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Chairman, Ben Bernanke
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Inflation-targeting, unless someone is keeping a big secret from us, is the only arrow in the quiver of a nation's central bank, in our case the Federal Reserve. A strong case that the Federal Reserve should acquire no other duties, rests on the fear that any new duty might conflict with holding inflation on target (at present, 2% per year). The recent adventure of the present Chairman, Ben Bernanke, into "Quantitative Easing" illustrates that diluting and confusing the role of the Federal Reserve will tempt the Executive Branch to poach on its independence. In this particular case, the adventure was the purchase of vast amounts of bad loans in order to remove them from the economy, never mind the future problem it will create of re-selling those loans to someone. Mr. Bernanke is lending credibility to the outcry of Representative Ron Paul (R, Tx) that the Federal Reserve should be abolished entirely.
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Kenneth S. Rogoff
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Maintaining price stability (Inflation targeting) rests on Alan Greenspan's simplification of Milton Friedman's "monetary" theory that you can combat inflation or deflation by appropriate adjustments of interest rates and the money supply. Greenspan's further insight was that you needn't measure "monetary aggregates", you just have to measure inflation itself and react like a helmsman with a compass. Until 2008 it looked as though Greenspan had won the argument, by avoiding a deep recession for seventeen years, in the so-called "Great Quieting". Inherent in this helmsman theory is a deeper theory that all episodes of deflation (depression, recession, whatever) are merely over-reactions to inflation; avoid inflation and then forget about deflation. Still further behind this analysis is the observation that all governments at all times are pushing toward inflation, count that as an immutable law. The blunder of holding interest rates too low in 2001-3, for example, has been blamed as deliberately inflating in order to combat the Dot-Com crash of 2001 for political reasons; by this reasoning, the rescue of the DotCom dip led straight to the 2008 Subprime plunge. There is thus evidence that monetary effort by the Federal Reserve is powerful enough to control inflation, provided other branches of government abstain from political interference. In the long run, however, the Fed can only smooth out wobbles in the main trajectory. As Rogoff has shown, all crises whether of currency, banking, commodities or securities, are pretty much the same and caused by unwise borrowing. Avoiding inflation is enough to prevent a recession since government pressure to inflate can be counted on. Paul Volcker may have proved the issue in another way in 197_. During the Carter Administration, the country experienced "stagflation", we had inflation and unemployment at the same time. Improving one might seemingly make the other worse. But, dismissing the whole mess as inflation in disguise, Volcker promptly jacked up interest rates a great deal -- and both inflation and unemployment then went away. What seems proven is that stagflation is just a variant of inflation and should be treated by sharply raising interest rates.
If inflation targeting is as powerful as that and as simple as that, what could go wrong? One present worry is that so much American money has fallen into foreign hands that the Federal Reserve could lose control. There is a second source of danger. Broadly speaking, this concern is that public opinion might demand inflation -- or policies which would surely cause it -- and in a democracy, the time might come when the Federal Reserve would have to give people what they demand. James Madison warned us about that. In a democracy, it's their country to ruin if they please.
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Fringe Benefits
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New Jersey increased the number of state employees and their fringe benefits. As is so often the case, these state employees and their union became the core voting bloc for the party in power, usually Democrats. Not only are there a remarkable number of employees in each of the local offices for the Bureau of Motor Vehicles for example, but New Jersey included the local municipal and school employees (mainly police and school teachers) in the state health and pension system, a decidedly unusual step. These were not trivial costs. Longer life expectancy makes pensions and health care more expensive. Just how a ten-mile ambulance ride gets to cost $1700 is a related story, passed over here. And then, a few years ago it seemed like clever bookkeeping to float a bond issue to bring the state pension system up to full funding. Long term full funding tends to mean a stock portfolio, buying stocks with a bond issue is like buying stock on margin. By a stroke of timing, the booming dot-com stock market promptly crashed, taking New Jersey's margined stocks down even faster. In a sense, not only has the state raised the reimbursement of its workers, it has guaranteed them for life.
