Swiss Army Brand Turnaround Benefitted Both Employees and Shareholders, Not Top Management
Swiss Army knives are a pretty good product and you may have noticed the brand has shown up on some other nice things in recent years. Swiss Army brand watches, luggage and fragrances are on the market now too and keeping to the quality, value and style of the knives they have done well.
The parent company, Victorinox, is headquartered in Switzerland, one of the more expensive places in the world in which to do business. In this age of outsourcing and the pressure to lower costs, expensive Switzerland’s economy is still doing very well. Unemployment is only 3.65% and the currency is stronger than either the US dollar or the Euro.
The Financial Times wrote last week that after 911, Victorinox faced a 30% drop in sales of its’ Swiss Army knives due to new strict airport security measures. Since airport security was going to remain strict, the company decided that this was probably a permanent loss of sales and scaled back its' operations and began to develop and invest in new products.
Victorinox has a commitment to its' workforce as well as its' stockholders. During the adjustment period, the company went to great pains to protect the whole workforce and didn't, like many American companies, reward management for firing workers and outsourcing. Cutting costs like extras across the firm and lending unneeded people out to other firms temporarily minimized the job cuts. The payroll policy also came into play. The company has a rule of limiting its' top paid employees to a ratio of 5 to 1 to the wages of the lowest paid employees, a policy that helped control payroll costs at the time.
The expansion into watches, luggage and fragrances was a success and the new products now make up 60% of sales, a track record which makes Victorinox’s turnaround notable. Despite scoring a small triumph, the company’s management team hasn’t been given bonuses worthy of a czar and instead can enjoy a rate of pay five times that of the bottom of the company’s pay scale as well as the job security, esteem and respect such good work merits. Victorinox’s shareholders and employees have also been rewarded and the company’s future seems to have been only enhanced as the quality and value and reach of the Swiss Army image has only benefitted.
By the way, Swiss Army knives are not made in China. They are still made in Switzerland.
Investment Conclusion: Question management teams whose strategy to add value is to outsource jobs without a realistic strategic plan that will make the company succeed in the long run and are paid huge salaries and bonus packages to do so. Hint: There are lots of them out there right now.
Wednesday, December 29, 2010
Friday, December 17, 2010
Tax Bill Finally Passed
Now We Can Make Tax Related Investment Decisions
After weeks of wrangling and a long year of uncertainty, at least we know now what tax rates are going to be over the next two years. The bill extended the tax regime we have been in for a number of years but added an estate tax on estates over $5 million.
There was no estate tax this year so when Yankees owner George Steinbrenner died last summer, it seemed his his heirs were lucky and their Dad's $1.5 billion estate would pass tax free. This bill addressed that loophole, however. His heirs now have a choice whether to pay 35% now or keep the much lower cost basis on the estate and pay capital gains taxes on it sometime in the future. I imagine the Steinbrenners will keep the Yankees for now and pay taxes on it some other day.
Fidelity Investments did a nice summary on the new law's tax rates and investment ramifications. If tax policies are important to you, I recommend giving it a close read.
Fidelity's Take on the Tax Bill
Investment Implication:
This tax law is stock market friendly because it will reduce uncertainty and isn’t going to trigger new year end selling as it taxes long term capital gains and dividend paying investments at the same rates as today.
The big questions about this law in a year or so will be did the low tax rates stimulate the economy and was the benefit enough to increase tax revenues down the road enough to reduce the budget deficit?
First observation this afternoon: Bond yields fell very sharply today which seems to indicate the market felt the tax bill will stimulate the economy substantially to help balance the government’s budget without creating an inflation problem.
After weeks of wrangling and a long year of uncertainty, at least we know now what tax rates are going to be over the next two years. The bill extended the tax regime we have been in for a number of years but added an estate tax on estates over $5 million.
There was no estate tax this year so when Yankees owner George Steinbrenner died last summer, it seemed his his heirs were lucky and their Dad's $1.5 billion estate would pass tax free. This bill addressed that loophole, however. His heirs now have a choice whether to pay 35% now or keep the much lower cost basis on the estate and pay capital gains taxes on it sometime in the future. I imagine the Steinbrenners will keep the Yankees for now and pay taxes on it some other day.
Fidelity Investments did a nice summary on the new law's tax rates and investment ramifications. If tax policies are important to you, I recommend giving it a close read.
