Moneybox
A blog about business and economics.

Aug. 8 2017 6:39 PM

Columbus, Ohio, Will Offer Free Bus Passes to 40,000 Downtown Workers

Downtown business interests in Columbus, Ohio, say rents are down and the office vacancy rate is rising—simply because there’s no place to park.

It’s the same complaint that downtown power brokers made during the 1950s, one that helped create the streetscape of U.S. downtowns, which features plenty of street parking, large single-use parking garages, and parking on the lower floors of office buildings and hotels. (Columbus is not exactly a parking desert, but it is also the country’s largest city without rail transit, and 83 percent of downtown employees drive to work alone.)

Last week, the Capital Crossroads Special Improvement District opted for a cheaper and more novel solution than creating more parking spaces: Give 43,000 downtown workers free bus passes for 18 months starting next summer. The passes will be funded by a tax on downtown office owners but made possible by COTA, the regional transit agency, which is slashing the annual cost of a bus pass to $40.50 from $744. The hope is that 4,000 to 5,000 workers will sign up.

Aug. 8 2017 6:15 PM

Americans Are Overpaying for Insurance Because Obamacare Is Too Confusing

Millions of Americans who would qualify for financial help to buy health insurance under Obamacare seem to be leaving that money on the table by purchasing coverage that's ineligible for assistance, according to a new paper published in the journal Health Affairs.

Why are so many people turning down government help? In short, we don't know for sure. But the study, authored by researchers from the Urban Institute and Michigan State University, raises a familiar issue with the health law. For many insurance shoppers, Obamacare may just be too confusing.

If you're reading this article, chances are you're familiar with the Affordable Care Act's online insurance exchanges—the state and federal websites, like healthcare.gov, where Americans can compare plans and buy coverage every open enrollment season. Most Americans who buy insurance on the individual market now use these portals, and for good reason: In order to qualify for Obamacare's coverage subsidies, you have to get your insurance through an official exchange.

Nonetheless, there are still millions of Americans who have continued to buy their coverage off the exchange. Often, the plans they choose are identical to what's offered on ACA's marketplaces. The running assumption among health care experts I've talked to over time was that the vast majority of those customers probably made too much money to receive any government help, since only families that earn between 100 and 400 percent of the poverty line are eligible for Obamacare's tax credits. For those not getting a subsidy, it might be easier and less of a time suck to buy directly from an insurer, rather than log on to healthcare.gov and fill out a long form. They may also be able to find insurance options with slightly wider networks or other advantages.

Except, it turns out that a lot of those Americans shopping off the exchanges would qualify for subsidies. Using the data from the National Health Interview Survey, the Michigan State and Urban Institute team estimated that 6.3 million nonelderly adults bought their insurance coverage outside Obamacare's marketplaces in 2015. Almost 41 percent of them reported incomes between 100 and 400 percent of the poverty line—meaning they should have been tax credit eligible. Almost 19 percent earned less than 250 percent of the poverty line, meaning they would have qualified for special subsidized plans that lowered their out-of-pocket costs like deductibles and co-pays.

But for some reason, they said no thanks.

For a number of consumers, that may have been a rational choice. Many younger, healthier Americans, for instance, have chosen to skip the exchanges and buy inexpensive, short-term health plans that don't meet Obamacare's regulatory standards. These policies don't cover pre-existing health conditions and can include lifetime caps on coverage. As a result, the federal government doesn't actually consider them insurance, and those who buy them still have to pay the individual mandate's tax penalty for the uninsured. Even with that added cost, short-term plans may be more affordable for some.

Still, it seems fairly obvious that some people are simply overpaying for coverage because they don't know any better. "I have to think a lot of them just aren't aware they could get better deals buying through the exchange," the study's lead author, Michigan State economist John Goddeeris, told Modern Healthcare. "Probably a good number of people are making a mistake."

This is not the first study to suggest that millions may be unwittingly forgoing Obamacare's financial assistance. A January Health Affairs study found that 31 percent of Californians who bought insurance on the individual market in 2014 missed out on the ACA's premium tax credits or cost-sharing subsidies either because they bought insurance off the exchange, or chose the wrong kind of plan. One clue about what might have gone wrong: People who qualified for aid but bought off-exchange coverage anyway were less likely to have gotten help from an insurance counselor. Meanwhile, in a 2015 survey by the Robert Wood Johnson Foundation, 59 percent of the uninsured said they either did not know about Obamacare's tax credits, or didn't understand them.

