than it receives in revenue. It couldn't spend money on anything else and balance the budget. Within the next 10-25 years (forecasts vary) simply the interest on the debt may be more than revenue. The budget couldn't be balanced even in theory which means the country would have effectively gone bankrupt   before that. 

Politicians didn't learn enough from the financial crisis. Many people  lost houses when they couldn't afford rising mortgage costs. Often they  overestimated their future earnings and underestimated expenses. Its understandable to dream about what could be done with a higher income, but its best to use conservative estimates when planning budgets.  Federal agencies aren't doing a good   job of  considering the possibility of lower income and higher expenses
Last year the Federal Reserve published a study "How Good Are the Government’s Deficit and Debt Projections and Should We Care?" which looked at the track record of the  Congressional Budget Office projections from the last few decades. They compared them with "random walk" (RW) projections, i.e.   random guessing, and found  that

"the CBO’s cumulative 5-year projections are considerably worse than projections from the RW model; [...]the deficit projections beyond a year were unreliable. Importantly, we found that the projections were biased in the direction of underprojecting the size of the deficit or overprojecting the size of the surplus."

Since the CBO tends to be overoptimistic, it is useful to consider more conservative projections combining other government data. People in business often plan by exploring best, expected and worst case scenarios because they know the future is hard to accurately predict.The new page goes into detail  and provides an interactive graph of future federal finances where assumptions can be changed.

Saturday, March 30, 2013

Social Security forecasts are very unrealistic, we don't have good estimates for what it will cost.

A new site  page is up, or here is an intro:
In the US Treasury's annual "Financial Report of the U.S. Government" released in January 2013, the Government Accountability Office reports that the numbers for Social Security are so problematic it couldn't audit them to even render an opinion, saying: "In addition, GAO issued disclaimers of opinion on the 2012, 2011, and 2010 Statements of Social Insurance (SOSI)".  They don't attempt to audit projections of future finances which are even more problematic, and may underestimate worst caste costs. Their claimed "high cost" scenario is high cost in nominal dollars, but if you adjust it for inflation it becomes the lowest cost scenario. 

  It is important to note the SSA has  a history of not just being  wrong on their expected demographic estimates (which is understandable for a long term forecast), but more importantly being overoptimistic about how much variation to consider for best/worst case scenarios. The 1950 annual SSA report projected US population in 2000 to be worst case 199 million, best case 173 million. In reality it turned out to be 282 million, 42% above their highest projection. Imagine if their real costs turn out to be 42% higher than their current projections. 

The SSA claims to be able to forecast things like GDP yearly growth through 2090  more accurately than 2  or 5 year forecasts have proven to be for the past few decades from the Congressional Budget Office, the Administration, the Federal Reserve and blue chip private consensus estimates.  Their estimates indicate they think they can forecast future GDP even more accurately than GDP is measured. Their projections have questionable estimates, and exhibit overconfidence in the accuracy of those estimates.

Imagine by analogy someone were to document the most sophisticated  weather forecast system existing today. They might provide lots of numbers,  but if it gave a forecast for the weather 1 year from today and claimed it would be off at most by 1 degree we would still be wise to be rather skeptical without better evidence their methods were realistic.
  The US needs to plan for the possibility 
Social Security system could wind up  in far worse shape than it admits since the estimates should be considered far less certain than it claims. For more details see this new site  page

Govt. overestimates future economic growth.

There are reasons to expect  the US economy to grow more slowly in the future than it has in the past. It  doesn't seem to be growing at an exponential rate,  which means its yearly % growth will go down over time.

Unfortunately government entities often perform estimates of future tax revenue, debt  and spending ( e.g. of social security and medicare)  based on   unrealistically optimistic  hopes for how fast our economy will grow.   Private retirement plans are often made assuming future percentage returns on investment will match past returns, which may not be the case for those who invest only in the US.

Supporting details on on this new site page here.