Fidelity's Take on the Tax Bill
Investment Implication:
This tax law is stock market friendly because it will reduce uncertainty and isn’t going to trigger new year end selling as it taxes long term capital gains and dividend paying investments at the same rates as today.
The big questions about this law in a year or so will be did the low tax rates stimulate the economy and was the benefit enough to increase tax revenues down the road enough to reduce the budget deficit?
First observation this afternoon: Bond yields fell very sharply today which seems to indicate the market felt the tax bill will stimulate the economy substantially to help balance the government’s budget without creating an inflation problem.
Friday, December 10, 2010
China's Stolen Software a Trojan Horse
China's growth in manufacturing is in large part due to the theft of technology and licenses. As a result of stolen software installed on the majority of China's computers, it is particularly easy for hackers to get into them....
-Investment Conclusion? Some day just maybe, software companies like Oracle and Microsoft will increase their revenues in China. In the meantime, it is the same thing as before. The Chinese are stealing western technology and neither business or government care to do much about it.
One persistent problem is that much of the pre-installed software still consists of pirated copies. While China has released statistics showing that the use of legitimate software in China has increased dramatically, the Business Software Alliance, an international software industry group, estimates that 79 percent of the software sold in China in 2009 was illegally copied, creating a loss to the industry of $7.6 billion in revenue. Even more important to Beijing, these statistics mean the vast majority of Chinese computer systems — government and private alike — remain vulnerable to malware.
China and its Double-edged Cyber-sword | STRATFOR December 2010
-Investment Conclusion? Some day just maybe, software companies like Oracle and Microsoft will increase their revenues in China. In the meantime, it is the same thing as before. The Chinese are stealing western technology and neither business or government care to do much about it.
Monday, November 15, 2010
Uncle Sam’s Government Works Best When on a Deadline.
Fiscal Commission Draft Report
Bipartisan Commission Tries to Deal with Reality
There is a threshold where the total debt* of a nation exceeds its’ ability to service the interest and have a hope of paying off the principal but no one knows exactly where that is. By different accounting, the US government currently has an outstanding debt of between 60% and 90% of our annual economic output (GDP). For comparison sake, the headline problem child in this arena is Greece at 120% of GDP. For the US, current rates of annual deficit spending of nearly 10% of GDP are pushing us too close to Greece’s situation and that is the deadline Uncle Sam faces.
With Federal budget deficits that are now embedded in our economy rather than just part of economic cycles and other stubborn problems like health care costs per capita that are double those of any other nation on earth, it was very good news last week when the President’s bipartisan fiscal commission released their preliminary draft. The 24 page report is gathering attention and support even as many political leaders dismissed it out of hand. It has been patently very easy for an elected official (of either party) to vote to increase spending, but the fiscal condition of the country and mood of the electorate seems to have swung around to wanting to go in the direction of fiscal responsibility and the report has provided sound talking points for the public and policy makers to work with.
To summarize generally the document’s recommendations:
• Rollback the last decade’s growth of government, government waste and military spending
• Freeze the growth of government pay.
• Eliminate earmarks from the budget process
From an investment point of view, sound fiscal policy is overdue and absolutely required to provide the back drop for future investment success. The rock solid credit worthiness of the US is a huge advantage for our economy in terms of the cost of borrowing, buying imported goods like oil and attracting investment. If our national deficits are not addressed, we can expect a downgrade in our credit status sometime in the future that will be detrimental to our children’s financial security, our portfolios and the economy. After all, who emigrates to Greece to find financial opportunities?
* The debt referenced in this discussion is the debt of the US Federal government.
Bipartisan Commission Tries to Deal with Reality
There is a threshold where the total debt* of a nation exceeds its’ ability to service the interest and have a hope of paying off the principal but no one knows exactly where that is. By different accounting, the US government currently has an outstanding debt of between 60% and 90% of our annual economic output (GDP). For comparison sake, the headline problem child in this arena is Greece at 120% of GDP. For the US, current rates of annual deficit spending of nearly 10% of GDP are pushing us too close to Greece’s situation and that is the deadline Uncle Sam faces.
