Time to dump retail stocks

Normally I don't recommend stocks, because this is a blog about firm strategies and not about the stock market.

That said, I think now is the time to dump US retail stocks, for three reasons:

• Many fear the US economy is heading to a double dip recession, reducing consumer discretionary spending. For example, the FT reports that last week brought the largest shift by investors to cash in the past 18 months.
• The US will eventually have to solve the problem of high fiscal deficits, and the current administration prefers to raise taxes than cut spending (which it itself increased $0.5 trillion in one year.)
• Employers will be see huge cost increases under ObamaCare, which will be largest in a relative sense for low-wage workers. For example, the White Castle hamburger chain — which pays for most of its employees’ insurance costs — figures that its net income will decline 55% after 2014 due to penalties for its copayments.

Is this a shorting opportunity? There I’m less sure, because I can’t predict the timing of the combined effect. Suffice it to say that I see no upside to retail stocks — at least until a regime change — but lots of downside.

It’s possible that there will be exceptions. For example, perhaps unionized grocery stores with generous benefits that sell basic necessities will escape much damage. However, I’m inclined to say better safe than sorry.

Healthcare reform and entrepreneurship

For about 2 hours today, I was scheduled to appear on the local TV news to provide a commentary on the impact of Sunday’s healthcare bill upon local entrepreneurs. So while waiting for my 1 p.m. (later 2 p.m.) interview, I was doing some background reading to be up to speed.

Alas, the interview was cancelled because the reporter had his story changed, when shortly after noon Google announced that Chinese search users would get uncensored results from Google.com.hk. So my mom will have to wait a while longer to see a video of her firstborn being interviewed as an “expert” on TV.

Preparing for the planned interview, I didn’t see a single credible source on the impact of the Senate bill (let alone the planned changes) on small business — nothing equivalent to the November article in Time magazine about the House bill. The most complete factual source I saw was the Tax Foundation timeline published Sunday, but that was bullet points without links to a description of the details.

Obviously, for business, the economy, and the broader society, this massive change brings tremendous uncertainty, particularly during the period between the bill’s enactment and when the major spending is scheduled to begin in 2019. There will be two presidential and five Congressional elections between now and then — not to mention the low probability that either party will actually enact Medicare cuts that are budgeted as the major cost savings.

For California, there is also the uncertainty as to whether the Federal bill will increase or decrease the momentum behind the proposed single-payer monopoly for funding healthcare that has already passed the state Senate. Presume Arnie (and Meg) would veto such a bill, while Jerry would eagerly sign it.

There are also unresolved questions as to how the various mandates will work, and whether they will result in increased availability (and increased costs) of insurance for small and growing businesses. Even without the law of unintended consequences, I don’t think anyone has a clue as to what the net effect will actually be — even if the CBO did have enough time to do their job right.

However, there are two changes where the results are pretty easy to predict:

• Increased taxes on the “rich”. Those making over $200k (family income $250k) will pay 0.9% more on earned income and 3.8% on unearned income (such as investments). This will cause the wealthy to choose not to realize income, which over time will reduce the pool of money available for angel investments. (How much? How soon? Who knows?) As an added benefit, like the AMT this surcharge is not indexed for inflation, so this surcharge will eventually become a middle class tax hike — particularly in high living cost areas like Silicon Valley.
• The 2.3% excise tax on medical device makers. Why those who produce medical innovations should be taxed to pay for increased spending elsewhere is beyond me, but it will shift startups and investments away from this sector.

Both take effect in 2013, presumably to insulate politicians from political consequences until after the 2012 elections.

Anyone who understands economics knows that if you want less of something, then tax it. But then understanding economics is not a pre-requisite for law school, let alone elected office.

CalPERS is strangely silent

Lord knows, CalPERS (my pension fund) has had its share of problems over the past two years, losing more principal than ever before. (Like most asset-speculating pension funds, if it doesn’t make enough money in the market, either employees or employers will have to raise contributions to pay for promised pensions).

Still, it is strangely silent on the Obama administration’s controversial plan (embodied in the Senate bill) to surtax 40% of employer-provided healthcare over a certain amount ($1,900/month for a family of four).