The ACA has done an enormous amount of good by helping millions obtain health insurance they otherwise couldn't afford. But it's also a complicated policy contraption that assumes a relatively savvy consumer, and without extensive public education, many people are simply going to miss out on its benefits. Even the Obama White House seems to have failed at adequately spreading the word, which may well have hurt the law politically; it's easy to imagine that some voters who were enraged by rising premiums didn't realize the government was there waiting to give them a tax credit. Now, the ACA is being run by an administration that has spent months gradually sabotaging the law for political gain, and will almost surely cut back on outreach. I'm guessing the number of people paying more than they should for coverage is about to rise even higher.

Aug. 8 2017 2:09 PM

Rich San Franciscans Find Out What Poor People Already Know: Investors Can Buy Their Land for Almost Nothing

In April 2015, a couple from San Jose, California, quietly bought one of America’s most exclusive and expensive streets for a song.

For a measly $90,000, the San Francisco Chronicle reports, Tina Lam and Michael Cheng purchased San Francisco’s tony, private Presidio Terrace. Flanked by mansions that sell in the eight figures, the street has been managed by nearby homeowners—which have included House Minority Leader Nancy Pelosi and California Sen. Dianne Feinstein—since 1905. The purchase, the Chronicle writes, "includes a string of well-coiffed garden islands, palm trees and other greenery,” in addition to the real jackpot: 120 free parking spaces. At a monthly parking rate of $200, the couple could make their money back in a couple years.

What happened here? According to its lawyer, the Presidio Homeowners Association forgot to pay a $14-a-year tax bill because it was being mailed to the wrong address. So the city put the property up for auction. The PHA, in other words, lost a private street in the most expensive city in the country over a paltry $994 in unpaid back taxes, penalties, and interest.

As if the story couldn’t get any richer, Presidio Terrace was whites-only until the 1948 Supreme Court decision Shelley v. Kraemer, which stopped courts from enforcing racial covenants—deeds that stipulated that a property couldn’t be sold to a minority. Now the street itself is owned by a couple of Asian American immigrants.

It’s a hilarious, headline-grabbing example of a much more pernicious practice, in which governments auction tiny tax liens to private investors, who impose onerous interest charges and legal fees in order to foreclose on homes. It’s a tragedy of the financial crisis repeating as farce.

Aug. 7 2017 7:19 PM

Did the Rich Really Pay Much Higher Taxes in the 1950s? The Answer Is a Little Complicated.

American progressives like to remember the mid–20th century as a time when the only thing higher than a Cadillac’s tail fin was the top marginal tax rate (which, during the Eisenhower years peaked above 90 percent for the very rich). Uncle Sam took 90 cents on the dollar off the highest incomes, and—as any good Bernie Sanders devotee will remind you—the economy thrived.

Conservatives, however, often try to push back on this version of history, pointing out that those staggeringly high tax rates existed mostly on paper; relatively few Americans actually paid them. Recently, the Tax Foundation's Scott Greenberg went so far as to argue that “taxes on the rich were not that much higher” in the 1950s than today. Between 1950 and 1959, he notes, the highest earning 1 percent of Americans paid an effective tax rate of 42 percent. By 2014, it was only down to 36.4 percent—a substantial but by no means astronomical decline.

averageeffectivetaxrateonthetop1percentofu.s.households

Greenberg is not pulling his numbers out of thin air. Rather, he’s drawing them directly from a recent paper by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman in which the three economists—all well-loved by progressives—estimate the average tax rates Americans at different income levels have actually paid over time. Their historical measure includes federal, state, and local levies—including corporate, property, income, estate, sales, and payroll taxes. And lest you think Greenberg is misrepresenting anything, here’s Piketty & co.’s own graph (rates on rich folks are shown in green).

There are a few obvious reasons why the taxes the rich actually paid in the 1950s were so much lower than the confiscatory top rates that sat on the books. For one, the max tax rates on investment income were far lower than on wages and salaries, which gave a lot of wealthy individuals some relief. Tax avoidance may have also been a big problem. Moreover, there simply weren’t that many extraordinarily rich households. Those fabled 90 percent tax rates only bit at incomes over $200,000, the equivalent of more than $2 million in today’s dollars. As Greenberg notes, the tax may have only applied to 10,000 families.