With Federal budget deficits that are now embedded in our economy rather than just part of economic cycles and other stubborn problems like health care costs per capita that are double those of any other nation on earth, it was very good news last week when the President’s bipartisan fiscal commission released their preliminary draft. The 24 page report is gathering attention and support even as many political leaders dismissed it out of hand. It has been patently very easy for an elected official (of either party) to vote to increase spending, but the fiscal condition of the country and mood of the electorate seems to have swung around to wanting to go in the direction of fiscal responsibility and the report has provided sound talking points for the public and policy makers to work with.
To summarize generally the document’s recommendations:
• Rollback the last decade’s growth of government, government waste and military spending
• Freeze the growth of government pay.
• Eliminate earmarks from the budget process
From an investment point of view, sound fiscal policy is overdue and absolutely required to provide the back drop for future investment success. The rock solid credit worthiness of the US is a huge advantage for our economy in terms of the cost of borrowing, buying imported goods like oil and attracting investment. If our national deficits are not addressed, we can expect a downgrade in our credit status sometime in the future that will be detrimental to our children’s financial security, our portfolios and the economy. After all, who emigrates to Greece to find financial opportunities?
* The debt referenced in this discussion is the debt of the US Federal government.
Monday, September 27, 2010
Don't Believe Farmers' Grousing
It was too dry. It was too hot. The economy was bad. A storm took down a lot of corn.
Don't believe any of that this year. The American farmer will produce record corn and soybean crops amidst more exports and higher prices. In addition, Russia's wheat crop has wilted this summer. Russia is the world's third largest wheat exporter, but it has stopped wheat exports until next year's harvest. US wheat farmers are benefiting as a good wheat crop is being met with greatly increased export sales and higher prices.
Usually for farmers, a bad economy and record crops add up to lower prices. In 2010 however, growing world demand for grains and bad crops in places like Russia have more than taken up the extra supply and is actually pushing the price of grains higher. It is good business for US agriculture to have more to sell and also to get a higher price for it.
Business is so good actually, that farm income is projected to be up at least 24% this year. How would you like to get a 24% raise in the midst of this deep recession?
Don't begrudge them, however. The financial fortunes of farmers tend to ebb and flow in big cycles. For instance, you were a lot better off a real estate or stock investor in the 1990's than a farmer. Looks like the farmers will be spending a bit more money this year. Hmmm what do farmers like to buy and from whom and who do they bank with?
Don't believe any of that this year. The American farmer will produce record corn and soybean crops amidst more exports and higher prices. In addition, Russia's wheat crop has wilted this summer. Russia is the world's third largest wheat exporter, but it has stopped wheat exports until next year's harvest. US wheat farmers are benefiting as a good wheat crop is being met with greatly increased export sales and higher prices.
Usually for farmers, a bad economy and record crops add up to lower prices. In 2010 however, growing world demand for grains and bad crops in places like Russia have more than taken up the extra supply and is actually pushing the price of grains higher. It is good business for US agriculture to have more to sell and also to get a higher price for it.
Business is so good actually, that farm income is projected to be up at least 24% this year. How would you like to get a 24% raise in the midst of this deep recession?
Don't begrudge them, however. The financial fortunes of farmers tend to ebb and flow in big cycles. For instance, you were a lot better off a real estate or stock investor in the 1990's than a farmer. Looks like the farmers will be spending a bit more money this year. Hmmm what do farmers like to buy and from whom and who do they bank with?
Wednesday, August 18, 2010
Germany Confronts Rising Healthcare Costs
The August 16 issue of Financial Times reports that the Minister of Health in Germany is issuing new policy guidelines to get control of spiralling health costs. The paper report that as of the end of 2008, the cost of drugs and treatments had risen between 10 and 15% over the previous five years in Germany and that the country is now spending around $3,800 per year per person on healthcare.
Meanwhile, the United States government has stalled in its' attempts to control healthcare costs since it doesn't seem to be a dire issue to policy makers. This year alone, however, insurance premiums are reported to be rising as much as 20% while the US spends a bit more on healthcare per person. Almost twice as much as Germany actually, over $7,200 per person.
Meanwhile, the United States government has stalled in its' attempts to control healthcare costs since it doesn't seem to be a dire issue to policy makers. This year alone, however, insurance premiums are reported to be rising as much as 20% while the US spends a bit more on healthcare per person. Almost twice as much as Germany actually, over $7,200 per person.