New Jersey has always had high real estate taxes, now painfully high. But Jersey residents once could console themselves they had no sales tax and no income tax. Now, NJ sales and income taxes are nearly the highest in the country, and just about every other form of state taxation is at unsustainable levels. Doesn't matter, the state is running a $5 billion deficit and will run a greater deficit for as long as anyone can predict. Forbidden by the courts to borrow money, it's not easy to see what the Governor can do except raising taxes some more. Well, perhaps there is one thing if the unions will let him. He can extend the retirement age of state employees from the present age 55 to age 75. Having retired at age 81 I have little sympathy and have even written a long essay praising the joys of late retirement.
But let's see him try to do that without anyone noticing.
Let's begin this discussion of international finance by relating the story of how the United States solved the same problem in 1913. This wasn't a ho-hum bit of history, it set the pattern the world is now about to adopt or reject. Remember, our current lame duck President comes from Texas.
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Federal Reserve Building
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In 1913, the Federal Reserve system was created. It had various purposes, but it essentially stripped the state governments of the ability to adjust interest rates and placed that power in Washington DC. The appointment process to the Fed board was tinkered with to achieve as much independence from politics as possible, although it was unrealistic to think politics would be totally excluded. Politicians never give up power voluntarily, but in this case, they also escaped blame for the unpleasant things a central bank is occasionally called on to do, so it was a deal. The remaining uncertainty thus became the question of whether the states would yield to federal authority on interest rates, something they had consistently resisted ever since the Constitution was ratified. The first resister was Texas.
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Franklin D. Roosevelt
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It suited the Texas economy to have lower interest rates than other states, but the fledgling Federal Reserve decreed that the nation as a whole needed higher rates. In a fairly typical Texas style, Texas just lowered rates anyway. Almost immediately, nobody would deposit money in Texas banks, who were flooded with requests for loans from the rest of the country. That situation couldn't last more than a few days, so Texas capitulated, and no state has defied the Federal Reserve since then. In this little story lies the hope that a similar international banking arrangement can be devised, and announced shortly after November 15. That would probably put George W. Bush in a class with George Washington and Abraham Lincoln in the history books, his current low popularity not withstanding. For that reason alone, there is cause for concern about the newly elected incoming President. The worrisome historical model at this level lies in the refusal of newly elected Franklin D. Roosevelt to cooperate with the lame duck Herbert Hoover during a similar economic crisis of 1933. On the level of "practical" politics, Roosevelt got away with this deplorable behavior, by enacting many of Hoover's proposals six months later and taking full credit. The country was much worse off as a result, but Roosevelt nevertheless seems to have achieved enduring historical praise for his imaginative ideas. This time, one would hope that fear of the blogosphere, the London Economist and the Wall Street Journal would make such behavior politically unprofitable for either Obama or the maverick McCain. But you never know.
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Henry Paulson
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Now, to return to the present crisis. In a sense, every type of financial institution from banks to hedge funds, every nation from America to Zimbabwe, and every expert from Hank Paulson to Barney Frank -- has been tested, and occasionally failed quite visibly. People are scared, have every reason to be. But on the other hand, sound reasoning will never defeat politics and financial greed, except in a rare crisis containing obvious general danger. So, this mess represents an opportunity for the think tanks to be given a chance at leadership, just as John Maynard Keynes was listened to respectfully at Breton Woods in 1944. It was just about the last time a guru got his way without the use of financial power or an overwhelming voter mandate. As Franklin Roosevelt is reported to have said, "I don't understand a word the man says, but we must do something."
