Moneybox
A blog about business and economics.

Jan. 10 2017 3:11 PM

Republicans Will Come Up With an Obamacare Replacement. And Donald Trump Will Lie About What’s in It.

Here’s a modest prediction: While congressional Republicans may look disorganized and a bit hapless right now, they are going to get their act together at some point and craft an official proposal to replace Obamacare. Then Donald Trump will try to sell the plan by lying about what's in it.

That's the most obvious solution to the political impasse that the GOP is fast approaching. And it means that news organizations, which collectively found themselves incapable of helping voters discern truth from fiction during the presidential campaign, need to figure out ahead of time how they will cover a policy battle in which the president of the United States has no attachment to—or perhaps even understanding of—the basic facts involved.

This week, Republicans on Capitol Hill are confronting two unpleasant realties: Snuffing out Obamacare may not be as simple as they hoped, and any replacement proposal acceptable to conservatives may be unacceptable to the public. The party's original legislative game plan—“repeal and delay”—was to pass a filibuster-proof budget reconciliation bill that would eliminate the Affordable Care Act's major planks after two or three years, then use that sunset period to concoct a substitute. That strategy now looks shaky, as a number of Republican senators have said they would prefer to repeal and replace Obamacare simultaneously, or at least see an official replacement plan on paper before voting to repeal. That, of course, would make the process take longer.

Trump, meanwhile, has weighed in with the firm but unrealistic demand that Republicans both repeal and replace Obamacare with extreme haste. “We have to get to business. Obamacare has been a catastrophic event,” he said on Tuesday. As for the time table for replacement, he said, “Long to me would be weeks” and that "It won’t be repeal and then two years later go in with another plan.”

Inconveniently, that would require the GOP to reach a consensus on how to reform America's entire health insurance system over the next month or so, something it hasn't been able to accomplish in the six years that it’s controlled the House of Representatives. It would also force Republicans to grapple with the fact that every single replacement proposal their party has put forward would leave fewer Americans with health coverage than under Obamacare. And while kicking families off of their insurance in order to pass large tax cuts for the wealthy may be acceptable to conservative ideologues, it isn't exactly an election winner.

Unsurprisingly, Republicans have been shy lately when asked about their plans for health reform. Take this athletic dodge from Nevada Sen. Dean Heller, reported in Bloomberg:

Senator Dean Heller, a Nevada Republican up for re-election in 2018, declined to say whether he believes the GOP plan will cover as many people as Obamacare.
"I would anticipate nobody’s going to lose their health care for the next two or three years until the replacement is put in place. I think that’s pretty fair," he said.
And after two or three years?
"That’s a lot of prospective thinking," Heller said. "You can ask me in two or three years."

The early Republican disarray has lead some to speculate that the party may settle for mostly cosmetic changes to the Affordable Care Act—rebrand it Trumpcare and call it a day (which would be appropriate enough, given that the president made a whole second career stamping his name on buildings other people built). Jonathan Chait is already suggesting that, if the current trends continue, “Obamacare, or something substantially similar, is probably going to survive.”

This seems premature. Lest we forget, Senate Democrats spent months fighting over the details of Obamacare—first trying in vain to wrangle some sort of bipartisan compromise, then fine-tuning a bill that both Sens. Bernie Sanders and Joe Lieberman could agree on. At times, the whole effort appeared poised to unravel over seemingly tangential issues like abortion funding. It was a long, exhausting legislative tightrope walk, performed above a pit of screaming conservatives tuned into Rush Limbaugh.

Given how hard it was to erect the Affordable Care Act, nobody should have thought that tearing it down and rebuilding something in its place would be a swift or painless process. Republicans may have set some unrealistic expectations by promising to slay Obamacare within a hot minute of Trump taking the oath of office. But even with the speed bumps they've hit, the health care industry has still been “stunned,” as the New York Times puts it, by just how quickly they've managed to move to repeal the law. Meanwhile, Trump has picked Georgia Rep. Tom Price to be his secretary of health and human services. Price has written his own replacement plan and signed on with the proposal House Speaker Paul Ryan put forth this summer. The White House is going to offer up something, and Senate Republicans are going to feel ample pressure to back it.