Thursday, May 20, 2010
Curing Greece Syndrome
Curing Greece Syndrome
Review: Comeback America, Turning the Country Around and Restoring Fiscal Responsibility, David M. Walker, Random House, 2010
If you feel a distinct disquiet every time you consider the future of our country, you might consider reading David Walker’s new book, Comeback America. In this diagnostic and prescriptive summary of what ails America’s budget from the former head of the Federal Government Accountability Office (GAO), the scope of the fiscal issue, from political pandering, to risky demographics to the complicity of nearly every American in the tax vs. benefit charade is fronted.
Comeback America may be the one book you should read on the fiscal problem. A credible commentator of the first order on the subject, Walker positions himself as both non-partisan and highly placed. He was comptroller of the GAO for 10 years through 2008 and is a political independent. With 10 year experience in of one of the most politically independent positions in the government and near the epicenter of the fiscal issue, Walker brings deep credentials to the debate.
Since this book’s publication earlier this year, events have added color but not overshadowed his point. Lately Greece is on page one as its fiscal wreck now threatens continental Europe’s single currency and banking system. It is thanks to Greece that you don’t have to be a Cassandra anymore to see how the process of a sovereign first world fiscal implosion plays out. It is playing out right before our eyes.
Discovering the truth about a government’s true financial health isn’t really that easy. Up until recently, It would have taken a mystic to foresee Greece’s issues. The politicians had been lying about the true fiscal situation and it didn’t come out until the last government left office. Not collecting taxes while increasing services to get votes isn’t just a Greek politician’s trick, of course. Walker argues it has been done by the majority of our own State and Federal administrations for years. No it isn’t just the Greeks, but since this Greek canary has already died and its fiscal/political paradigm has been laid bare for all to see, the lessons are more easily understood.
Walker’s treatment of the subject is both understandable and substantial in its description of the pathology of the United States’ government finances. He shows how the US is hiding huge future liabilities such as promises to provide services for our retired citizens or public sector pensions which are not paid for, or how the Federal budgeting process that leads to pork barrel spending is the product of our election rules and how we are overspending on legitimate programs such as defense and education and not getting the results we pay for. Finally he takes on the government for chasing delusions such as the most expensive (one we cannot afford even now) but not the best healthcare system in the world and pretending it is otherwise. Judging from the information in recent articles about Greece, we have a lot in common with them.
So how can Comeback America ease your pessimism? It is about our comeback. It has good realistic and non-partisan ideas about how to do this. Walker’s ideas start with putting our own individual financial choices on a sounder footing to restructuring our political system so as to remove the incentives for professional politicians to trade the nation’s financial future for votes in the next election. The information is both valuable and accessible.
Walker portrays America as he understands it; still capable of reforming itself in the process of rediscovering our past fiscal responsibility and thus restoring hope. This is the issue of our time and post the fall elections this year look for the government to begin to address our structural deficits. Understanding the issues and options we face is a good idea. For 2010 this is a timely book and a good read.
Review: Comeback America, Turning the Country Around and Restoring Fiscal Responsibility, David M. Walker, Random House, 2010
If you feel a distinct disquiet every time you consider the future of our country, you might consider reading David Walker’s new book, Comeback America. In this diagnostic and prescriptive summary of what ails America’s budget from the former head of the Federal Government Accountability Office (GAO), the scope of the fiscal issue, from political pandering, to risky demographics to the complicity of nearly every American in the tax vs. benefit charade is fronted.
Comeback America may be the one book you should read on the fiscal problem. A credible commentator of the first order on the subject, Walker positions himself as both non-partisan and highly placed. He was comptroller of the GAO for 10 years through 2008 and is a political independent. With 10 year experience in of one of the most politically independent positions in the government and near the epicenter of the fiscal issue, Walker brings deep credentials to the debate.
Since this book’s publication earlier this year, events have added color but not overshadowed his point. Lately Greece is on page one as its fiscal wreck now threatens continental Europe’s single currency and banking system. It is thanks to Greece that you don’t have to be a Cassandra anymore to see how the process of a sovereign first world fiscal implosion plays out. It is playing out right before our eyes.