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Barney Frank
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Let's use a few examples out of a great many available. Ireland issued a guarantee for all the deposits in its banks. Immediately, money poured into Irish banks from British depositors, unsettling the British banking system. So the United Kingdom had to issue the same guarantee, and then other nations followed. America rescued Bear Stearns, Fannie Mae, and AIG, and finally called a halt at Lehman Brothers. Other nations copied this approach of rescuing institutions in trouble until the Bank of England copied the Swedish approach of 1991 of reversing this approach. If you are in a sinking lifeboat, you want to rescue the best rowers, not the weakest. But there are some small countries with big banks, like Switzerland and Iceland, where it would be impossible for a small government to rescue a huge international bank within its borders. Conversely, the Eastern European countries have essentially no local banks. In the case of Hungary, most home mortgages were held in Austrian and Swiss banks. When the flow of funds forced a devaluation of the local currency, the cost of almost every mortgage in Hungary doubled, and the national government could do nothing about it.
Let's mention what may well be the largest such factor in this international banking game, the so-called Japanese carry trade. When the overheated Japanese stock market collapsed fifteen years ago, the Ministry of Finance responded by lowering interest rates to one or two percent. Taking into account the inflation rate, Japanese banks were paying the borrower to take their money. So, the international banking community promptly responded by borrowing money in Japan at 2% and lending it out in Germany at 8%. Amounts of money in the trillions churned through this money machine. An unknowable but large amount of this money originated in China, which was trying to prevent its surpluses from provoking a revolution with inflation. The Japanese carry trade is at an end except in reverse, as money is flowing back to the now seemingly safe Japanese economy. Perhaps even a casual reader can look up from the World Series and the presidential election, to realize that absolutely everybody is scared, and possibly scared enough to do something cooperatively. It means loss of national power and sovereignty for everybody, a reconsideration of the European Common Market, and setting aside any disruptive schemes to discipline Premier Putin's behavior as a hidden by-product. As Frank Roosevelt said, we don't understand a word of it, but we must do something.
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The World Bank Logo
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Among the small practical ideas advanced, one of the most promising is to persuade the Chinese government to float its currency. We have historically tolerated small primitive countries when they try to struggle out of poverty by artificially cheapening their currency. In China's case, and before that in Japan's, cheapening the currency in order to stimulate exports has been politely referred to as "pegging the currency to the dollar". Pegging it low, that is. But Japan and China are no longer barefoot and aspire to become important figures in international finance. China is said to resist this proposal on the grounds that it needs 7% annual growth to prevent social unrest leading to a revolution. To some extent, this is probably just bargaining talks, and the counter-proposal offered is to strengthen Oriental power within the International Monetary Fund, as part of the process of increasing the power of the now-indolent IMF. We will have to wait for November 15 to see if clever little schemes like this one will suffice for the purpose. Much depends on China's willingness to cooperate, but even more, depends on the validity of blaming present messes on currency manipulation for the purpose of mercantilism. Beggar thy neighbor behavior has certainly been common; the question is whether it was the main cause.
If all those think tanks led by the Bank of England, have found the stone whose removal will start a benevolent avalanche, a second Breton Woods conference might just get us out of the soup; within two years we should be pleased with the way our cleverness restored the world to prosperity. If not, more grandiose ideas must be desperately considered. Europe must abandon all those silly five-hundred-page constitutions and form a national union. In our own case, that worked for eighty years and then we had a civil war, but even a repetition of all that sounds better than what we now face. If Europe simply cannot seize the moment, it is very likely to retreat into insignificance. Under those changed circumstances, the world economy will amount to three nations: China, India and the USA. We have yet to learn whether the Chinese and particularly the Indian governments can summon up enough domestic leadership to deserve a place in international leadership. And that presently is far from certain.
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The steepness of the federal interest rate curve on a graph -- three-month treasury bills pay less interest than ten-year government debt, with yields for intervening time durations sloping from low to high -- is all a carefully maintained function of the Federal Reserve. The slope of this curve in the newspapers quickly summarizes the current Fed policy. The Federal Reserve mainly controls the money supply by issuing or retiring short-term government debt; the effect upon supply by such action raises or lowers short-term rates, which in turn "changes the slope of the yield curve at the short end". The Fed ordinarily ignores the cost of longer-term debt, leaving that to be determined by the public bond markets. Less often, the Federal Reserve buys or sells long-term treasury bonds to modify long-term yields, or to adjust the international value of the dollar. By affecting rates at either end of the curve, change in the curve's slope is the result. Sometimes that's intended, and sometimes it just can't be avoided.