To Greenberg, the takeaway from this is simple: Progressives should stop fixating on the tax rates from 60 years ago. “All in all, the idea that high-income Americans in the 1950s paid much more of their income in taxes should be abandoned. The top 1 percent of Americans today do not face an unusually low tax burden, by historical standards.”

I’m not convinced. Effective tax rates on 1 percenters may not have fallen by half, as some on the left might be tempted to imagine. But they are down by about 6 percentage points1 at a time when the wealthy earn a vastly larger share of the national income. That drop represents a lot of money. Moreover, as Greenberg admits, tax rates on top 0.1 percent have fallen by about one-fifth since their 1950s heights. That rather severely undercuts the idea that taxes on the wealthy haven't fallen “much.”

Moreover, there may be reasons to support higher taxes beyond their ability to raise revenue. One popular theory among left-leaning intellectuals right now—advanced by Piketty, Saez, and their protegée Stefanie Stantcheva—is that high tax rates actually ease income inequality by discouraging CEOs and professionals from demanding exorbitantly high pay for their services.* In other words, thanks to high tax rates, people didn’t bother trying to get as rich. After all, there’s no point in bargaining for a giant bonus if the government is going to clip off most of it. I wouldn’t say the theory has been accepted as a consensus fact at this point, but it’s certainly alive and being taken seriously.

So the real tax rates rich Americans paid in the 1950s may not have been so stratospherically high as some progressives assume. But they also may have helped create a more egalitarian society. That seems worth considering.

1 Or more, depending on how you pick your frame of comparison. If you average the rates 1 percenters paid between 2010 and 2014, their effective average rate comes out to about 33.6 percent.

*Correction, Aug. 8, 2017: This post originally misspelled Stefanie Stantcheva’s first name.

Aug. 3 2017 7:28 PM

Outside of Elite Colleges, Affirmative Action Is Already Disappearing

The Trump administration may or may not be preparing a legal assault against college affirmative action policies. But in case lawsuits do start flying, here's a piece of context that's worth keeping in mind: Outside the very top tiers of higher education, race-based admissions have largely disappeared already.

That was the finding from a recent working paper by sociologists Daniel Hirschman of Brown and Ellen Berry of the University of Toronto, which quantified the decline of affirmative action on America's campuses over the last two decades. In 1994, they found, about 60 percent of selective colleges—schools that reject at least 15 percent of their applicants—publicly stated that they considered race in their admissions process. By 2014, that number was down to the 35 percent.

The vast majority of that drop occurred at lower-ranking schools. Among the 63 institutions deemed “most competitive” by Barron's Profiles of American Colleges, 93 percent considered race in 1994. Two decades later, that mark had barely slipped, inching down to 88 percent. By comparison, at the 587 colleges Barron's considered merely “competitive,” the number using affirmative action dropped from 46 percent to 18 percent.

graph

In other words, affirmative action went from a being common policy across all sorts of campuses to more of a niche practice particular to brand-name, wealthy colleges.

Here's another way to put those numbers in perspective. There are around 4,700 two- and four-year colleges in America, but only 1,000 or so schools reject a meaningful number of applicants each year. Of those, just 352 claimed to consider race in admissions by 2014 according to Hirschman and Berry—and 124 of them fell into Barrons' two most prestigious categories. There were only 158 schools in those categories, so most prestigious schools considered race in admissions.

But in total, those two tiers of colleges are responsible for educating just 6 percent of America's undergrads.

This isn't to minimize how important the debate over affirmative action is. Quite the contrary. Top colleges are gate-keepers for elite institutions, stepping stones into politics, finance, Silicon Valley, T14 law schools, the media, and beyond. Harvard and Stanford's admissions policies play a not-insignificant role in determining who gets to run the country one day. By extending black and Hispanic students extra consideration, they're giving them a necessary boost into those worlds. You might assume that smart, driven kids will succeed no matter where they go to college, but economists have shown that attending a prestigious school is especially beneficial for minorities and first-generation students, possibly because it helps them develop professional networks their families lack.

