As Long As It's An Entitlement It Will Be A Ponzi Scheme

In a post yesterday I gave a couple of reasons why Medicare is a mathematical Ponzi scheme.  To get a deeper understanding of how this comes about, you need to follow the constant efforts of advocates to game more money out of the system, and the futility of government attempts to push back.  Indeed, one wonders if the bureaucrats who run the program have any interest in looking out for the taxpayers, when their short term interest is in seeing the program expand, and seeing themselves move up in a bigger and bigger organization.

The legal profession now has a specialty called "Elder Law," largely consisting of people who make a living out of figuring out how to get more money out of Medicare and Medicaid.  The American Bar Association has an entire Elder Law section.

Here is a completely mind-numbing article from today's New York Law Journal on one of the hot Elder Law topics of the day, the Medicare "improvement standard."  As you may have been unaware before now, Medicare pays for home health care aids for eligible people, but under HHS's Medicare Benefits Policy Manual there is an "improvement standard" to determine what is actual medical care -- the concept being, if care doesn't have the prospect of making you better, it isn't medical care that should be covered by Medicare. 

Lawyers challenged this criterion in a nationwide class action brought in Vermont.  They found a highly sympathetic plaintiff, Glenda Jimmo, 71 years old, with severe diabetes, legally blind, and with a leg partially amputated.  Medicare denied her claim for home health care aides, saying that the claim wasn't really for medical care because it had no prospect of improving her condition.

Result:  after losing one motion, the government gave up.  The case has been settled on a nationwide basis, to be approved by one judge in Vermont, under which Medicare will revise the Benefits Policy Manual to make it clear that "skilled nursing services" are covered whether or not improvement in condition is expected or hoped for.

There is no mention in the article of any estimates of the cost to the government of this settlement.  It is easily in the tens of billions of dollars, more likely hundreds of billions over a long enough time period.  Our only gatekeeper is a judge in Vermont, undoubtedly carefully selected by the plaintiffs, who in any event probably won't even be given any information about the financial consequences of the settlement to the government.

Now you are undoubtedly thinking, why does Ms. Jimmo care about getting this payment from Medicare?  If she's really as badly off as described, wouldn't Medicaid pay for the aides?  And now we get to what this case is really about, although not discussed anywhere in the article:  If a service is covered by Medicare, it is covered even if you are a billionaire. If it's Medicaid, you must use up your assets first, or at least most of them.  Ms. Jimmo therefore has some assets that she doesn't want to use up paying for her aides.  The most common such asset would be a house, which the elderly person would much prefer see passed on to her kids at her death rather than used to save the government from paying for the aides.  Also at issue could be  money or other investments, in some cases lots of them.

These issues never get discussed in these articles or the cases, which proceed as if the immense cost is not even a consideration in the outcome. Who could be so cold-hearted as to deprive the blind and amputated Glenda Jimmo of her healthcare aide? But if the government must pay for all  healthcare costs for  even millionaires and billionaires while they pass the wealth on to the children, what is the chance that Medicare costs will not spiral away until they swamp the entire economy?  Is the government's credit card really infinite?

Ponzi Schemes

Are social security, Medicare, and Medicaid Ponzi schemes?  (And how about Obamacare?)

It depends on how you define the term "Ponzi scheme."  Defenders of the entitlement programs say they are not Ponzi schemes because Ponzi schemes are  illegal whereas the entitlements are not; and because in Ponzi schemes the investors are deceived about the true nature of the investment, whereas with the entitlements it is all laid out right there in the statute books.

I'll concede both of those points, but those points are not really important.  The important aspect of the Ponzi scheme is its mathematics.  The key characteristic is that the liabilities of the scheme increase at a geometric rate that is faster than any possible ability to attract new money into the system.  In that sense, Medicare and Medicaid are clearly Ponzi schemes.  Social security has Ponzi scheme aspects, although not beyond cure by fixes that are at least theoretically possible.  For Obamacare it's too early to tell, but the odds that it will prove quickly to be a Ponzi scheme are exceedingly high.

Medicare spending in 1990 was $107 billion according to this article.  By 2011 it reached about $563 billion per a chart here.  That's a compound annual growth rate of over 8%.  The economy is growing at around 2%.  In a good year it grows at around 4%.  In a spectacular year it grows at around 7%, and we may never see one of those again.  Medicare grows at 8%, compounded, year after year after year. 