While framed as a charge on “Cadillac” plans for executives, in reality most of the revenue will come from large employee groups that have been able to negotiate generous (tax-free) benefits — i.e., unions. On Monday, the AFL-CIO finally noticed and opposed this provision.

But why CalPERS hasn’t said anything is beyond me. It is the largest pension fund in the country. Two years ago, it was the third-largest health insurance buyer in the country, but vaulted into second place last fall (after the Feds) due to the GM bankruptcy and downsizing.

So if anyone had an interest in the taxation of employee benefits — and the economies of scale to analyze such proposals — it would be CalPERS. Its web page even offers a collection of web pages related to national Health Care Reform.

But nothing appears about how the two-month-old taxation proposals would impact CalPERS members. How many state employees or retirees have plans that exceed the taxable threshold? Wouldn’t the CalPERS members want to know before their representatives vote on the final measure?

According to CalPERS statistics, in 2009 it paid $5.7b in healthcare premiums for 1.3m current or former public employees (both state and local). For state employees, it pays about 85% of the total cost (although only 80% for current employees).

Are many or most CalPERS employees under the “Cadillac” threshold? From the aggregate stats I’ve seen, it’s impossible to say. However, as an organization CalPERS strongly favors health care reform, and majority of its trustees are appointed or elected by union members or Democrat elected officials.

So is CalPERS hiding bad news to support a political agenda? Or is it too inept to figure out this is an important and relevant issue? Either way, it’s failing its fiduciary duty to beneficiaries and employers, who somehow between them would have to pay the incremental cost of any surtax.

Great healthcare blog

Prof. Scott Harrington of Wharton is an expert on healthcare economics. I learned of him from his detailed op-ed in Monday’s WSJ, and then used that to find his website and blog.

Harrington’s blog provides the best and most detailed economic analysis I’ve found for the current healthcare debate. There have also been excellent heathcare posts at EconLog (a joint blog of several economists). (Econlog, Cato and Heritage are good places to track economic issues more broadly.)

Harrington’s blog pointed me to a dynamic column in Forbes about last week’s latest presidential salvo over transforming the healthcare system. Here are excerpts from the column by David Gratzer, MD:

Before a tense and packed House, the President told Congress:

"Millions of Americans are just a pink slip away from losing their health insurance, and one serious illness away from losing all their savings... And in spite of all this, our medical bills are growing at over twice the rate of inflation..."

That's President Clinton, sixteen years ago almost to the day, in a speech about a complex health-care plan built on government expansion, with billions in hidden costs. Last night, a President--who was only 32 then--is now in the White House, out to prove that nothing has changed in the minds of the Democratic leadership since the Clinton debacle.

President Clinton's health-care legislation didn't fail in 1994 because people didn't want better health care. The White House plan failed because it was too bureaucratic, too complicated, and too expensive.
…
The President (yes, Obama this time) told Congress that "our collective failure to meet this challenge--year after year, decade after decade--has led us to a breaking point." Has it really? When President Clinton conjured similar fears about pink slips and millions losing coverage to Congress in 1993, 15.3% of Americans were uninsured. In 2007, the percentage of Americans without insurance was...15.3%. A solution to this problem is needed, but the fact that it hasn't grown worse is a sign that Congress has time to think, and little reason to panic.

Since President Clinton spoke of health inflation in 1993, health costs continued to rise faster than wages, but President Obama refuses to acknowledge years later that the U.S. health inflation rate is almost identical to rates in government-run systems. Rising costs must be attacked, yes, but if rationed health management can't stop health inflation in Britain or Ireland, will a rush to President Obama's version of HillaryCare do any better?

The entire column (and both blogs) are strongly recommended.

Latest in a series of outsourced economic policy criticism as a cost-cutting move during difficult times.

The great disconnect

John Goodman writes:

All across the country, Members of Congress are facing very angry constituents over the issue of health care. So ferocious has been the response that an estimated two-thirds of the Members are not even going to hold town hall meetings. Reportedly, our elected representatives are shocked.

I don't know why. … Where, you wonder, were the politicians as this anger was boiling over? Don't they have staffers who answer their telephones and open their mail?
…
How did this happen? I think there are three causes.