We also know that when schools end affirmative action, black and Hispanic enrollment tends to drop. After California banned schools from considering race, for instance, minority admission rates at its top state universities plummeted 50 to 60 percent; at U.C. Berkeley, black and Hispanic students fell from 22 percent to 12 percent of the freshman class.

In contrast, it's not clear how much white students have at stake in the affirmative action debate other than symbolic satisfaction. To be sure, at least a few lose spots at top colleges to minority applicants with lower test scores or grades (of course, many also lose spots to legacies and other unexceptional students with wealthy parents who donate or pay full freight). But if they lose a spot at one insitution, there's still a strong chance they'll be accepted to another similar school. And at many top colleges, such as Berkeley or the University of Texas at Austin, the main beneficiaries of race-blind policies have been Asian students. If affirmative action were ever finally ended for good, the face of America's elite professional class might not become that much more white. But it would be even less black and brown.

Aug. 1 2017 7:01 PM

A Small Yet Soul-Crushing Illustration of Donald Trump’s Utter Economic Illiteracy

The full transcript of Donald Trump's Wall Street Journal interview, which leaked to Politico, is enough to make anyone spiral into despair—like most performances from our president, it's full of moments that illustrate his tenuous grasp of reality. As Slate's official economics correspondent, though, there was one section that left me especially crestfallen—in just one short paragraph of word salad, he delivers a subtle but telling demonstration of his total ignorance on how economies work.

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Here's the passage. Trump is trying to explain that he thinks the United States is growing too slowly compared with the rest of the world, and therefore we need to cut our corporate tax rate to 15 percent. I've bolded the key part.

So I’ll call, like, major—major countries, and I’ll be dealing with the prime minister or the president. And I’ll say, how are you doing? Oh, don’t know, don’t know, not well, Mr. President, not well. I said, well, what’s the problem? Oh, GDP 9 percent, not well. And I’m saying to myself, here we are at like 1 percent, dying, and they’re at 9 percent and they’re unhappy. So, you know, and these are like countries, you know, fairly large, like 300 million people. You know, a lot of people say—they say, well, but the United States is large. And then you call places like Malaysia, Indonesia, and you say, you know, how many people do you have? And it’s pretty amazing how many people they have. So China’s going to be at 7 or 8 percent, and they have a billion-five, right? So we should do really well.
But in order to do that – you know, it’s tax reform, but it’s a big tax cut. But it’s simplification, it’s reform, and it’s a big tax cut, 15 –

At some point, it appears Donald Trump heard somebody say that the United States cannot grow as fast as China or Malaysia because we have a “large” economy. No doubt, what they meant is that the U.S. is a highly developed, rich nation and therefore can't expand as quickly as developing countries that can still reap large gains from taking basic steps to improve their living standards. But Trump did not understand it that way. He apparently thought that when whoever he was listening to said “large,” they were talking about population. Therefore, in his mind, if China grows at nearly 7 percent per year with its 1.4 billion people, the U.S. should be able to do it too.

This is the man who millions of voters are relying on to bring back jobs. Bottoms up.

Aug. 1 2017 1:50 PM

Trump, Man of the People, Brags About Corporate Profits as Wages Stagnate

President Trump took to the Twitter-waves to broadcast some important economy news Tuesday morning.

Trump usually posts such tweets—another one Tuesday was on the media’s failure to report on the stock market’s gains this year—to take credit for the strength of the economy and reassure his audience (and himself) of his general awesomeness. Trump never tweets negative news, like, say, the crap sales this year from the auto industry, which is the largest manufacturing and retail sector of the economy.

Never mind the absurdity of Trump taking credit for positive economic news and ignoring the negative—Trump arrived in the White House after an eight-year boom in corporate profits and the stock market that can hardly be attributed to him. There’s something else that’s amiss. The fact that American companies are making more than ever is actually a big part of the problem in this country. And its arguably one of the reasons we ended up with Trump.

Of course, corporate profits are better than corporate losses. And more corporate profits are generally better than less corporate profits. But the signal fact of the past decade or so is that, while the fortunes of the corporate sector recovered rapidly after the financial crisis (thanks, Obama and Bernanke!), the fortunes of American workers never quite did.