Here's a not-too-hard math exercise:  if Medicare is currently about 4% of the economy, and grows at 8% per year, and the economy grows at 3% per year, how many years until Medicare is larger than the entire economy?  The answer is shorter than you might think:  around 70 years.  At that point everyone works all the time, but we have no food, no housing, no clothes, no vacations, and not even any medical care except for old people.  Everyone works just to provide the medical care for the old people.

That scenario won't happen because Medicare as currently structured will fall apart, just like the  Madoff scheme fell apart, well before we get there.  But how soon:  10 years, 20,or 30?  Nobody knows.  But it will happen because there is no way around the math.  And by "Medicare falls apart" I mean the Federal government falls apart, unless they have somehow separated themselves from paying for Medicare in the meantime.

You ask, why can't we just slow it down, say to the rate of inflation or slower?  Good luck with that.  The reason is that the incentives are perverse and every one of the millions of people working in the healthcare system has the incentive to try to get as much money out of Medicare as possible.  With Medicare, every provider tries to raise his price every year by inflation or more, but that is only one of several factors at work.  A second factor is that people live longer, so there are more and more beneficiaries.  And then there are the new treatments.  If you come up with a new treatment, you don't charge just last year's price plus 3% because there was no last year's price.  You can set a new price at whatever you think you can get away with.  The government has no ability to push back because you will be able to show that somebody died when they refused to pay.  That's how we end up with new cancer treatments costing $100,000 for a course of treatment.

But you ask, with every good sold in the private economy, the producer has the same incentive to get as much money as possible out of the consumer.  So why don't sales of every consumer good turn into a Ponzi scheme?  The answer is that private individuals can't afford the price.  If Apple tries to price the new iPad at $100,000 the way a pharmaceutical company prices a new drug, it will sell about six of them and lose money.  That's why you see new electronic products coming out at high prices ($10,000 for a flat screen TV) that then drop quickly over time.  The rich buy in the first round and the increasingly less rich in subsequent rounds at lower prices.  In Medicare, every course of treatment is sold to the richest buyer of all, the one with the infinite credit card who can't say no when someone is dying.

I can confidently predict that until Medicare is reformed in a way that it must meet a budget and people cannot just get whatever treatment they want, then it is a Ponzi scheme (in the mathematical sense) and it will collapse.

Can't Wait For The Second Term

Now that Barack Obama doesn't have to spend 24/7 running for president, is he going to get back to the job and, say, actually try to tackle the problem of the debt?

If you think he'll do that, I say you don't know the man.  Here's my prediction: He's basically going on vacation.  Lots of Hawaii, lots of golf, maybe a top-notch European resort playground for Michelle and the kids.  Lots of pomp and circumstance with himself as the center of attention.  Lots of state dinners.  Occasionally he'll take a couple of hours and give a speech blaming whatever problems there are on the Republicans.  What are we going to do about it?  He's got the job for four years and he can't be fired except for a process way too cumbersome to even try.

Meanwhile, which country has more government debt per capita, the U.S. or Greece?  It's the U.S. by quite a wide margin - $53,378 per capita versus $39,384 for Greece.  The news from Greece is all riots and arson.  The EU is demanding a two-year increase in the retirement age before granting the next bailout.  The horror!  Let's burn the place down!  Plenty of good photos at http://www.powerlineblog.com/archives/2012/11/back-to-work-the-debt.php

When your livelihood comes from making money in a private job, and you want to make a better livelihood, you can work longer or harder or better or smarter and make more money.  Result:  more harder and better work, more goods and services produced, better off populace.  When your livelihood comes from hand-outs from the government, and you want to make a better livelihood, you do it by putting political pressure on the government.  Result: riots.  No reason to work at all, because there are no rewards to be had there. 

Can They Teach Politicians Any Basic Economics?

Every day everything is rationed by the price system. It seems to be a requirement of being a politician that you don't understand how that works.  When there is any kind of disaster, they go completely crazy.