Discovering the truth about a government’s true financial health isn’t really that easy. Up until recently, It would have taken a mystic to foresee Greece’s issues. The politicians had been lying about the true fiscal situation and it didn’t come out until the last government left office. Not collecting taxes while increasing services to get votes isn’t just a Greek politician’s trick, of course. Walker argues it has been done by the majority of our own State and Federal administrations for years. No it isn’t just the Greeks, but since this Greek canary has already died and its fiscal/political paradigm has been laid bare for all to see, the lessons are more easily understood.
Walker’s treatment of the subject is both understandable and substantial in its description of the pathology of the United States’ government finances. He shows how the US is hiding huge future liabilities such as promises to provide services for our retired citizens or public sector pensions which are not paid for, or how the Federal budgeting process that leads to pork barrel spending is the product of our election rules and how we are overspending on legitimate programs such as defense and education and not getting the results we pay for. Finally he takes on the government for chasing delusions such as the most expensive (one we cannot afford even now) but not the best healthcare system in the world and pretending it is otherwise. Judging from the information in recent articles about Greece, we have a lot in common with them.
So how can Comeback America ease your pessimism? It is about our comeback. It has good realistic and non-partisan ideas about how to do this. Walker’s ideas start with putting our own individual financial choices on a sounder footing to restructuring our political system so as to remove the incentives for professional politicians to trade the nation’s financial future for votes in the next election. The information is both valuable and accessible.
Walker portrays America as he understands it; still capable of reforming itself in the process of rediscovering our past fiscal responsibility and thus restoring hope. This is the issue of our time and post the fall elections this year look for the government to begin to address our structural deficits. Understanding the issues and options we face is a good idea. For 2010 this is a timely book and a good read.
Monday, March 29, 2010
Trying to Make Sense of the Health Care Bill
Friday March 19. 2010
My job is to understand events and translate them into investment views and strategies. It is in this vein, that I offer the following comment on the latest health care reform bill that seems likely to pass this weekend. It is also my attempt to help you understand it better. The United States spends 2-3 times more per capita on health care than most other developed nations and we don’t get our money’s worth in my opinion. Among developed countries, for instance, the US is below average in life expectancy.
The fiscal impact of the bill on the nation’s balance sheet is the primary investment issue and there are details in the bill that I see, as presented by the Wall Street Journal, that are going to be negatives to the market. There are some slightly positive aspects and finally there is a glaring omission that leaves me concerned. The CBO has announced that the bill will result large savings over 10 years and into the future. Be skeptical of that. They are under tremendous pressure.
Negatives:
The negatives surround the extra taxes that are going to be levied to pay for the expansion of coverage to those who now are not covered. It should be noted that the indigent go the emergency room when they really need medical attention and they are admitted. The cost for their care, and emergency room care is quite expensive, is passed onto all of the rest of us in higher prices. So there is some part of this expansion that is already in the system. The extra taxes are focused on those with incomes over $250,000. For those people, interest and dividend income will be taxed at higher rates next year it appears if you are above that income level. There are other taxes, but again they are not directly affecting the majority of people, but are going to have some influence on the market in the future and the consumption of certain items such as super expensive health plans. New taxes such as those on insurance companies and medical device companies will probably be passed on to us. There is some element of charade in these numbers.
The bill will probably hinder some job growth. The rhetoric against the bill misses that it is employers of more than 50 people, for instance, who will have to provide a plan or pay a $750 per employee penalty. That penalty isn’t huge and presumably the fee will be used by the government to subsidize a system of health insurance accessible by individuals. Employers of more than 200 employees don’t have the option of not providing health insurance. What we think of as small buisiness, those employing less than 50 persons, doesn't pick up a mandate to provide health coverage.
Positives:
The positives begin with the fact that the issue will be better defined and the uncertainty can diminish. Good for everyone to get this worked out, but this is only the beginning. A very very long slog lies ahead.
Another positive is that the cost of care issue in the US is being addressed, though only superficially, by the pooling of insurance buying for individuals and small business people. I believe the market is also going to be opened up to interstate competition. Competition will help but it is indirect isn’t it? It is competition between the insurance companies that charge 15% of the system’s cost to allocate funds. This is helpful but not a solution.
It is positive that health care will be more accessible and the risk of financial devastation due to health problems will be reduced. This is a positive for small business and the general welfare of the nation. Broad coverage also offers us hope that inefficient emergency medicine can be reduced as the gateway to health care by the poor. That can save us all money it is hoped.