1. Politicians who don't know anything about health care.…
2. Policy wonks who do not understand the voters.…
3. A very deceptive presidential campaign … that made these promises: Universal coverage, … Paid for by taxes on the rich…; and If you like the health plan you're in (which 87% of Americans do) you can keep it

…
Now comes the surprise from Capitol Hill: Forget everything we said during the election. We really didn't mean it after all. In particular:

1. Whereas the campaign mantra was universal coverage ("we're the only developed country that doesn't insure all its citizens"), that term is almost never heard any more. The clear goal now is to nationalize the health care system ("we're the only country in the world that doesn't have a national system").
2. Far from being left alone if you like the plan you are in:
   1. You and your employer are going to be heavily taxed if your insurance doesn't conform to the plan the federal government is designing.
   2. You, along with millions of other Americans, may lose the plan you like and be pushed into a health insurance exchange where the premiums are likely to be higher than what you now pay and health plans have perverse incentives to underprovide to the seriously ill.
   3. Costs cannot be controlled unless we all get less — fewer tests, fewer exams, fewer services — with Barack Obama's grandmother's hip replacement being Exhibit A.
3. Far from escaping the financial burden of reform, it now appears that everyone will be burdened — from the elderly to the casual consumers of soda pops.

To lighten up the harsh and specific criticisms, the blog posting also included a funny reference to the oldie-but-goody “Shout”.

I might disagree with the “deceptive” part. My reading is that there are many on the left who are economically ignorant (perhaps willfully so) and made promises without adding up all the numbers — math, accounting and economics not being strong suits for most lawyers and politicians (left or right). So when Sen. Obama attacked Sen. McCain's proposal to tax expensive healthcare plans (which may end up part of ObamaCare), the political operatives making the decision (and perhaps the senator) didn’t realize the corner they were boxing themselves into.

Goodman — who has claim to be the “Father of Health Savings Accounts” — edits the Health Policy Blog where the article appeared. (He is not to be confused with the movie actor or Marine general). As his blog demonstrates, Goodman is clearly a healthcare policy wonk, but one from a free market perspective.

In a WSJ.com column on Saturday night, Goodman added additional thought on the public frustration:

For the past two months the National Center for Policy Analysis (the think tank I run) and Salem Communications (which employees such talk-show hosts as Mike Gallagher, Bill Bennett and Michael Medved) have been sponsoring an online petition at www.freeourhealthcarenow.com for those who wish to express their opposition to nationalized health care. In the process we've collected more than 1.1 million signatures and we're in email communication with many on a weekly basis.

These are a very diverse group of people. … For the most part, these individuals are not funded or organized by anybody. They really are grass roots. Sure, there may be a few top-down "astroturf" groups and some special-interest groups that are secretly gleeful. But there is no way the kind of spontaneous outpouring we've witnessed could be bought or organized by anyone.

Why are they so angry? The reasons are manifold, but the single biggest reason is the arrogance of our elected officials in Washington. Think about it. For the past seven months a small group of politicians has been meeting behind-closed-doors with powerful special interests to decide whether you will be able to keep your current insurance, where you will be directed to get new insurance and at what price, what fines you and your employer will have to pay if you don't conform, and how they're going to get your doctor to change the way he or she practices medicine. In the process, they never asked you what you thought about anything. If you are not mad about this, odds are you don't understand the situation.

A leading healthcare economist, Goodman not only sees the problems that ObamaCare is trying to solve, but also the new ones that it will cause.

As I see it, that’s the chronic problem with this (and several other) administration efforts to ram through solutions while they have the votes. The real world is messier than the idealized view used to justify the legislation, and the proposals to expand government have not seriously considered the serious side effects they cause (most noticeably adding trillions to the national debt.) Frankly, most economists are being ignored in favor of inside-the-Beltway political operatives who favor command-and-control solutions, achieved in a once-in-a-lifetime crisis opportunity that won’t be allowed to go to waste.

In his WSJ piece, Goodman concluded:

In an off-the-cuff answer to a question on ABC's nationally televised White House infomercial, the president said we're only talking about people giving up care that is "unnecessary." Yet no patient, no doctor, not even the most liberal person in the country thinks the government can pull that off without a glitch.

In truth, there is a deadly serious issue here: How do you get rid of waste and inefficiency without denying people care they really need? The answer is not easy. No other country has found it. And if the president wants to tackle this challenge he, not his opponents, bears the burden of proof to show how that will work.