Here we have our Attorney General, the ever-grandstanding Eric Schneiderman, investigating "Sandy price gouging."    "Our office has zero tolerance for price gouging," he is quoted as saying.  It seems that one store raised the price of a bag of potatoes from $3 to $7.  A gas station raised the price of a gallon by 83 cents.  Would the world be better off if the stores sold out of potatoes or gas on the first day and then nobody could get more at any price?

New York's General Business Law Section 396-r prohibits charging an "unconscionably excessive price" during an "abnormal disruption of the market." Is $4.89/gal an "unconscionably excessive price"?  In California they pay it every day.  As for New York, you'll have to ask Schneiderman to find out.

Meanwhile Mayor Bloomberg calls for gas rationing.  You need rationing because without a price mechanism to allocate the gas, you'll immediately run out.  How about hiring a few thousand bureaucrats to hand out ration cards?

The genius of the price allocation mechanism is that there is always supply, without having to go through a bureaucracy, if you can pay the price. 

California Speeds Up Its Drain-Circling

I suppose that congratulations are in order to California, which passed Governor Brown's income tax increase measure by 54-46.  Proposition 30 will increase top marginal state income tax rates from 9.3% to 10.3% on income above $250,000, 11.3% on income above $600,000, and 12.3% on income above $1 million.  The increases are retroactive to the beginning of 2012 and will be in effect through 2018.  The measure also includes a sales tax increase.

Dan Mitchell says "I feel safe in stating that this measure is going to accelerate California's economic decline."  Agreed.

Changes in behavior resulting from extra taxes often happen slowly and can be somewhat hard to spot, but let me mention a couple of examples:

(1) In 1975 when I moved to New York, New York State's marginal income tax rate was 14%; New York City had an additional tax with a top rate of about 4%.  No state has anything close to that 18% combined rate today.  Those top marginal rates kicked in at very low income -- if recollection serves, I was paying the top state rate within my first year as a law firm associate, earning just over $20,000 per year.  At the time, New Jersey and Connecticut had no state income taxes whatsoever.  What happened?  This is the era when Greenwich Village was seedy, a new major corporation announced it was leaving New York every month or so, and the Bronx was burning.  Despite the high tax rates, the City defaulted on its debt.  New York City's population dropped by over 800,000 from 1970 to 1980.  Meanwhile, the New Jersey waterfront right across from us took off with one new tower after another, while the seemingly equally desirable Brooklyn waterfront across from the other side of Manhattan had not a single new building go up for decades.  And downtown Stamford, CT (about 35 miles away) also boomed with one new office building after another.

In the intervening time, what?  Starting in the late 70s New York State (first under Gov. Hugh Carey, but also under his successors Cuomo and Pataki) lowered the top state marginal rate in many steps until it got below7%. New Jersey adopted its first state income tax in the late 70s(after which then-Gov. Jim Florio was immediately ousted from office), and has continued to increase its top rate

until it is now 8.97%. Connecticut introduced its first income tax in the early 90s, and has increased it since until the top rate is now 6.87%.

The combined New York State/City top rate (State recently went back up to about 9% on a "temporary" basis) is still somewhat higher than either New Jersey or Connecticut, but instead of the ridiculous 18% to zero, we are now within striking range of competitiveness.  Results:  today Brooklyn is hot and Jersey City is ice cold.  The Bronx is no longer burning, Greenwich Village is fancy, and even the Lower East Side is gentrifying.  The Manhattan business community resumed growing in the 80s, and today new businesses have replaced the corporate headquarters that fled in the 70s.  Within the last year a major corporation (UBS) that had left Manhattan for Stamford years ago announced that it was planning to return.  (As of now, Connecticut has apparently retained them by offering some big-time "incentives" aka bribes.)

OK, there are other factors that went into this.  Public safety was certainly one.  Another was that, as bad as is the management of the New York State and City governments,New Jersey and Connecticut are clearly worse.  But there is no doubt that the 18% income tax rate differential was killing New York City.

(2)One other brief example.  I once was given a tour of Philadelphia that took us to City Line Avenue on the city's west border.  The side outside the city limits was lined with new office buildings.  The other side of the street consisted of decrepit buildings and vacant lots. 

The interesting question will be, how much of the projected increase in revenues will California actually achieve?  Good luck California! 