Is it possible that the replacement effort will collapse under the weight of its own contradictions? Maybe. As many (Chait included) have argued, Republicans dislike Obamacare in large part because it taxes the wealthy in order to expand insurance coverage to the poor and working class. But because that's not a politically palatable position, they've attacked it for insuring too few people while saddling them with expensive premiums and high deductibles. Those are real problems for which Republicans don't have any actual solutions; instead, the GOP has drafted proposals that would let the government spend less on health care and maybe allow young, healthy adults (mostly men) to purchase cheap coverage that currently doesn't exist because of Obamacare's regulations. Selling those ideas to a public that's been told they're already paying too much for bad insurance will be hard. Selling Democrats on it will be even harder. And since Republicans only have a 52-seat majority in Senate, they need some opposition votes to overcome a filibuster.

But Republicans may also be led by just the con man for the job. Donald Trump does not know anything about health care. But he does care about winning, about cutting taxes, and about undoing his predecessor's legacy. And he has no compunctions about spouting nonsense, or lying outright, about pressing policy issues. If the Congressional Budget Office says a Republican replacement plan won't cover 19 million people, do you think Trump will give a damn? Do you think Trump even knows what the Congressional Budget Office is? He'll happily go on Hannity and tell the country that everybody will get great, cheap coverage, better than anything they've had before.

So here's how I see the fight shaping up: Republicans will come up with an Obamacare replacement and Trump will tout it with a barrage of hyperbole utterly divorced from reality, just like he touts everything. At that point, the debate becomes a struggle to win over public opinion, plus whether Republicans can find eight Democrats to go along for the ride. If journalists treat Trump's sales pitch credulously—or even lead with a bunch of headlines along the lines “Trump Says X”—it's going to give the GOP an advantage and help the party squeeze Dems like Joe Manchin of West Virginia. If instead reporters spend time asking Trump basic questions like whether he can actually explain the details of his own health care plan, Obamacare may have a fighting chance. Even then, they'll have to cut through reams of noxious internet propaganda and Trump-friendly reporting from Fox News and Breitbart.

Which one will it be? I don't know. How much faith do you have in the efficacy of the fourth estate these days?

Jan. 9 2017 4:41 PM

No, AP, You Don’t Need to “Fact-Check” Whether Meryl Streep Is Overrated

The Associated Press picked an unfortunate time to make a mockery of its own fact-checking standards.

On Monday, the day after Meryl Streep criticized President-elect Donald Trump in a speech at the Golden Globe Awards, the news agency published what it billed as a “fact check” of Trump’s claim that Streep is “one of the most overrated actresses in Hollywood.” The AP’s 304-word report was headlined, “FACT CHECK: Streep Overrated? Trump Picks a Decorated Star.” Here’s an excerpt:

While "overrated" is an opinion, Streep, who took aim at Trump in her speech while accepting the Globes lifetime achievement award, holds the record for the most Academy Award nominations of any actor. She has earned 19 Oscar nominations and three wins, as well as a record 29 Golden Globe nominations and eight wins, and two Emmy Awards.
Plus there's a Presidential Medal of Freedom, not to mention 10 People's Choice Awards, two British Academy Film Awards, four National Society of Film Critics Awards, two Screen Actors Guild Awards, a Kennedy Center Honor and has been named a Commandeur de l'Ordre des Arts et des Lettres, the highest civilian honor given by the French government.

The list of accolades goes on to enumerate another couple of dozen, in roughly descending order of how much anyone could possibly give a crap. The story then compares Streep’s acting trophy case to Trump’s, noting that he received two Emmy nominations for “best outstanding reality competition.” (Fact check: The award is called “Outstanding Reality-Competition Program.”) It concludes on what is, for the AP, an uncharacteristically snarky note:

But he beat her to one award—a Golden Raspberry. He won a worst supporting actor trophy in 1989, appearing opposite Bo Derek in the crime comedy "Ghosts Can't Do It."