Yet far from accepting this responsibility, the White House is ducking the issue. …

The new tactics it is employing show the White House is completely out of touch with the American people. Those who attend town-hall meetings know they are not being organized or funded by anyone. And when the administration attacks their character and their motives and intentionally distorts the truth, it only adds to the anger people already feel.

Continuing blogging cost reductions through outsourced economic criticism

Health reform vs. biotech innovation

A major reason for the high cost of US healthcare is that Americans pay full prices for brand new drugs that are either not available in other countries or (due to monopsony buying power) sold at a vastly reduced price. We have an American pharmaceutical (and now biotech) industry because of this policy, and we get solutions before anyone else, but effectively American consumers subsidize the rest of the world.

Without healthcare reform, one of the biggest healthcare policy questions before Congress would be establishing the policy for generic biotech drugs. Unlike small molecule (chemically produced) drugs, it is much harder to establish the biological equivalence of large molecule biologics (which tend to be protein-based created using recombinant DNA) without conducting new clinical trials.

Of course, generic biotech drug makers do not want to be required to conduct expensive and time-consuming clinical trials. They would rather sell knock-off drugs after patents expire, just as small molecule generic makers did after Hatch-Waxman came into effect.

The government has two hats here. As the safety regulator, it must reduce the chances of unsafe drugs being sold. As the nation’s largest drug purchaser (and antitrust regulator) it wants lots of competition for drugs to push down prices, as Hatch-Watchman has done for small-molecule drugs.

Alas, there is also the little inconvenient problem that if the biotech companies never get monopoly rents, then they won’t get VC investment and won’t develop drugs and probably won’t even come into existence. Large risky investments in innovation (new compound investments are among the riskiest) don’t get made without financial incentives and a supply of capital. (There are academic criticisms of using patents to incentivize innovation, but patents are a much cleaner incentive for pharma innovation than for say software or electronics).

Blogger Gene Quinn of IP Watchdog notes an interesting policy discussion last week on CNBC with two former government officials and the head of BIO (Biotech Industry Organization), the industry trade association. He summarizes the issues succinctly:

[T]he segment is well worth watching and will no doubt dispel the myths and lack of understanding by open-minded individuals who question why the biotechnology industry wanted 12 to 14 years of exclusivity for biologics, when the FTC said zero years of exclusivity would be sufficient, President Obama wanted no more than 7 years of exclusivity and Congress opted for 12 years of protection. Co-anchor Joe Kernan started off the questioning by saying: “How did you get 12 years? Why exclude biotechnology from the cost pressures that everyone else is going to have to live under?”

Surrounded by Republicans, apparently the CNBC host interjected himself to speak for the administration’s position:

Specifically, Kernan said: “it just seems like you are a poster child for the exorbitant costs of treatment and maybe some of the costs we shouldn’t be undertaking and we have to judge where to spend the money.” And people wonder why throughout the health care debate the public has been fighting so hard, despite the erroneous and scandalous labels hurled at ordinary citizens who simply want answers and know the government is lying about so much.

Here, Kernan defines the problem as should we be undertaking the cost of exorbitant treatments? Despite what President Obama and his team say, and despite what Democrats in Congress say, the truth is that the overwhelming majority of health care costs come at the end of life, and the only way to lower costs is to ration care at the end of life, as was suggested by Kernan.

Or, as Harvard economist Marvin Feldstein put it Wednesday: “The Obama strategy is to reduce health costs by rationing the services that we and future generations of patients will receive.”

Patent term is the key policy lever for increasing or decreasing the incentives for new drug discovery: it can make or break companies in this industry (while at the same time, excessive term delays competition that makes readily available).

I hope that the patent issue can be debated outside the context of healthcare reform, because it’s too important an issue to get buried among 1,011 unread pages of the healthcare reform bill.

Two newspapers in one!

A regular feature of Best of the Web Today (at WSJ.com) is the “Two Newspapers in One!” excerpt, showing schizophrenic reporting by the same paper (usually the NYT) at the same time. Here’s my own entry on the Journal’s London-based rival, which editorially has shown a much greater affinity for national heathcare than does its American cousin.