Omissions:
I am going to say here that I am very critical of the absence of health care cost reductions in this bill. The government has an opportunity to get something important done here and they have passed on it. The most obvious reform would be tort reform, opposed by the trial attorneys. It should be noted that the trial attorneys are politically very powerful and are in particular patrons of the Democratic Party. Tort reform would limit damage awards and eliminate medical malpractice as a gold mine for attorneys and an unmanageable risk for physicians. It would undoubtedly decrease the cost of healthcare in the US by allowing physicians to practice sensible medicine and not order every possible expensive test in order to protect themselves from lawsuits.
We should wonder why the absence of tort reform in the bill should be tolerated by the taxpayer. Certainly it is a reform that would be quite popular among voters but not politicians.
Another omission is how the $438 billion cut in Medicare reimbursement over 10 years is paid for or what it means in practice? This cost reduction is the cornerstone of the savings in the plan and it hasn’t been given much airtime. It seems to be a cut that the care providers are supposed to work into their practice. Will it mean they serve Medicare clients differently? I don’t know. It probably does.
In the US, we pay more for drugs and specific treatment than other countries. There are incentives for treatments to be offered us regardless of cost or the effectiveness. Incentives such as more profits for the provider, or a patient who feels better cared for or to avoid the attacks of trial attorneys all contribute to our too expensive healthcare system. Does this bill really tackle this issue? I don’t see that it does.
I also think the role of insurance companies needs to be justified in our system. 15% of the cost of healthcare is the insurance industry’s “administrative cost”. The hospitals also have significant administrative costs as do companies who provide insurance to their employees and then the government is administering too as do individuals who are bombarded with bills, and letters about deductibles and denied coverage. Pretty ungainly apparatus it seems, the value of which is questionable.
While it is good we are finally dealing with the health care issue in our country, without smart cost reductions, we should be concerned about the effect on the economy and for the coming generations who are being left with a legacy of debts. Real reform isn’t just about coverage expansion. Health care reform without cost reduction is at best a neutral but probably amounts to a negative and which is probably why there is so much opposition to the bill.
Post Script; March 29, 2010
There is a growing list of talented and non-partisan voices refuting the claim by the Congressional Budget Office that the Health Care Reform Bill will lower the cost of health in America. William Gross of Pimco manages more fixed income money than anyone on the planet and it his business to comment on this issue. If the US government isn't solvent at some time in the future, he has to take steps to protect his client's vast holdings of government bonds. Gross sees the CBO estimate as false and in his montly report last week sees at least a $500 billion cost deficit instead of a savings.
More than anything, the health issue is a fiscal issue. A 50 year old man who is 50 pounds overweight can ill afford to put on more weight if he wants to enjoy a healthy retirment. A 234 year old man, Uncle Sam is now doing just that. He is alot overweight and gaining much more every year. Will he make it to 250?
National Geographic, Excellent Graph Showing Heath Care Cost Problem, Dec 2009
http://blogs.ngm.com/.a/6a00e0098226918833012876a6070f970c-800wi
Wall Street Journal Table
http://online.wsj.com/public/resources/documents/st_healthcareproposals_20090912.html
New Yorker Article on Cost Overruns of Medicare
http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande
My job is to understand events and translate them into investment views and strategies. It is in this vein, that I offer the following comment on the latest health care reform bill that seems likely to pass this weekend. It is also my attempt to help you understand it better. The United States spends 2-3 times more per capita on health care than most other developed nations and we don’t get our money’s worth in my opinion. Among developed countries, for instance, the US is below average in life expectancy.
The fiscal impact of the bill on the nation’s balance sheet is the primary investment issue and there are details in the bill that I see, as presented by the Wall Street Journal, that are going to be negatives to the market. There are some slightly positive aspects and finally there is a glaring omission that leaves me concerned. The CBO has announced that the bill will result large savings over 10 years and into the future. Be skeptical of that. They are under tremendous pressure.
Negatives:
The negatives surround the extra taxes that are going to be levied to pay for the expansion of coverage to those who now are not covered. It should be noted that the indigent go the emergency room when they really need medical attention and they are admitted. The cost for their care, and emergency room care is quite expensive, is passed onto all of the rest of us in higher prices. So there is some part of this expansion that is already in the system. The extra taxes are focused on those with incomes over $250,000. For those people, interest and dividend income will be taxed at higher rates next year it appears if you are above that income level. There are other taxes, but again they are not directly affecting the majority of people, but are going to have some influence on the market in the future and the consumption of certain items such as super expensive health plans. New taxes such as those on insurance companies and medical device companies will probably be passed on to us. There is some element of charade in these numbers.