Because banks pay interest to depositors at around the short-term rate, while the same banks charge interest rates to borrowers at about the higher federal long-term rate, the current slope of the curve is said to be the main determinant of bank profits. In fact, banks charge whatever the market will bear, and their profitability mainly reflects the cost of the money, which the Fed has the power to set. Banks borrow short and lend long. If the Federal Reserve artificially cheapens costs for the banks, then bank profits get fattened by public subsidy. Of course, it works the other way as well; in a banking crisis, the yield curve can be forcibly steepened to rescue banks from failure, temporarily sacrificing ideal monetary levels for the purpose. For the most part, what's good for banks is good for the economy; but it turns out bank profits are artificially subsidized much of the time. This artificially widened yield curve eventually punishes retirees and other savers by lowering interest rates on their savings accounts, or else it could punish debtors by increasing the interest rate they pay on mortgages and other credit. For political reasons, the pain is usually shared among voting blocs. It can be argued this subtle subsidy of banks by the public creates the compensating benefit of economic stability despite occasional bubbles and recessions like the present one. However, the Federal Reserve system has operated for almost a century, revealing an enduring bias in favor of inflation, i.e, the subsidy of debtors by creditors. Present policy intentionally allows a steady rate of 2-3% inflation, and the century-long effect of such policy since 1913 has been to increase the price of gold from $17 to $900 an ounce. A penny then is a dollar now, making no allowance for income tax shrinkage of such fictitious gains. Overall, the effect of semi-stabilizing the yield curve is to reward banks and debtors, extracting this subsidy from creditors and retirees. To go a step further, independent of the Federal Reserve but by government action, retirees have been compensated in the past by unearned Social Security payments. The payment imbalance of the entitlement programs is admittedly about to shift in the other direction in a few years. All this is rough math, with many individual exceptions; but the initial effect of the Federal Reserve system is to benefit bank profits at the expense of creditors. If we assume creditors react by demanding higher interest rates to compensate for the cost, bank stability is being maintained by increasing interest rates by 2-3%, mostly paid for by borrowers.
Is this standardless monetary standard worth its inflationary cost? Compared with a strict gold standard, yes, it probably is. A limited supply of gold to support a constantly growing economy once led to deflation and economic instability and would do so again. An economy without a hard monetary standard responds to politics, is inevitably inflationary. The political independence of the Federal Reserve is dubious at best, and constantly under populist attack. So slow steady inflation seems to be one part of the system we can live with, in order to avoid either deep deflations or galloping inflations. Gradual low inflation may well be the best compromise we can devise, assuming the method of achieving it is otherwise tolerable. The 2008-2010 banking crisis, however, may be a moment of discovery that market systems must also be able to rely on the assumption that almost every bidder in an auction is limited by his pocketbook. When two or more determined bidders are eager to buy but unlimited in resources, price ceases to have restraining power and becomes irrational. A marketplace can tolerate a few bidding frenzies, but excessively flexible monetary systems lead to bubbles in small markets, explosions in big ones. Disregard of the price is particularly exaggerated by globalized trading systems, where customary prices are soon forgotten by abstraction within a virtual environment of essentially unlimited bidding power by essentially unlimited numbers of bidders. Forbidding to stop, all bidders but one must run out of discretionary money.
So, right off, what are the disadvantages of lifetime coverage? They would seem to be:
1. At the moment, persons receiving Medicare are excluded from starting Health Savings Accounts. During the debate about Obamacare, seniors were therefore remarkably uninterested in two topics which didn't affect them: Obamacare and Health Savings Accounts. Very few seem to realize that Medicare is 50% subsidized by the federal taxpayer, and therefore few realize they are quite right to be uneasy Medicare might be "robbed" to pay for Obamacare. No politician is comfortable discussing this issue, for fear his party will be blamed for injuring a perfectly blissful status quo. Naturally, everybody likes buying a dollar for fifty cents, and everybody likes to imagine payroll deductions and premiums create an impregnable entitlement. The sad truth is the 50% subsidy, paid for by borrowing from foreigners, practically guarantees Medicare will be eyed as a victim, using the "fairness" argument. Seniors on Medicare, of which I am one, should be immediately in favor of a proposal which forestalls such pressure. Unfortunately, right now every one of them is looking toward the sunset, gambling on outliving a threat they hope will go away.