Edward Luce, “Health opens a new front in America's culture wars,” Financial Times,US ed., Aug 15-16, 2009, p. 7:

Barack Obama has been accused by his more constructive critics of mishandling America’s increasingly deranged debate over healthcare reform …
…
To its surprise, the Obama administration is faced with a full-scale culture war over healthcare which has very little to do with arguments and everything to do with identity.
…
More than a generation ago, the great American historian, Richard Hofstadter, wrote the classic The Paranoid Style in American Politics. Having watched many public servants and colleagues in academia hounded out of their jobs on the flimsiest of pretexts during the “red scare” of the McCarthy era in the 1950s, Hofstadter identified what he saw as a peculiarly American pathology of proneness to conspiracy theory.
…
His theory holds up very well in 2009. Anyone who visits a few of this month’s rowdy town hall meetings can grasp that opposition to Mr Obama’s healthcare proposals is a lightning rod to a far larger world view, which seeks to protect American values and the US constitution from an alien takeover.
…
The multi-generation battle to reform healthcare will be won or lost over faith rather than reason. The more nuanced Mr Obama appears, the more frenzy it will provoke in his critics.

Clive Crook, “Obama took wrong turn on health,” Financial Times, US ed., Aug 17, p. 9:

Unruly protest makes good television and is especially welcome in a slow month for news. The protesters have been dominating US newspapers and news programmes in recent days.

It is all a little misleading. Many who are sceptical about the Democrats’ plans have asked intelligent questions. But this is too dull for prime-time, and before you know it, intelligent questions bog you down in complex details. Better to make the protests the story.

Rowdy demonstrations are not what the administration wanted, but in a way they have played into its hands. They have shifted the focus from the reform measures to the unreasoning anger of the least appealing opponents.
…
[T]he great majority of US citizens have health insurance and are happy with it. To appeal to this majority, Mr Obama argued that health insurance, both public and private, would soon become unaffordable unless healthcare inflation was brought under control.

Fine – until the independent Congressional Budget Office examined the Democrats’ plans and found that they all added substantially to long-term costs. The CBO’s estimates attacked the core of Mr Obama’s case and they especially rattled moderate Democrats. Yet the line from the White House never deviated. This entire exercise, the administration blithely repeated, is about controlling costs. Can anyone be surprised that moderates are having doubts?
…
… Mr Obama needs to rethink his approach. His mistake all along was to promise nearly all Americans something for nothing. The sensible, pragmatic, Obama-supporting centre of the country looks askance at that, and it is right to.

Speaking truth to power

Last week, in a WSJ op-ed Whole Foods co-founder and CEO John Mackey proposed a free-market alternative to improve the nation’s healthcare system:

1. Remove the legal obstacles that slow the creation of high-deductible health insurance plans and health savings accounts (HSAs).
2. Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits.
3. Repeal all state laws which prevent insurance companies from competing across state lines.
4. Repeal government mandates regarding what insurance companies must cover.
5. Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year.
6. Make costs transparent so that consumers understand what health-care treatments cost.
7. Enact Medicare reform.
8. Finally, revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help the millions of people who have no insurance …

This is a fairly standard list of market-oriented reforms, not all that controversial particularly now that the public option is in trouble.

However, while Whole Foods has long been the darling of the organic food-loving crowd, apparently Mackey’s op-ed has brought calls for a boycott of the company from the cultural left.

Is it that he’s a libertarian? That he’s proposing free market solutions? Or that he’s opposing President Obama? Or perhaps it was the confrontational lead paragraphs of his op-ed:

“The problem with socialism is that eventually you run out of other people's money.”

—Margaret Thatcher

With a projected $1.8 trillion deficit for 2009, several trillions more in deficits projected over the next decade, and with both Medicare and Social Security entitlement spending about to ratchet up several notches over the next 15 years as Baby Boomers become eligible for both, we are rapidly running out of other people's money. These deficits are simply not sustainable. They are either going to result in unprecedented new taxes and inflation, or they will bankrupt us.

While we clearly need health-care reform, the last thing our country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us much closer to a government takeover of our health-care system. Instead, we should be trying to achieve reforms by moving in the opposite direction—toward less government control and more individual empowerment.

Somehow, the phrase “speaking truth to power” doesn’t seem to be as popular as it was a year or two ago.