The bill will probably hinder some job growth. The rhetoric against the bill misses that it is employers of more than 50 people, for instance, who will have to provide a plan or pay a $750 per employee penalty. That penalty isn’t huge and presumably the fee will be used by the government to subsidize a system of health insurance accessible by individuals. Employers of more than 200 employees don’t have the option of not providing health insurance. What we think of as small buisiness, those employing less than 50 persons, doesn't pick up a mandate to provide health coverage.
Positives:
The positives begin with the fact that the issue will be better defined and the uncertainty can diminish. Good for everyone to get this worked out, but this is only the beginning. A very very long slog lies ahead.
Another positive is that the cost of care issue in the US is being addressed, though only superficially, by the pooling of insurance buying for individuals and small business people. I believe the market is also going to be opened up to interstate competition. Competition will help but it is indirect isn’t it? It is competition between the insurance companies that charge 15% of the system’s cost to allocate funds. This is helpful but not a solution.
It is positive that health care will be more accessible and the risk of financial devastation due to health problems will be reduced. This is a positive for small business and the general welfare of the nation. Broad coverage also offers us hope that inefficient emergency medicine can be reduced as the gateway to health care by the poor. That can save us all money it is hoped.
Omissions:
I am going to say here that I am very critical of the absence of health care cost reductions in this bill. The government has an opportunity to get something important done here and they have passed on it. The most obvious reform would be tort reform, opposed by the trial attorneys. It should be noted that the trial attorneys are politically very powerful and are in particular patrons of the Democratic Party. Tort reform would limit damage awards and eliminate medical malpractice as a gold mine for attorneys and an unmanageable risk for physicians. It would undoubtedly decrease the cost of healthcare in the US by allowing physicians to practice sensible medicine and not order every possible expensive test in order to protect themselves from lawsuits.
We should wonder why the absence of tort reform in the bill should be tolerated by the taxpayer. Certainly it is a reform that would be quite popular among voters but not politicians.
Another omission is how the $438 billion cut in Medicare reimbursement over 10 years is paid for or what it means in practice? This cost reduction is the cornerstone of the savings in the plan and it hasn’t been given much airtime. It seems to be a cut that the care providers are supposed to work into their practice. Will it mean they serve Medicare clients differently? I don’t know. It probably does.
In the US, we pay more for drugs and specific treatment than other countries. There are incentives for treatments to be offered us regardless of cost or the effectiveness. Incentives such as more profits for the provider, or a patient who feels better cared for or to avoid the attacks of trial attorneys all contribute to our too expensive healthcare system. Does this bill really tackle this issue? I don’t see that it does.
I also think the role of insurance companies needs to be justified in our system. 15% of the cost of healthcare is the insurance industry’s “administrative cost”. The hospitals also have significant administrative costs as do companies who provide insurance to their employees and then the government is administering too as do individuals who are bombarded with bills, and letters about deductibles and denied coverage. Pretty ungainly apparatus it seems, the value of which is questionable.
While it is good we are finally dealing with the health care issue in our country, without smart cost reductions, we should be concerned about the effect on the economy and for the coming generations who are being left with a legacy of debts. Real reform isn’t just about coverage expansion. Health care reform without cost reduction is at best a neutral but probably amounts to a negative and which is probably why there is so much opposition to the bill.
Post Script; March 29, 2010
There is a growing list of talented and non-partisan voices refuting the claim by the Congressional Budget Office that the Health Care Reform Bill will lower the cost of health in America. William Gross of Pimco manages more fixed income money than anyone on the planet and it his business to comment on this issue. If the US government isn't solvent at some time in the future, he has to take steps to protect his client's vast holdings of government bonds. Gross sees the CBO estimate as false and in his montly report last week sees at least a $500 billion cost deficit instead of a savings.
More than anything, the health issue is a fiscal issue. A 50 year old man who is 50 pounds overweight can ill afford to put on more weight if he wants to enjoy a healthy retirment. A 234 year old man, Uncle Sam is now doing just that. He is alot overweight and gaining much more every year. Will he make it to 250?