The Ascendancy of the Basket Cases

Barack Obama has won the election.  That means that my first official effort at predicting an election result has come out wrong.  However, I did hedge my bets by asking questions to both Obama and Romney about what they would do after the election.

To me the most remarkable thing about the election is the extent to which a relative handful of "basket case" cities determined the election by giving huge local majorities to Obama.  What do I mean by "basket case" cities?  They are the poster children for the failure of government spending to improve people's lives and incomes, cities in decline where decades of government programs have brought only shrinking populations, vast vacant zones, fleeing businesses, high crime and low income.  Yet they provide very large electoral majorities for the candidate promising to further expand the failed programs.

Consider Ohio.  Cleveland is the classic basket case.  Its population has gone from a peak of 914,808 in 1950 to just 396,815 in 2010.  It lost 17% of its remaining population between 2000 and 2010!  Second worst basket case in Ohio is Toledo, which has gone from 383,818 people in 1970 to 287,208 in 2010.  According to the latest figures I can find here, Obama won Ohio by not much over 100,000 votes; his margin in Cuyahoga County (Cleveland) was about 236,000, and in Lucas County (Toledo) was about 61,000.  In other words, his margins in just the two worst basket case cities (with their surrounding counties) provided his entire margin of victory in Ohio and then some.

How about Michigan?  Detroit certainly qualifies as a basket case; indeed, if there were a contest for worst basket case in the U.S., the two finalists would have to be Cleveland and Detroit.  Detroit's population

hit a peak of 1,849,568 in the 1950 census, and by 2010 had fallen to 713,777.  The population decline for just 2000 - 2010 was an astonishing 25%!  Detroit has famously stopped providing most city services to large vacant zones within the city limits.  While I'm having some trouble finding exact figures at this hour, and Obama won Michigan handily, it looks like almost his entire margin of victory, if not all of it, came from Wayne County.  If it did not, then including the results from a couple of smaller Michigan basket cases (e.g., Flint,Pontiac) would be enough to provide the entire margin of victory in Michigan.

Next, Chicago and Illinois. You may ask, is Chicago really basket case? If you go there, it will not appear to be one, at least on first impression. The downtown is in good shape, with new condos and office towers; the near north side is upscale and attractive.  But the population has gone from a peak of 3,620,962 in the 1950 census to just 2,695,598 in 2010.  How is that manifested?  Try taking the Green Line el south from the loop to the end of the line.  After being told by your hosts that you should never attempt such a thing, you will observe huge deteriorated public housing projects surrounded by vast vacant areas and abandoned private buildings.  For anyone willing to open his eyes and look around, Chicago demonstrates "the misery and ruin that well-intentioned liberals combined with aggressive public sector labor unions inflict on the poor they ostensibly want to serve." 

And Illinois is in a completely impossible position with public pensions, where systematic over-promising and under-funding has made default within the next few years a virtual certainty. How does that turn out in the election? Obama won Illinois by about 825,000 votes. His margin just in the city of Chicago was about 679,000;and in the remainder of Cook County (Chicago's county) it was about 280,000.  In the city of Chicago, Obama won by an astounding 84 - 15 percent.  So Chicago and Cook County alone provided more than Obama's entire margin of victory in Illinois. 

Just those three examples alone account for some 54 electoral votes, or a 108 electoral vote swing if the voters in the basket case cities had voted in the same proportions as the voters in the remainder of their states.  If that would not have swung the election, add Philadelphia to the mix and it would have.  Or Milwaukee.

Even as the subjects of the dependency society have their cities descend into a death spiral, those subjects continue to vote with huge margins to continue their dependency.  On the scale of entire nations, we have Argentina, Venezuela, Greece, maybe all of Europe.  Can anyone actually exit the death spiral through the democratic process, through being convinced that their better future lies with an opportunity society rather than a hand-out society?  Our next few elections may give us our last chance to find out.

UPDATE:  Final election results from Google.

Ohio:  Obama margin -101,000; Cuyahoga County (Cleveland)  -236,000; Lucas County (Toledo) -61,000

Michigan:  Obama margin - 358,000; Wayne County (Detroit)  -335,000;Genessee County(Flint) - 47,000

Illinois:  Obama margin - 825,000; Cook County (Chicago) - 850,000

Pennsylvania:  Obama margin - 284,000; Philadelphia County - 466,000