The 62.5% solution

The Brits are mad that U.S. conservatives and libertarians are holding up their National Health Service as an example of what will happen to America under Obamacare. (As the past year has demonstrated, both the British and Germans are as nationalistic as the French or Americans when their countries are criticized by outsiders.)

As part of the self-organized British response, you will find that the talking point

The UK spends less per head on healthcare but has a higher life expectancy than the U.S.. The World Health Organisation ranks Britain's healthcare as 18th in the world, while the U.S. is in 37th place.

has shown up at least 400 times on the web.

Checking the 2000 WHO study, sure enough the US ranks #37 after Finland, Australia and Denmark and barely ahead of Cuba and New Zealand. But what do the rankings mean? There are five criteria:

1. Health Level: 25 percent
2. Health Distribution: 25 percent
3. Responsiveness: 12.5 percent
4. Responsiveness Distribution: 12.5 percent
5. Financial Fairness: 25 percent

The libertarian flagship thinktank, Cato, has compiled a number of commentaries on the limitations of the WHO rankings, as well as a detailed report. I won’t rehash all the arguments here, but let me pick up two quick points.

As Cato analyst Glen Whitman notes, three of the measures — financial fairness, health distribution and responsiveness distribution — are about equity rather than about quality outcomes (either at the mean or even at the minimum). These measures are weighted 62.5% of the total. A bad but fair system would rank ahead of a good but unfair system for 5/8ths of the WHO points — so without a calculation eliminating those weightings, we don’t know what effect they have on the final result.

Whitman also observes:

The WHO rankings have also been adjusted to reflect efficiency: how well a country is doing relative to how much it spends. In the media, however, this distinction is often lost.

Costa Rica ranks higher than the United States (number 36 versus number 37), but that does not mean Costa Ricans get better healthcare than Americans. Americans most likely get better healthcare -- just not as much better as could be expected given how much we spend. If the question is health outcomes alone, without reference to spending, we should look at the unadjusted ranking, where the U.S. is number 15 and Costa Rica is number 45.

So saying “UK spends less per head” is double-counting. Without adjusting for efficiency, the UK is #9 and the US #15.

There are also other problems with the comparisons. As Dr. Ronald Wenger wrote last month:

Review of recent literature suggests that life expectancy is a poor statistic for determining the quality of a health care system because many people actually die with minimal interaction with the health care system (in auto accidents, homicide, and sudden death).
…
According to a 2007 article in the New England Journal of Medicine, only 10 percent of premature deaths in the U.S. are related to the health care system. The great majority (85 percent) of premature deaths are related to human behavior, genetic predisposition, and social circumstance.

Wenger also makes two other interesting points. First, Japanese-Americans in the US have life expectancy similar to Japanese living in Japan (which has the highest life expectancy in the world.)

Secondly, America spends a disproportionate share of its healthcare dollars on detecting and treating cancer, but even if all cancer deaths eliminated, US life expectancy would only increase by 2.4-3.0 years. So America values saving cancer patients far beyond any economically rational cost-benefit analysis for the current generation. (Of course, if treatments become more efficient and effective, the benefits may be realized by the whole world a generation later).

Thus, it’s impossible to directly compare the results of two vastly dissimilar trillion-dollar healthcare systems. All sorts of value judgements enter in to making adjustments for comparability, making the final result more subjective than anyone is willing to admit. (And the assumptions don’t seem to make it into the talking points.)

As with other aspects of life, there are three kinds of lies: “lies, damned lies, and statistics.”

Front lines of healthcare battle

On Monday, San Jose saw what may have been its first and last healthcare town hall of the 2009 congressional recess. Rep. Zoe Lofgren (D-San Jose) came to Almaden in south San Jose, the GOP pocket in her safely Democrat district. As far as I know, the appearance was announced only via email and word-of-mouth. This is the email I saw

Almaden Valley Community Association
Informed Citizens Organized for Constructive Action

Our speaker has requested 7:00 to 7:45. Please be on time.
Monday, August 10th
7:00 to 9:00 PM

Speaker: Zoe Lofgren

Subject: Questions & Answers

Location: Almaden Community Center
6445 Camden Avenue, San Jose 95120

At 6:40, the hall was at its 200 rated capacity and the doors were closed, but as the 100 people left outside became increasingly restless, the doors were re-opened for standing room under the watchful eyes of four SJPD officers.