There is probably a conceivable world, a possible set of circumstances, under which some version of the AP item’s concept could have been amusing or illuminating, had it been better executed. Unfortunately, that is not the world we live in today, and this was not that version.

The flaws are too numerous and too obvious to bear full enumeration here. Suffice it to say that there were no facts in Trump’s claim to check; that publishing a laundry list of Streep’s accolades does nothing to rebut the claim that she’s “overrated”; and that the exercise smacked of the very brand of smugness that Trump routinely accuses the mainstream media of evincing.

All of this would be more easily excused as a misguided lark, had it not come at a time when the practice of nonpartisan fact checking is under assault from many on the right, who regard it as an excuse for the liberal media to cloak an ideological agenda in the guise of objectivity. Recently, some conservatives blasted Facebook’s decision to collaborate with a number of organizations that routinely fact-check possibly false claims, including the AP, on the grounds that they couldn’t be trusted to evaluate facts impartially. The AP’s “fact check” on Trump and Streep inadvertently reinforced the right’s anti-media point so effectively that Breitbart simply republished it in full, sans commentary.

In a time when information and disinformation are vying for readers’ attention on the slanted battlefields of cable news and social media, scrupulous journalistic fact checking is as important as it’s ever been. But objectivity and neutrality are philosophically tenuous constructs to begin with, and it doesn’t help when the organizations that profess to them stray so blatantly and clumsily into partisanship. We don’t need the AP’s fact-checkers to crack cheap jokes at the president-elect’s expense. We have the rest of the internet for that.

What we need is for them to, as far as possible, stick to the facts, and let the rest of us argue about whether Trump is acting petty or Streep is overrated. OPINION: He is, and she isn’t.

Jan. 5 2017 6:15 PM

Yes, Homeowners Really Will Get Hosed by the Republican Tax Plan

On Wednesday, I published a piece arguing that the Republican tax plan would hurt home values by effectively killing off the mortgage interest deduction for middle-class families. A few readers have suggested that might not be such an awful policy move. So I want to elaborate on why it is.

To quickly review, the Republican tax blueprint that Paul Ryan rolled out this past summer calls for simplifying the IRS code by eliminating a number of breaks and nearly doubling the standard deduction to $24,000 for joint filers. Technically, the plan would keep the mortgage interest deduction in place. But with such a high standard deduction, very few people would choose to itemize. That would kill the tax advantage of having a mortgage, leading home prices to fall. People who paid more than $24,000 a year in mortgage interest would still get some benefit from the deduction, meaning that the luxury housing market would be comparatively unaffected.

I find this pretty terribly misguided. The mortgage interest deduction is a deeply flawed piece of policy that has inflated housing prices without expanding ownership much if at all and should be reformed. But doing it in a way that swiftly penalizes middle- and upper-middle-income homeowners while leaving the wealthy relatively unscathed isn't the way to approach the task.

I've seen a few points raised in response. I'd like to address three in particular.

First, some people have suggested that the House plan would still be a net positive to homeowners. If house prices drop, but middle-class families get a tax cut from the higher standard deduction, aren't they better off?

Not necessarily. The Tax Policy Center estimates that under the comprehensive House plan—which, to be fair, is just a preliminary sketch—the bottom 80 percent of households would see a less than 1 percent increase in their after-tax income. For a family in the fourth quintile, you're talking about a $410 annual bump.

total_drop

Now, let's say a family in that income bracket owned a $200,000 house, which would be well below the median new home price of $305,000. As I mentioned in my earlier piece, a recent analysis from a Federal Reserve Board economist suggested that killing the mortgage interest deduction entirely could cause a 6.9 percent average drop in home prices. Let's say they fell less than half that much, by 3 percent. That would mean a $6,000 property value loss, equal to about 14 years' worth of the tax break they'd receive under the Ryan plan.