2. The computer revolution, which makes lifetime health insurance even imaginable, has severely impacted the investment community. It is still difficult to foresee which branch of the existing financial community would be natural allies, or natural enemies, of Health Savings Accounts. A remarkably large segment of the investment community already has HSAs for their personal affairs, and the banking community sees a chance that Bank Debit Cards could displace the huge industry of insurance claims processing. Meanwhile, insurers remain uncertain whether HSAs are a new revenue source or a threat to existing lines of business. The Dodd-Frank legislation is so large and complex it confuses everyone about net winners and losers. Investment advisors have been hit hard by the recession, and are forced to charge $250 per trade when their competitors charge $7.50 for the same service. Just about everybody in the HSA business is uncertain whether HSAs are insurance policies with an attached savings account, or whether they are investment vehicles with stop-loss insurance attached. Things are tough when lobbyists don't even know which committee to lobby. It takes time for HSAs to achieve profitable size, so industry leadership hangs back to see what they look like when bigger.
3. There are lots of small advantages, but one big disadvantage. The transition from one system to another takes a long time, perhaps a lifetime for some.
How can we navigate a transition that might take a century to complete?
Transition Strategy. The general answer to the long transition period lies in providing more than one method to close the transition gaps. Start from both ends, and then find one or more methods to break into the middle. If life insurance saves money, use some of it to overfund parts of the system as an incentive. When you find people are gaming the system, drop the feature which permits it. If some goal is accepted to speed up the transition, calculate what it is worth to accomplish it, and limit the feature as the transition speeds up. The method proposed in the ****previous**** chapter will certainly work out, but a newborn baby will be a Medicare recipient before children's insurance is complete for everyone. The rest of us have already lost some years for compounding, while some of us are already on Medicare and are, as they say, entitled. Therefore, we propose two additional ways of getting to the goal. Reducing the cost of healthcare is one, to be taken up in Chapter ****. That one works for everyone's finances at any age.
The other method, which suits people of working age, is the present topic. It has two possible solutions, the issuance of special revenue bonds, and offering inducements for dropping Medicare. In the present environment, just using Medicare as a transfer vehicle is unthinkably unwise, politically. Reducing Medicare can only be brought up as a voluntary exchange, long into the future when the financial attractiveness of the HSA approach is so well established it has no political downside. It can be used to pay for non-medical retirement costs after HSAs demonstrate they can comfortably cover medical ones. At that point, it would no longer have the stigma of "robbing" Medicare but might be politically acceptable as making some use of unspendable double coverage.
Special Bond Sales. The safer approach is, therefore, to issue bonds to smooth out bumps in what is in some respects an equity investment. To match present cultural patterns, it should be recognized that working parents now fully assume the medical costs for their children, but have only a moral liability for the medical costs of their retired parents. Therefore, our culture might accept bond indentures with similar structure, but in one of the cases resist an identical bond issuance which differs significantly from accepted local patterns. In fact, it is difficult to imagine enacting any proposal which does not generally respect societal patterns. An important feature would be to start HSAs at an early age, adding as much as 26 years to the duration available for compounding. At 10%, that would be almost four doublings of the investment, and a fairly good start toward the initial goal of $80,000 in the account by age 65, while still starting with relatively small investments in childhood. True, a bond issue would have the interest to pay, but since the interest payment stays within a family it might be designed to seem less burdensome than taxes. It is a curiosity that U.S. Treasury bonds are entirely general obligations, unlike state bonds. There may be a good reason why federal bonds for specific projects are agency bonds, but someone else will have to explain it. The two purposes for which special bond issues might be considered are: respect for society's wishes with regard to parent/child discipline, divorce and illegitimacy issues; and to smooth out gaps in coverage necessitated by nonlinear relationships between revenue and expenses at different ages.