Rep. Lofgren’s 10 minute opening statement mentioned energy policy (although not “cap and trade” by name), paygo, and her hopes for immigration reform, clearly the House’s plan for health care reform was what brought out the huge crowd — almost 1% of the community.

It’s not clear why she bothered, since as a reliable social liberal it was clear the seven-term incumbent was not interested in considering changes to her strong support for HR 3200. The noisy audience was similarly unpersuaded.

Still several speakers (as I would) praised her for holding a town hall at a time when many of her Democrat colleagues are running from similar (“un-American”) confrontations. In fact, Sunday’s Mercury News flatly (and incorrectly) predicted no face to face meetings by Lofgren or her two Democrat colleagues, Reps. Mike Honda and Ann Eshoo, even though Honda “held four live town-hall meetings during the August recess in 2007.”

Based on applause, the audience seemed to be about 75% opposed to the health care plan. (The rest were either for it or being quiet). Some of the big applause lines were:

• against healthcare for illegal aliens
• expansion of government control
• Congress should fix Medicare and Social Security first before launching into healthcare reform
• eliminating existing plans (which Lofgren argued was to require plans to expand benefits to cover existing conditions and cap total payments).

The crowd showed derision for many of the Congresswoman’s arguments, especially the assertion that US healthcare was inferior to other countries. Although the crowd was angry and sometimes rude, it was never “violent.” It was clearly a room full of people with their own strongly held beliefs rather than “radical fringe Astroturf”.

The biggest applause, however, came with the question that (roughly) asked:

Since 85% Americans are happy with their health insurance why don’t you just change healthcare for the 45 million uninsured and leave the rest of us alone?

It was quite clear that the room was divided between those who most trust their doctor, and those who trust the government to protect them from their doctor (or insurance company or employer or …).

In fact, this is the stark divide between Americans for and against the House plan, as demonstrated by the July 21-22 Fox News poll. In the poll, Republicans demonstrated an unshakable trust in the existing system while Democrats and independents aren’t sure:

If you were sick or seriously ill, would you rather be in a government-run health care system or the current privately-run health care system?

	Government-run	Privately-run	(Either)	(Don’t know)
everyone	19%	64%	8%	9%
Democrats	32%	45%	11%	13%
Republicans	4%	90%	2%	3%
Independents	20%	59%	12%	10%

I didn’t get a chance to ask my question, but here’s what I was going to ask.

Currently about 81 million of 308 million Americans are on government run healthcare. If (as you said tonight) the goal is to reduce the uninsured to about 5%, that would mean that government-run healthcare would increase about 42% to 115 million Americans.

Right now, the federal government pays on average (as best I can tell) 25-30% below market rates, thus forcing each American with private health insurance to subsidize the government by $440 a year.

How will we keep our existing health providers if they are expected to subsidize an increasing proportion of money-losing government-funded patients? And how will private health insurance compete with the government option which is paying below market rates?

Health care financing math

From Cato

The most comprehensive view of a program's projected shortfall comes from calculating the present value of all of its future outlays and subtracting any new revenue sources. The House plan has a present-value shortfall of $13.6 trillion. That's the amount of additional money that must be set aside, in today's dollars, to put this program on a sustainable course. This estimate optimistically assumes that health-care costs will eventually grow with the general inflation rate (they're currently growing much faster).

This enormous shortfall is equal to about 1.6 percent of all future projected GDP, or 3.5 percent of all future payrolls subject to Social Security taxes. From those numbers, this additional burden might actually seem manageable. But President Obama promised that he would raise taxes only on those in "rich" households.

That's where the arithmetic gets especially interesting. Funding the new health-care plan on the backs of households making $200,000 or more per year would require permanently increasing their annual total tax payments by about 50 percent. So, for example, a household that currently pays $50,000 in federal income taxes would need to pay another $25,000. Remember, however, that Social Security and Medicare already face enormous shortfalls. Shoring up these programs — another Obama campaign promise — would require collecting 328 percent more tax revenue from the rich. No, we didn't forget a decimal point: That is three hundred and twenty-eight percent.