It gets worse, though. Houses tend to be heavily leveraged assets, so a small drop in value can erase a good chunk of a homeowner's equity. Let's say our hypothetical family owned 30 percent of their house, or had $60,000 in equity, with $140,000 on their mortgage. That 3 percent price drop would leave them with a $140,000 mortgage and $54,000 in equity—a 10 percent home-equity loss, all in exchange for a pretty meager tax cut.

That could have consequences for the rest of us, by the way. Economists have found a pretty strong “wealth effect” associated with housing: When prices go up, homeowners spend more; when prices drop, they spend less. A sudden contraction in the housing market can cause the whole economy to clam up.

The upshot: A bunch of middle-class homeowners would come out poorer in this bargain, and the broader country might pay a price for it.

Now, point two. Some have suggested that lowering home prices a bit would be a good thing, especially for young buyers, since housing costs are absolutely insane in many parts of the country.

I think that's a bit optimistic. Falling home values might make down payments more affordable. But the Fed Board analysis I pointed to earlier suggests that if the mortgage deduction goes, first-time homebuyers will be hurt more long-term by the higher borrowing costs than they’ll be helped by lower prices—even in places like San Francisco and New York.*

Finally, there are those like the Washington Examiner's Tim Carney, who allows that, yeah, there might be losers in this bargain, but their misfortune is worth the cost of a simpler tax code that lowers the burden for many and gets rid of distortions in housing prices.

But that's missing my point. We should reform the mortgage interest deduction, or maybe phase it out entirely. And I'm not necessarily against tax relief for lower earners; raising the standard deduction may even be a smart, simple way to offer it. But we need to do those things while minimizing the harm to homeowners who've made major financial decisions based on the current tax code. (Disclosure: I own my apartment. So do many people who'd be writing on this subject.) Congress could accomplish that by raising the standard deduction while turning the mortgage interest deduction into a set tax credit anybody could get whether or not they itemized. That would better target the policy's benefits at working-class homeowners without instantly yanking them away from slightly wealthier families and severely disrupting the market. You could then choose to sunset that credit over a decade or two—as Britain did with its mortgage subsidies—or keep it around. That approach would certainly be expensive. But we might be able to afford it if Congress wasn't contemplating a tax plan that slashed rates on millionaires and billionaires.

*Correction, Jan. 9, 2017: Because I goofed up reading the Fed paper, I originally reported that its author had concluded that eliminating the mortgage interest deduction entirely would cause home values to fall less in metro areas where housing supply is almost always tight, like San Francisco, than in more flexible markets, like Alexandria, Louisiana. The study basically says the opposite—in metro areas with greater price elasticity of housing supply, values fall less. Thankfully, for my dignity at least, other conclusions in the study support the broader point I was trying to make, which was that pushing down house prices by killing the mortgage interest deduction might not be that much of a boon to young homebuyers.

Jan. 5 2017 2:57 PM

Trump Taps Bear Stearns Economist Who Said Not to Worry About Credit Crisis for Key Treasury Job

Talk about failing up.

Donald Trump is reportedly set to nominate David Malpass, the former chief economist of Bear Stearns, for a key post at the Treasury Department. Bear Stearns was, of course, the first major American investment bank to sink during the 2008 financial crisis after going all in on mortgage bonds.

Malpass was one of the many guys on lookout who didn't see the iceberg coming. On Aug. 7, 2007, at a moment when bond markets were beginning to look increasingly shaky, he wrote an op-ed in the Wall Street Journal titled, “Don't Panic About the Credit Market,” in which he argued that, “Housing and debt markets are not that big a part of the U.S. economy, or of job creation.” This was not correct.

“While it's frowned upon to look for a silver lining when markets tumble and painful losses accumulate, the housing- and debt-market corrections will probably add to the length of the U.S. economic expansion,” he added. This was also not correct.