Proposal 16 :Congress should authorize special limited-use bond issues (or Federal agency bond issues) for two Health Savings Account purposes: to fund accounts of late age at enrollment within the transitional stage who have difficulty attaining self-sustaining status; and to create a permanent bridge between age groups which are in chronic deficit and age groups which are in permanent surplus, to the extent that such particular age disparities remain in balance. In both of these cases, it is calculated the accounts will eventually come into permanent balance after a full transition has taken place within current demographic trends.
Comment: With the passage of time, it should be possible to identify age groups (for example, the first five years of enrollment) which will eventually come into balance with other age groups which permanently generate a surplus. Knowing aggregate lifetime coverage will itself bring these two groups into permanent balance, it is sensible to borrow from one and loan to the other during early transitions, at minimal interest rates. Having provided for eventual coverage of these secular risks, it becomes more reasonable to extend favorable rates to them during early transition. When the slots are fully loaded, so to speak, there will always be secular fund imbalance between age groups, where market rates are always needed to cover the overall plan design. The intent of these two interest rate levels is to distinguish between a transitional phase which is temporary, leading to an equilibrium loan imbalance which is a natural part of the design.
As a practical demonstration of the superiority of equity investing over zero-sum fixed income, an invisible psychological value cannot be overstated. If our nation expects for longer longevities to rely increasingly on investments rather than salaries, it must broaden its experience with sensible risks. Whether we like the idea or not, we are collectively taking long strides toward a rentier culture, where our main hope of advancement lies in greater willingness to understand and buffer the reasons for market volatility. One of the features of even this attenuated risk-taking is to recognize that a few people will start their investing at the bottom of a dip, while most will start at the top of a peak. The long-term result will smooth it out, but some people are destined by the luck of their birthday to make more profit in an equity market, than others. And some people are destined by the timing of their illnesses to end up with less money in the account than others, too. It may not seem fair, but tampering with investment cycles will not improve it. By establishing a system of buy-ins, both as a transition step and also for late-comers, the opportunity of market-timing is created. Almost nothing is more discredited as an investment strategy than market-timing by amateurs, but it probably cannot be completely avoided here, and will probably exaggerate the differences in account size achieved by members of the same age cohort. Somehow, the attitude must be made general, that nobody can make anything at all in the accounts if we return to annual premiums; all extra money in these accounts is "found" money. The books will not balance completely at all stages, so it becomes a political question whether to forgive the difference (as Lyndon Johnson did in 1965) or to define it as a subsidy (as Barack Obama seems to be planning for his start-up insurance system.) Perhaps in accounting for residual medical costs at the end of life, a way can be found to equalize outcomes, but it seems unwise to tamper directly with such large amounts which are mainly responding to the world's inherent volatility.
There are several other serious matters. They will be briefly noted, and then an omnibus solution presented, the IIOO. Let's answer one inevitable jibe immediately: How can poor folks afford this? Answer: They have to be subsidized, that's all, just as they are in every other proposal including Obamacare. It's important to face this because neglecting it is the route by which every deficit has been incurred, every budget unbalanced. People who spend other people's money on healthcare characteristically have higher than average health costs themselves. But the novel discovery is Health Savings Accounts have generally proved to reduce costs by 30%. When both approaches operate at the same time, results are not reliably predicted but can be monitored. Miscalculations usually result in debts, dropped options and dropped amenities. A politically appointed board would be wise to refuse an assignment to address this, unless contingency instructions are clear, and remain out of their hands. When Congress eventually discovers how to put a ceiling on the national debt, effective answers to this related issue may become more apparent.