For a variety of reasons, in fact, the relationship between pay and profits—which was already  increasingly tenuous in the 1990s and the 2000s—broke down entirely during the Obama era. Companies, having survived the collective near-death experience of the 2008 financial crisis, were eager to keep costs down. With massive slack in the labor market—the unemployment rate was 10 percent in October 2009—and unions on their back, workers at all skill levels were not in much of a position to bargain for higher rates. If they did summon up the courage to ask for more, companies could wield the threat of automation, outsourcing, or offshoring. Oh, and thanks to Republican intransigence, the federal minimum wage has remained stuck at a measly $7.25 per hour for the past decade.

So even as median household income stagnated and wages grew a tiny bit, we saw a massive increase in pre-tax corporate profits, from $1.38 trillion in 2008 to $1.84 trillion in 2010, $2.13 trillion in 2012, and $2.16 trillion in 2016. That’s an increase of more than 56 percent in six years. More significantly, corporate profits as a percentage of GDP, which never topped 6.4 percent in the 1990s, rose from 7.3 percent in 2008 to 10.4 percent in 2014. Another way of looking at this, as Pedro da Costa points out in Business Insider, is that labor’s share of the overall economic pie has been plummeting during this expansion. America has been making a lot bigger pizzas in the past several years, but all the extra slices are being delivered to executives and shareholders.

The strange, unpredicted thing is that this trend continued even as the expansion continued to roll on and the labor market tightened. There have been more than 5 million jobs open in the U.S. since August 2014. The unemployment rate stands at 4.4 percent. In many states and cities, the minimum wage is rising. And yet overall pay isn’t really budging much. Median household income adjusted for inflation in 2015 was below its level in 2006.

This state of affairs is maddening. It’s true that inflation has generally been muted since the onset of the financial crisis. And many important things have become cheaper, like clothes and wireless service. But some goods and services that people really need—say, housing, education, and health care—have become significantly more expensive in the past decade. What’s more, there is something soul-sapping about showing up to work every day and either getting the same as you did last year, or getting paid less than you did last year, and never getting a raise or bonus—especially when you can see that your company’s profits are rising dramatically. It’s almost as if the system was, dare I say it, rigged against those who work and toward rewarding those who sit on their rears and collect dividends.

To aggravate matters, in the past few years, the financial press (me included), Wall Street, the Obama administration, and the Federal Reserve were trumpeting the economic gains apparent in this long-running expansion. That disconnect between corporate prosperity and the struggles of workers was one of the factors that helped ignite Trump’s campaign. While he’s gleefully taking credit for the corporate prosperity now, the previous political establishment’s identification with that disconnect was a theme that Trump played off of masterfully throughout the campaign and even in his closing argument campaign ad.

In theory, of course, profits and wages should be rising in closer harmony. The demand for labor relative to the supply is relatively high. But the structural forces that allowed companies to keep wages down as they recovered—the weakness of unions, the threat from offshoring and automation, the insecurity of millions of people traumatized by the financial crisis—are still with us, even as the economy enters its ninth year of expansion. I’d add another less appreciated factor. A kind of pathology has taken root among business owners. They’ve convinced themselves not only that they shouldn’t have to raise wages in order to attract, motivate, and reward workers, but that it would be detrimental to their business if they were to do so.

Given that the president views every relationship as a zero-sum game, it’s not likely companies will come under any short-term pressure to share a higher proportion of their profits with their employees. But that doesn’t mean executives should rest easy. If jobs stop roaring as profits continue to levitate, Trump may flip the script.

July 31 2017 12:12 PM

Trump May Try to Deal a Death Blow to Obamacare This Week

With Obamacare repeal dead in Congress for the time being, the White House is signaling that it may step up efforts to sabotage the law this week—and possibly throw insurance markets into chaos in the process.

The rumblings began with a Saturday afternoon tweet from President Trump, in which he suggested that, after months of toying with the idea, he might finally follow through on a threat to end crucial subsidies to insurers, known as cost-sharing reduction payments. Of course, he didn't use that exact language.

While wildly misleading—the cost-sharing subsidies are in no way an insurer “bailout”—the tweet left little doubt about what Trump was thinking. Then on Sunday, adviser Kellyanne Conway told Fox News that the president would make a final call on the issue this week. “That's a decision that only he can make,” she said, somewhat tautologically.