By the time Malpass wrote all this, Bear Stearns' own hedge funds were already in turmoil due to mortgage losses. Two days after the publication of this piece, BNP Paribas froze three of its funds, marking the real beginning of the credit crunch that then metastasized into the utter horror show of 2008. By March, Bear Stearns was getting sold to J.P. Morgan practically for spare change in a last-minute rescue deal backed by the Fed.

Economists are, of course, frequently wrong, especially when trying to guess when the next recession is around the corner. But Malpass followed his epic swing and miss by crying out for higher interest rates in 2011—a terrible idea—and complaining, weirdly, that the economy was suffering because the dollar wasn't strong enough. He also ran in New York's 2010 Republican Senate Primary and lost.

All of this makes him a sort of odd fit for the Trump administration. As Thornton McEnery pointed out over at Deal Breaker, our incoming president has generally stocked his Cabinet with highly successful Wall Streeters—guys like Wilbur Ross, Steve Mnuchin, or Gary Cohn—not guys who've faceplanted trying to make the biggest call of their careers. (Another exception may be CNBC talking head Larry Kudlow, who confidently told the world there was no recession coming in December 2007, and may head Trump's Council of Economic Advisors). Moreover, Malpass' strong dollar obsession doesn't really mesh with the Trump administration's stated goal of reviving manufacturing and exports. However, he does bring to the table high-level government experience from his days in the Reagan and George H.W. Bush administrations, during which he worked on early versions of NAFTA. Plus he signed onto Trump's team as an economic adviser during the campaign and has since helped guide the treasury transition, so he has loyalty going for him.

So, what is Malpass getting tapped to be? Undersecretary for international affairs, a position that sometimes gets described as America's “financial diplomat.” Ex–Treasury Secretary Tim Geithner held the job during the Clinton years, and as the Journal puts it, “Mr. Malpass would advise the Trump administration on global economic and financial developments, taking the lead on G7 and G20 macroeconomic issues.” Which is to say, assuming Malpass is confirmed by the Senate, he'll partly be responsible for figuring out when the global financial system is about to burst into flames, then putting out the fire. We can only be thankful Trump has picked such an eagle-eyed scout for the job.

Jan. 4 2017 6:36 PM

Own a Home? Then You’re Gonna Hate the Republican Tax Plan.

Considering it’s been less than a decade since the real estate crash that plunged the world into economic calamity, you might think Republicans in Congress would be a little wary of legislation that risked infuriating voters by pushing down house prices.

Apparently not! As part of the massive tax-cut push they've cued up for this year, GOP leaders are quietly contemplating a proposal that would indirectly curtail the mortgage interest deduction, long considered a sacred cow of American tax policy. The move would almost certainly lead some home values to fall, though it's hard predict by how much.

Currently, homeowners who itemize their taxes can deduct the value of their interest payments on up to $1 million of mortgage debt. That wouldn't change under the House GOP's latest tax blueprint, which Speaker Paul Ryan rolled out during the summer campaign season and is set to serve as a launching-off point as Ways and Means Committee Chairman Kevin Brady crafts his reform legislation. However, the plan would render the mortgage break useless for millions of families by roughly doubling the standard deduction available to all taxpayers, from $12,600 to $24,000 for a married couple.

How so? Itemizing only makes sense for taxpayers if it will save them more than the standard deduction. Since most homeowners don't pay $24,000 a year in mortgage interest, and Republicans want to eliminate most other major deductions, including the break for state and local taxes, it will be extremely difficult for most households to hit the threshold at which itemizing becomes reasonable. The Tax Policy Center estimates that “38 million (84 percent) of the 45 million filers who would otherwise itemize in 2017 would opt for the standard deduction” instead. To be clear, these people should receive a tax cut—they would only pick the standard deduction in order to save money. The entire point of expanding it is to give working households a break while reducing their paperwork. But as a side effect, the tax advantage of owning a home would disappear, which should hurt real estate prices.

And what if you still itemize? Owning your home will net you less in tax savings than before, which should make it a less valuable asset. After all, the bigger the standard deduction, the smaller the edge from itemizing.