Transition from Term Most transition problems (shifting from one-year coverage to lifetime coverage) have to do with whether you are a child, whether your children are gone and forgotten, or whether you are supporting everybody else in your family. As the saying goes, how you stand will depend on where you sit. The unique borrowing problem here, is complete transition takes so long, groups will differ significantly on whether to unify forward (child to grandparent) or backward (grandparent to child), until it can be worked out how to borrow as a child and borrow for a time as a grandparent, depending on particular situations. What's to be avoided is intergenerational borrowing as groups; we've tried that. The benefits of invested premiums are obvious to all groups, but the arrangements must be debated thoroughly in order to avoid just kicking the can down the road. Almost any arrangement would suffice for a brief transition, but this transition would take so long it would amount to a Constitutional Convention when it was over. The eventual goal is to place the cost burden largely on working people age 26-75 since that is the only age group in direct contact with the national economy. The tricky part is to utilize other age groups during the transition -- and then slowly work out of it. Don't forget a third generation will intervene -- their own children, as well as their parents and grandchildren. The whole construction is a job for actuaries, but the modern use of index funds put on the table the potential of a diversified investment, absolutely without stock-picking, at favorable rates of interest, allowing room for cyclicity of the economy. America seems to need increased fertility, and the compound income might make it possible, but if it is not carefully examined, it might act as an inducement for women to delay their first child even longer than they presently do. As long as you don't get overwhelmed by too many transition issues at once, almost any intergenerational problem would be eased by generating more revenue. At ten percent, money compounds to double itself every seven years, and the resulting sums can boggle the mind. But if they are not planned for, the extra money will either vanish or induce people to act like a deer frozen in the headlights.
Making ten or twelve percent on safe investments may seem impossible to those who have recently lost thirty percent on the stock market, and of course, it is not guaranteed. That is why lifetime health insurance based on fixed income securities cannot be presented as guaranteeing payments for future services; only equity securities (stocks) can do that, and even they, mostly don't succeed in real terms, or net of inflation. Lifetime health insurance should only promise to supply a substantial portion of future health costs, and has little hope of doing so except for two possibilities. If the taxpayers would stand for it, you might deliberately overfund the accounts; since they won't, it is necessary to induce some to do it voluntarily and shrug your shoulders at those who don't. That probably won't work, either, so we are left dependent on our scientists to reduce or eliminate medical costs. They are willing enough to try, but of course, they can's guarantee. You can gamble on its happening, or you can wait until it is a sure thing. We are decades into fiat currency without the semblance of backing by monetary metals and must feel our way. However, the bright side of our present financial system is that transaction costs are steadily declining for reasonably safe passive investing. Professor Ibbotson has demonstrated that total market averages have been remarkably steady for asset classes over the past eighty years, and probably will safely remain so for another century, but that's another assumption which might go wrong. When you get down to it, you either go ahead or you don't. That's all. Investing in the total domestic stock market of America, the investment is guaranteed by the full faith and credit of America, just as surely as if invested in U.S. Treasury Bonds, and it pays a little better in return for its increased volatility.
Still another question comes from people who rightly believe there is no free lunch: Where does the extra money come from? A fast answer is that it comes from correcting a blunder of long standing, called the "pay as you go" system. To some extent, this problem began with the original Blue Cross plans of the 1920s, but it was elevated to its present stature by the Medicare and Medicaid proposals of 1965. By the pay/go approach, this year's premium money is spent for this year's sick people, not the people who paid the premiums. That ruse helped get the program started, but it means current unspent premium money is quickly gone, and thus it means no compound interest or investment income is generated by rather huge revenue collections in the future. Since health expenses rise with advancing age, a great deal of floating premium money might be invested for many decades, if only it had not already been spent. Actual projections are surprisingly large, but I would prefer that others announce their calculations, employing the motto of "Underpromise, but over-perform."
Other substantial sources of reserves exist, nevertheless. Health Savings Accounts now in operation are reporting 30% savings; since it is unlikely this record can be maintained with inpatients, who are generally older, overall savings may well turn out to be closer to 15%.