Most households making between $200,000 and $500,000 per year would not have enough money to pay their federal, state, and local tax bills, much less eat. Rich households in California or New York would not be able to pay their tax bills regardless of their incomes.
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We cannot allow federal health-care subsidies — mainly Medicare and Medicaid — to continue to grow faster than inflation indefinitely. The challenge is to find ways to make the nation's commitments to retirees and others sustainable without harming economic growth prospects. In this regard, the Obama administration is charting a course in the wrong direction — expanding entitlements on the backs of our nation's job creators. The math will work against the Obama administration and, eventually, against us all.

The latest installment in outsourced economic criticism in these difficult times.

Sam Walton is rolling in his grave

When I’m up late, I’ll turn anything on the idiot box rather than have silence. Early Thursday morning, it was Charlie Rose, who was interviewing H. Lee Scott, Jr., outgoing CEO of Wal-Mart. (During the show, the running gag was that Rose kept reminding Scott that there’s an opening for Commerce Secretary).

There were a few points where I agreed with Scott. For example, he and Rose were noting that the best shouldn’t be the enemy of the good, or, as Scott put it, “in business, you have to be generally correct: you don’t have to be perfect.”

The only problem with that quote was the context, which was instituting new government policies. Since we already expect government to captive of special interests, pork barrels, and politicians’ self-protection, [link] lowering our expectations further — from imperfect to mediocrity. I would have felt better if at least he’d identified first principles for economic policy, notably “first do no harm”.

However, I parted ways with Scott (not surprisingly) over one of the few areas he’s praised by left-wing activists: his push for greater government involvement in healthcare. About 26 minutes into the interview, Rose asked him about his views on healthcare.

Scott argued that government should mandate (or provide) healthcare for everyone, rather than impose a mandate only on large companies. Because “91-92%” of Wal-Mart “associates” have healthcare already, the he argued that the problem is small business and the self-employed. He predicted that in the next few years that “Those of us who have health insurance are going to be at a competitive disadvantage,” i.e. a race to the bottom.

If that point wasn’t persuasive enough, he then argued that a government failure to regulate small businesses would hurt the American economy because “large exporters” like Boeing would be at a disadvantage. Last time I checked, Boeing doesn’t compete with startups, but rather against a MNC with 50,000+ employees headquartered in the country that brought us socialism.

As a private citizen, Scott may legitimately believe that more healthcare mandates are better. However, as the CEO of the world’s largest company, Scott is not conveying his personal opinion but that of the company he represents.

Scott is holding in trust the seat made possible by the entrepreneurial imagination and tireless efforts of the late Sam Walton. The idea that his successor would advocate more government regulation to hurt competitors must have him turning in his grave.

Don’t get me wrong. Scott is no different than any other manager who’s work his/her way to the top of a big corporation. The selection processes reward politicians (kissing up, making peace), bureaucracy (consummate CYA) or worse yet, the overlap of the two in selective presentation of the truth to influence perceptions.

I realize that a good manager can preserve the value created by entrepreneurs, but the element of personal risk (or value added) is rarely there. Good CEOs are readily available in the labor market (even if great ones aren’t), with the main problem being that boards need to separate competent ones from those who are merely successful politicians. I gather that Scott has been an above-average manager (in an incomparably complex operation) and is now doing a “victory lap” prior to his retirement.

By comparison, entrepreneurs the ones who create value by doing something that hasn't been done before. They might offer something that people didn’t know they needed, like Steve Jobs, Juan Trippe or Fred Smith. Or they might find a way to deliver it more affordably than customers (or competitors) ever thought possible, like Michael Dell, Herb Kelleher or Sam Walton.

Entrepreneurs often continue as entrepreneurial leaders of their big companies, unless they’re shoved aside on the theory that the company needs a “real manager”. Clearly some founders develop the skills to grow their companies into the Fortune 500. In other cases, the founder grew into the job; it worked out for decades for Microsoft and Wal-Mart shareholders (among others).

Of course, successful entrepreneurs — nothing if not confident — often overstay their time. The visionaries have big ideas for time that has past. In ICT sector, we see this over and over again — tech entrepreneurs navigating a turbulent era of high uncertainty and high growth find they must cope with commoditized competition where pinching pennies is the norm. Exhibit A would be DEC founder Ken Olsen, the ultimate entrepreneur who failed to cope with the decline of the minicomputer market.