The House GOP half-acknowledges all this. Their proposal notes that “far fewer taxpayers will choose to itemize deductions, with the vast majority of taxpayers finding they are better off by taking advantage of the larger, simpler standard deduction instead.” But instead of honestly addressing how that might affect housing—the major source of middle-class saving in this country and one of the biggest drivers of the economy—they point to the magic asterisk of tax-cut fueled economic growth: “By improving the overall economy, this Blueprint promotes a thriving housing market.” This does not inspire confidence.

The House will almost certainly have an ally on this in Donald Trump. The president-elect's tax plan—which he may or may not have actually read—calls for expanding the standard deduction for joint filers to $30,000.

Again, it's tricky to say precisely how far home prices might fall as a result of this tax change. We certainly aren't talking about a 2007-style 30 percent bust. Federal Reserve Board economist David Rappoport recently estimated that killing the mortgage interest deduction entirely would bring down home values about 6.9 percent on average, nationwide.* Partially euthanizing it might have a smaller effect, but I haven't seen anybody model it out yet.

Still, it is unsurprising that the housing lobby is getting ready to fight this change tooth and nail.

Now, time for a disclosure: I bought an apartment last year. Had I known this tax change was coming down the pike, I might have kept renting. I certainly would have purchased a somewhat less expensive apartment. I am conflicted out the wazoo on this issue. But then again, so are millions of Americans.

It also must be said that the mortgage interest deduction is an objectively horrible piece of public policy that should be reformed. Currently, it's an estimated $80 billion-plus subsidy that disproportionately helps upper-middle-class and wealthy households—according to the Tax Policy Center, 72 percent of its benefits go to the highest-earning 20 percent of taxpayers. This is to be expected, since wealthier people can buy larger houses and take out bigger mortgages. It also explains much of its political invulnerability; people who earn low- to mid-six-figures vote and very much treasure their slice of the welfare state that's submerged in our tax code. But as a result, the deduction mostly encourages people who could have afforded homes anyway to buy bigger. Research has shown it does little if anything to expand homeownership overall, and may actually discourage it among younger American by driving up prices.

“The subsidy very well might help upper middle-income taxpayers in high-rate brackets to afford larger mortgages and thereby purchase more expensive homes,” the Urban Institute's Eric Toder wrote some time back. “It is unclear, however, why federal taxpayers should subsidize relatively well-off people’s acquisition of more expensive homes.” If we were starting from scratch, we'd never introduce this tax break to begin with.

There are also plenty of good ideas floating around about how to fix it. Both Democrats and Republicans have suggested turning the deduction into a standard tax credit available even to those who don't itemize, in order to target the benefits at the middle class. You could also try to follow the U.K. model and simply phase out the benefit over decades. That allowed them to ditch the subsidies without cratering the housing market.

But the House GOP is proposing to do precisely the opposite on both fronts. It would change the tax code overnight. And it would only save the deduction for wealthier households, leaving it for the rich to preserve the political fiction that the deduction hadn't been eliminated. In order to rack up $24,000 in annual interest payments at today's rates, a homeowner would need a roughly $550,000 mortgage (and after a couple of years they'd be back under the threshold). The median new home sold in the U.S. only cost $305,000 in November. Well-off New Yorkers buying two-bedroom apartments on the Upper West Side would still get a nice housing subsidy. Ohioans buying three-bedrooms in Cleveland? Not so much.

The perverse upshot of all this is that Republicans have engineered a way to mostly eliminate the mortgage interest deduction, hurting home values for the middle- and upper-middle-class, while leaving the luxury market comparatively unscathed. Welcome to the Trump years.

Read More:

*Correction, Jan. 5, 2017: This post originally misspelled economist David Rappoport’s last name.

Jan. 3 2017 3:07 PM

The People Who Evangelized for the 401(k) Now Think It’s Made Retirement Much Tougher

We’re not even a week into 2017, and we already have another reason to feel gloomy about our futures. The Wall Street Journal’s Timothy Martin tracked down several early proponents of the 401(k) and asked them what they think of their innovation, which has supplanted the traditional pension at most companies. Answer: not much!