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The subsidies don't appear to be the only part of Obamacare in danger. Asked by ABC's Martha Raddatz on Sunday whether the administration might stop enforcing the law's individual mandate requiring Americans to buy insurance coverage, Health and Human Services Secretary Tom Price suggested it was an option.

“The individual mandate is one of those things that actually is driving up the cost for the American people in terms of coverage,” he said, inaccurately. “So what we’re trying to do is make sure that Obamacare is no longer harming the patients of this land. No longer driving up costs. No longer making it so that they’ve got coverage and no care. And the individual mandate is one of those things.

“All things are on the table to try and help patients,” Price added.

Neither of these announcements comes as much of a surprise—insurers across the country have requested large rate hikes for 2018 to protect themselves in case Trump cuts off the cost-sharing subsidies or relaxes enforcement of the mandate. But even if the president won't catch the industry off guard, he can still do immense damage to the insurance markets.

Turning off the cost-sharing subsidies has often been referred to as Trump's nuclear option on Obamacare. Under the law, insurers are required to reduce out-of-pocket expenses like co-pays and deductibles for poorer customers. In return, Washington is supposed to pay the carriers directly in order to cover the expense. But several years ago, the House of Representatives sued to halt the payments, arguing they'd never been appropriated correctly. A federal trial court agreed, and Trump needs to decide whether to keep appealing the case.

If Trump hits the kill button, insurers will lose billions. Seven million Americans, or 58 percent of all marketplace enrollees, qualified for the cost-sharing reductions in 2017, and carriers will legally have to continue offering the reduced-cost plans whether or not the subsidy money keeps flowing from Washington. To make up for it, health plans would have to raise their premiums by 19 percent, according to the Kaiser Family Foundation. If that's the extent of the damage, then the nuclear option will have turned out to be a bit less than atomic. However, there's also a worst-case scenario in which many insurers would simply choose to leave the exchanges rather than stick with a line of business the White House would clearly be trying to napalm.

Scaling back the individual mandate would also roil the market, though how much would depend on precisely what Secretary Price chose to do and how insurers coped. The Congressional Budget Office believes that killing off the tax penalty for those who don't buy insurance outright would drive premiums up 20 percent as younger, healthier individuals dropped their coverage, leaving behind a sicker customer base with higher medical expenses. But marginally widening the mandate's exemptions might not have the same dramatic impact on costs. The big question, again, is whether insurers would simply get sick of the campaign to undermine the exchanges and drop out.

It is unclear exactly what Trump and his team thinks they will achieve by waging an all-out war against Obamacare using executive authority. Trump has at times suggested that the best thing Republicans can do would be to let Obamacare “implode” on its own, then clean up the damage with an all-the-more-urgent repeal bill. Perhaps he still thinks the party would more readily pass a replacement if the market is in ruins. But that's a dicey political calculation. First, Obamacare is not collapsing due to its own structural flaws; Trump is trying to tip it over, and much of the media will cover that. Moreover, voters get angry when their insurance premiums rise. Even if they don't realize that the president has taken the unprecedented step of trying to undercut the country's health coverage system for political gain, there's a strong chance they'll blame the party in power, which they've just watched spend six months bumbling in its attempt to pass health care legislation. What seems less likely is that they’ll blame the Democrats who passed the law, as Trump has suggested voters would do.

It's also worth keeping in mind that, if Trump kills the cost-sharing subsidies and the insurance markets don't crumble outright, the Americans poised to experience the brunt of the pain are basically middle-class voters. Insurers will still be required to keep a lid on out-of-pocket costs for low-income customers, and Americans who make less than 400 percent of the poverty line would still get tax credits that cap their health premiums as a percentage of their income, meaning they won't feel any pinch from rising prices. It's households that earn too much to receive subsides that'd end up paying more for their coverage. That group is incredibly vocal, and—being higher income—they tend to vote.

One sign that the administration knows it’s on shaky political ground is its obviously misleading rhetoric on both the cost-sharing subsidies and mandate. Calling the former a bailout makes absolutely no sense—it's not as if insurers accidentally underpriced their health plans in this case and now need financial help. Rather, they were required to offer low-income Americans discounted coverage, which the government promised—by statute—to subsidize.