National Geographic, Excellent Graph Showing Heath Care Cost Problem, Dec 2009
http://blogs.ngm.com/.a/6a00e0098226918833012876a6070f970c-800wi
Wall Street Journal Table
http://online.wsj.com/public/resources/documents/st_healthcareproposals_20090912.html
New Yorker Article on Cost Overruns of Medicare
http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande
Wednesday, January 6, 2010
Questions - Outcomes
Very very affordable mortgages are arguably the most effective policy the government has enacted to pull the economy out of the recession. But many people worry that mortgage rates are going to rise this year, possibly quite a bit and thus the improving economy could hit the skids. How likely is this to occur?
There are three reasons interest rates are so low.
-First there is demand for US government bonds and buyers are willing to accept the low yields they offer at this time. They are deemed safe in an uncertain world and some foreign countries such as China are accumulating US dollars from their trade surpluses that need to be parked somewhere reliable. These low rates are setting the floor in the market.
-Second, our Federal Reserve is buying new mortgages as they are being originated in a kind of subsidy that is intended to help the economy by creating financing and lowering the cost of home ownership. This policy is an indispensable aspect of the emerging recovery.
-Third, the inflation rate is very low and therefore interest rates should be low.
Unemployment over 10% is the biggest single influence at this time over interest rates. Such high unemployment means the government cannot back off from helping the economy and the mortgage supports must continue. It isn't wise and it is politically impossible to alter this policy for the visible future. As 2010 begins we are hearing that jobs creation is the biggest economic priority for the Obama administration. A recovery in housing is a key requirement and for jobs to be created the US is going to need those cheap mortgages for sometime.
High unemployment means labor costs aren't going to rise and inflation is going to be muted. Inflation should not be pushing on these rates for sometime and this is another reason for interest rates to stay low.
The third factor may not be so favorable. Investor demand for US government bonds could become an issue. It may take higher rates to keep them buying. Why? The huge deficits we continue to run are going to undermine that market as the quantity of US bonds in the world exceeds the demand. Will this happen and if so will it be later than sooner? We'll see. It isn't in anyone's interest for the US economy to crater and it seems adjustments to the bond market are going to be orderly. This is a factor that will push rates higher theoretically. In reality, it has yet to be seen.
So the interest rate market seems set for a moderate increase in rates but given how unlikely employment is to improve a great deal or inflation to rise, we are going to continue to see what are historically very good deals on mortgages. Get one today if you can!
There are three reasons interest rates are so low.
-First there is demand for US government bonds and buyers are willing to accept the low yields they offer at this time. They are deemed safe in an uncertain world and some foreign countries such as China are accumulating US dollars from their trade surpluses that need to be parked somewhere reliable. These low rates are setting the floor in the market.
-Second, our Federal Reserve is buying new mortgages as they are being originated in a kind of subsidy that is intended to help the economy by creating financing and lowering the cost of home ownership. This policy is an indispensable aspect of the emerging recovery.
-Third, the inflation rate is very low and therefore interest rates should be low.
Unemployment over 10% is the biggest single influence at this time over interest rates. Such high unemployment means the government cannot back off from helping the economy and the mortgage supports must continue. It isn't wise and it is politically impossible to alter this policy for the visible future. As 2010 begins we are hearing that jobs creation is the biggest economic priority for the Obama administration. A recovery in housing is a key requirement and for jobs to be created the US is going to need those cheap mortgages for sometime.
High unemployment means labor costs aren't going to rise and inflation is going to be muted. Inflation should not be pushing on these rates for sometime and this is another reason for interest rates to stay low.
The third factor may not be so favorable. Investor demand for US government bonds could become an issue. It may take higher rates to keep them buying. Why? The huge deficits we continue to run are going to undermine that market as the quantity of US bonds in the world exceeds the demand. Will this happen and if so will it be later than sooner? We'll see. It isn't in anyone's interest for the US economy to crater and it seems adjustments to the bond market are going to be orderly. This is a factor that will push rates higher theoretically. In reality, it has yet to be seen.
So the interest rate market seems set for a moderate increase in rates but given how unlikely employment is to improve a great deal or inflation to rise, we are going to continue to see what are historically very good deals on mortgages. Get one today if you can!
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