Herbert Whitehouse, a former Johnson & Johnson human resources executive who pushed the then-new savings vehicle in the early 1980s, now says even he can’t retire until his mid-70s if he wishes to maintain his standard of living, because, Martin writes, his 401(k) “took a hit” in 2008. He’s 65. And Ted Benna, the man most frequently credited for the 401(k) as we know it, says he doesn’t believe “any system currently in existence” can help most Americans finance their financial needs in retirement. Oof.

What went wrong? The 401(k) began as a technical adjustment to the tax code, one meant to mostly impact high-earning executives using profit-sharing plans. People like Benna, a benefits consultant, convinced the Reagan administration that the language of the statute allowed for all employees to put aside a portion of their salaries on a tax-deferred basis. It was supposed to supplement corporate pensions. Instead, in something almost no one foresaw, the 401(k) replaced them.

In 2017, we know that this historic accident isn’t working out for many people. The Center for Retirement Research currently estimates that about 52 percent of households are “at risk of not having enough to maintain their living standards in retirement” with “the outlook for retiring Baby Boomers and Generation Xers far less sanguine than for current retirees.” The Economic Policy Institute says just under half of households headed by someone between the ages of 32 and 61 have nothing saved for retirement.

Some, like noted economist Richard Thaler, see a simple fix to the 401(k) savings problem:

Unfortunately, it’s more complicated than that. Many companies already do auto-enroll their workers, but as of now employers aren’t required to even offer a 401(k) and they’re certainly not required to offer a match—and if they do match, they can stop at any point. Given the political climate in Washington, it’s hard to believe any of that will change soon.

How much needs to be set aside is also an issue. At the beginning of the 401(k) revolution, many employees were told 3 percent of their incomes would be perfectly adequate, as the Journal article reminds us. More recently, some, like Cindy Hounsell at the Women’s Institute for a Secure Retirement, have said as much as 15 percent. Since Americans currently put aside about 5.5 percent of their incomes, this presents something of a challenge. If hectoring people to save more worked, surely it would have by now. But it’s not like Americans are wasting it all on lattes. The New York Post, which isn’t exactly known for left-wing agitprop, reported last summer on a survey from America’s Research Group that claimed 20 percent of Americans can’t afford to buy anything but basic necessities. Others are putting their money elsewhere. The cost of child care has run double that of inflation since 2009. People who visit an in-network hospital emergency room run a 1-in-4 chance of getting hit with a surprise medical bill. So-called gray divorce can destroy even a well-planned retirement. Just under half of all households claim they couldn’t come up with $400 in an emergency without borrowing it. You get the idea. Saving for retirement isn’t simply a matter of willpower, or some behavioral finance trick. Life has become too expensive for many of us to save adequately.

I wouldn’t expect much help in the retirement department from the incoming Trump administration. The president-elect campaigned on a promise that he wouldn’t touch Social Security, but has since surrounded himself by people committed to cutting the program. (And his own track record in the 401(k) arena doesn’t exactly shine. According to BrightScope, the average account balance at Trump’s company is $26,000. And this is an improvement. Workers at Trump’s casinos who invested their 401(k)s in his stock—something at least 400 of them did—experienced huge losses when the companies went bankrupt.)

And things could get a lot worse. Recent research from noted economists Lawrence Katz of Harvard and Alan Krueger of Princeton found that almost all the job growth in the United States between 2005 and 2015 came from temporary or freelance work, which generally doesn’t offer stability, never mind access to 401(k)s with generous employer matches. And people like Whitehouse who think they can remain in the workforce well past the traditional retirement age could be in for a shock. About half of Americans retire before they plan due to circumstances outside of their control. And that’s before we get into technological progress doing away with many jobs—like, say, Uber driver—entirely.