The idea that the individual mandate drives up costs is even more absurd. Yes, people who have to buy insurance who otherwise wouldn't end up spending money they'd prefer not to. But by drawing healthy people into the market, the rule brings down the average cost of coverage. Floating these ridiculous rhetorical trial balloons suggests the administration lacks a stronger argument and knows it.

Or maybe not. Maybe this whole thing is just irrational. Maybe like Samson chained to the pillars, Trump just wants to bring Obamacare's whole structure tumbling down, even if it might kill his presidency, too. With this White House, you never know.

July 28 2017 4:42 PM

Tobacco Investors Just Learned That Trump Isn’t the Salvation of Every Odious Industry

The tendency to lean on political beliefs is one of the most powerful forces in investing and financial media, and one of the most dangerous. There’s a general sense that Republicans are good for business (lower taxes, fewer regulations, an overall permisiveness) and therefore good for the stock market. And there’s a sense that Democrats are bad for business (higher taxes, more regs, a skepticism toward industry’s prerogatives) and therefore bad for the stock market. The lived experienced of the markets over the past 25 years—booming under Clinton and Obama, tanking under Bush—should give the lie to this feeling. But it endures. And it has become particularly powerful under Trump, who regards the stock market as a kind of real-time approval gauge.

But doing so is precarious. And it can be continually confounding at the macro level and at the level of sectors and individual companies. That’s a lesson that investors who held stocks in tobacco companies—in particular the biggest one, Altria (formerly Philip Morris)—learned Friday.

Tobacco companies are in a strange position right now. Smoking is on the decline in the U.S., in part because of government efforts to discourage it via higher taxation, regulation, outright bans, and President Obama’s use of the bully pulpit and the executive pen. Only about 15.1 percent of Americans smoked in 2016, down from about 21 percent in 2005, according to the Centers for Disease Control and Prevention. And yet the profits of tobacco companies, paradoxically, are booming, in part because sales overseas are growing and in part because tobacco companies have the ability to raise prices. (That’s one of the advantages of making a product that is addictive.) Altria’s profit margins on tobacco products are remarkably high. Between 2001 and 2016, as the chart on Page 11 of Altria’s annual report shows, Altria’s stock nearly tripled, while the S&P 500 merely doubled.

Altria’s stock, like many others, continued to soar after Trump’s election—up about 10 percent in the first half of the year. It’s not hard to see why. Aside from benefiting from the general pro-business agenda of Trump—cutting corporate taxes, reducing the capital gains tax, and so on—Altria would seem to have far less to fear from a Trump administration than from an Obama or Clinton administration. While he doesn’t drink or smoke, Trump isn’t a particularly healthy person: He doesn’t work out or exercise or maintain a healthy diet. His administration has backed measures that would cut health care spending by hundreds of billions of dollars, some of which is now spent on smoking cessation. The Trump administration is full of lobbyists and corporate types eager to do the bidding of companies. The likelihood of the first family engaging in aggressive anti-smoking campaigns is laughable. Altria kicked in $500,000 to fund the Trump inauguration.

And the person Trump named to be the head of the Food and Drug Administration, which regulates tobacco, doesn’t have a history of anti-smoking activism. Scott Gottlieb is a physician, biotech investor, and former resident fellow at the American Enterprise Institute who also served in the Bush administration. What’s more, Gottlieb has been strongly in favor of deregulating pharmaceuticals and medical devices, as part of an effort to bring innovations to market more quickly and reduce costs.

And yet Friday morning, with little apparent warning, Gottlieb announced a new comprehensive plan to regulate nicotine. In an aggressive speech that spoke about cigarettes and nicotine in harsh terms, Gottlieb said “we need to envision a world where cigarettes lose their addictive potential through reduced nicotine levels.” For this reason, Gottlieb said, “I’m directing our Center for Tobacco Products to develop a comprehensive nicotine regulatory plan premised on the need to confront and alter cigarette addiction.” With a “balanced regulatory approach,” he noted, “we may be able to reach a day when the most harmful products are no longer capable of addicting our kids.”

This clearly came as a surprise to the companies and to their investors. Stocks reacted violently. In about 30 minutes, Altria’s stock fell 15 percent, sawing nearly $21 billion in market capitalization off the company. By later in the afternoon, the stock had stabilized, though it was still off by about 10 percent, or about $14 billion.