Inflation helped a lot to pay off the original startup costs of 1965, but at least nominally it is true the debt has been paid. We are now free to invest that ancient transition cost, so to speak, as long as we don't try to spend the same money twice. But there is considerable squeamishness about the public sector acquiring equity in the private sector, so Treasury bonds are about the only public sector investment the public will easily allow. Investment experts are however almost unanimous in feeling that equities provide greater long-term income (see graphs by Ibbottson) and security against inflation. On the other hand, if private individuals invest in common equity with index funds, less resistance is encountered. Any way you look at it, some investment income is better than no income, and for long-term investment, equity is better than debt. For political purposes, it would seem best to restrict investments to U.S. companies, and index funds are less controversial (i.e. "gambling with my money") for most small investors than actively managed funds, because the savings mostly come from reduced investment expenses. John Bogle is telling the world that 85% of most total return is diverted back to the financial industry, and this is one way to rebalance that. Fifty percent of investors would do better than average, fifty percent would do worse because of broad diversification, but not much worse, because total index diversification is fast approaching a maximum. Meanwhile, compound interest would be at work, and most people would be astonished to learn how large the long-term appreciation would grow. Tax-free, diversified, and long-term.
Finally, the question arises: how can you tell whether income from this source would equal the terminal care costs of fifty years from now? You can't, of course, you can't. But this transfer and invest scheme would generate a whole lot of money that presently isn't being generated. If it isn't enough, we will have to do something in addition. The monitor and mid-course correction system are expected to detect when more money is required to balance the books, and therefore more money will have to be invested in the Health Savings Accounts. If savings are insufficient, either subsidies or borrowing will have to be resorted to. Experts sometimes will be wrong, so revenue should be raised somewhat higher than the experts think we need. And if it all goes wrong, if we have an atomic war or an expensive cure for cancer, there is always the national debt. Which is where we began, isn't it.
Independent and Impartial Oversight Organization. (IIOO)After reviewing the complexities, it seems best to create an oversight body with more time and expertise that can be expected of representatives who are subject to periodic election. However, Congress must make it clear that it retains ultimate authority to break from the normal routine, occasionally concentrating its attention on conflicts between expert opinion and public opinion.
Working backward, a mixed public/private system needs an official backer of last resort, a function which cannot be delegated, and an experienced crisis management team in place with the authority to act within defined limits, most of the time. The last resort has to be the full credit of the United States, just as unfortunately it now is with Medicare. What's mainly needed is a sort of Federal Reserve in the very narrow sense of an independent management team, under the direct governance of a Board whose composition is half public, half private. To be useful, it needs a monitoring authority provided by a mandate from Congress, a comparatively limited amount of regulatory authority of its own, intentionally limited by adequate board representation from all stakeholders. The Board needs to be constantly told what is going on, and it needs general authority and trust to act in an emergency. Many proposals require a system of mid-course corrections particularly in the first decade of operation, at the same time the Board must not usurp Congressional authority.
Congress, on the other hand, must have the restraint of private oversight by technical experts who can appeal to the public, to make very certain it does not feel it has a new piggy bank. Corruption is one thing; misjudgments are quite another. Once in a while, we manage to construct such an agency.
Originally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.
Start in Philadelphia, take two days to tour around Delaware Bay. Down the New Jersey side to Cape May, ferry over to Lewes, tour up to Dover and New Castle, visit Winterthur, Longwood Gardens, Brandywine Battlefield and art museum, then back to Philadelphia. Try it!
Millions of eye patients have been asked to read the passage from Franklin's autobiography, "I walked up Market Street, etc." which is commonly printed on eye-test cards. Here's your chance to do it.
In 1751, the Pennsylvania Hospital at 8th and Spruce was 'way out in the country. Now it is in the center of a city, but the area still remains dominated by medical institutions.
Grievances provoking the American Revolutionary War left many Philadelphians unprovoked. Loyalists often fled to Canada, especially Kingston, Ontario. Decades later the flow of dissidents reversed, Canadian anti-royalists taking refuge south of the border.