Clearly, investors and the tobacco companies believed that the Trump FDA would take a more hands-off approach to regulating tobacco. After all, we’ve seen sharp pullbacks from regulation of toxic emissions and substances at the Environmental Protection Agency and a general desire to rip up consumer protections. But just because there’s a general air of deregulation, and just because people now in positions of responsibility are hostile to scientific consensus (hello, EPA and Interior), doesn’t mean that all important executive-branch appointees do so.

That’s the mistake tobacco investors made. Gottlieb, after all, is a physician, and a cancer survivor to boot. The science and medicine surrounding tobacco is long since settled, and the consensus is broad. The product has been regulated, without much controversy, for several decades. Everybody involved in health care really hates tobacco, an addictive product that has a host of really bad, expensive, and predictable effects on people’s health. “As a physician who cared for hospitalized cancer patients, and as a cancer survivor myself, I saw first-hand the impact of tobacco,” Gottlieb said in a speech Friday. “And I know all too well that it’s cigarettes that are the primary cause of tobacco-related disease and death. What’s now clear is that FDA is at a unique moment in history, with profound new tools to address this devastating impact.”

Not all of Trump’s appointees will be pro-corporate stooges at all times. And investing as if they are can be remarkably expensive.

July 28 2017 12:31 AM

The Latest Version of “Skinny Repeal” Might Give States a Chance to Wreck Obamacare

Republicans have finally unveiled the “skinny” Obamacare repeal bill they plan to vote on this evening. Like everybody expected, it’s an atrocious bit of policy—a piece of legislation that, as many GOP senators have already admitted, would destabilize the insurance markets by killing off the individual mandate while leaving the Affordable Care Act’s other regulations in place.

Somewhat surprisingly, the bill also still aims to make it easier for states to dismantle Obamacare on their own—though just how much easier is a bit of an open question, which of course won’t be resolved because Senate procedure is now a farce and Republicans are voting on this thing tonight.

As you may recall, the original Better Care Reconciliation Act made it extremely easy for conservative states to opt out of Obamacare’s rules and regulations by expanding the so-called 1332 “state innovation waivers” contained in the law. This provision was designed to let states experiment with alternative health care systems—like, say, single-payer—so long as officials could show that whatever setup they came up with would cover as many people as comprehensively as Obamacare, and without raising the federal deficit. The Republican bill would have nixed most those conditions, save the deficit bit, forcing the secretary of health and human services to approve pretty much any waiver request that came his way. Worse yet, once waivers were in place, the federal government would not be allowed to revoke it, no matter how states mismanaged their funding.

As Michigan Law Professor Nicholas Bagley wrote back in June, “If state officials blow the Obamacare money on cocaine and hookers, there’s apparently nothing the federal government can do about it.”

Earlier on Thursday, however, it seemed like those waivers-on-steroids might have be removed from the GOP’s bill. The Senate parliamentarian ruled that they were not eligible for a vote under the reconciliation process GOP leaders are relying on to pass their bill, and so would need 60 votes to break a filibuster.

But it turns out a somewhat-less-expansive version of the waivers made it into the skinny bill after all. To get them, states will still have to show that their proposals will cover as many people as thoroughly as Obamacare—those guardrails have been left in place. But once a waiver is approved, they can’t be canceled for eight years, which may effectively give states room to do whatever the heck they want. Or so writes Bagley late Thursday at The Incidental Economist: “So while the ACA’s guardrails are still in place, states can ignore them once a waiver has been granted. And there’s not a thing the federal government can do about it.”

Personally, I’m not so sure these waivers are really a free hall pass for states to revoke insurance from their residents. Presumably, if a state doesn’t abide by the terms of its own waiver, individuals who lost their coverage or premium subsidies could bring a lawsuit. (Likewise, if the administration tried to approve a waiver that clearly doesn’t meet all of Obamacare’s standards, someone would almost surely drag it into court). Would that work? I can’t say. There was some debate about it tonight on Twitter.

And that’s the problem (or, one of the problems, anyway). There hasn’t been nearly enough time to judge how this bill could affect health care for millions. And no matter what Mitch McConnell says, there’s a strong chance it could become law.

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