We need to think about what comes next for retirement savings. Martin’s article mentions various initiatives: state attempts to set up retirement savings options for people without access to them at work; longtime 401(k) critic Teresa Ghilarducci’s idea for a mandatory savings plan, in which the money would be collected by the government and managed by financial pros; and Marco Rubio’s now never-discussed plan to open the federal defined contribution system to people who don’t work for the government. But the Journal forgets about the most common-sense suggestion of all: increasing Social Security payments.

Jan. 3 2017 2:58 PM

New York, Which Might Make College Tuition-Free, Looks a Whole Lot Like Hillary’s America

New York Gov. Andrew Cuomo announced on Tuesday a proposal that would make his state's public colleges tuition-free for families that earn less than $125,000 a year, potentially turning New York into a proving ground for an idea beloved by progressive Democrats and maybe—just maybe—giving him a running start in the race for his party's 2020 nomination.

Cuomo's plan—which he's absurdly dubbed the “excelsior scholarship” (it's New York's state motto, but come on)—would benefit students at both two- and four-year schools. Undergraduates would still be required, however, to pay room and board, which can reach more than $14,000 at the state's flagship, SUNY–Binghamton. The in-state sticker price for tuition at the State University of New York's four-year colleges is currently $6,470.

“If you come from any family making $125,000 or less, the state will provide free tuition," Cuomo said during an event today at LaGuardia College. "It is going to be the first program like it in the United States of America. It’s once again New York leading the way.”

Right now, Cuomo estimates the plan will cost $163 million. That's remarkably cheap in the context of New York's $156 billion state budget. According to the New York Times, however, “the administration acknowledges that estimate could be too low—or too high—depending on participation.” So we may have to wait for something approximating a realistic cost forecast.

Cuomo was joined for the big unveiling by none other than Vermont Sen. Bernie Sanders, who popularized the idea of eliminating public college tuition during his run for the presidency. However, the governor's proposal is actually a bit closer to Hillary Clinton's free-tuition plan, which was also aimed at families earning less than $125,000. Between Cuomo's minimum wage bill, which Clinton cited as a model for the nation, his gun control legislation, universal pre-K in New York City, and the new college plan (assuming it passes the state Legislature, where Cuomo has a fairly strong record), the Empire State is starting to look a lot like a model of what life under a Hillary-style progressive government might look like. Of course, Cuomo, who is very obviously itching for a shot at Donald Trump in four years, also wants the approval of the party's social-democratic standard-bearer.

That speaks to the lasting legacy of the Democratic primary. The 2016 election turned out to be a disaster for progressives on a national level. But progressives are getting a consolation prize in states where Democrats retain power. Ambitious governors like Cuomo are going to move left where they can to appeal to the Sanders wing, and that means ideas like tuition-free college might become a reality, at least in some parts of the country.

Dec. 30 2016 2:08 PM

The Tragedy of Obamacare Is That We Will Never Know if It Would Have Worked

This year brought us a lot of unfortunate news about Obamacare. Major insurers pulled back from the exchanges after racking up losses on patients who turned out to be older and sicker than expected. The government announced that premiums would be 22 percent higher, on average, in 2017. The fleeing carriers and rising prices created a sense that the health reform law was finally in danger of collapsing in on itself. And then Republican Donald Trump was elected president.

But this month, a little bit of light has cut through the gloom. The Department of Health and Human Services announced that a record 6.4 million Americans had signed up for insurance plans on healthcare.gov during open enrollment, up 400,000 from last year. Meanwhile, analysts at S&P predicted that this year's big premium hikes would be a “a one-time pricing correction.”

This has led some of the law's advocates to declare that Obamacare would be in fine shape, were Republicans not preparing to junk it. At New York, Jonathan Chait writes that while the health care markets are stronger in some states than others, “on the whole, the exchanges are stable, and the predictions of the law’s critics have mostly failed.” At the New York Times, Paul Krugman writes, “Obamacare hit a bump in the road, but appears to be back on track.”

It would be bitterly ironic if Republicans started dismembering the Affordable Care Act at precisely the moment that it began to work as intended. But I think Chait and Krugman's assessment is a little bit premature. Obamacare certainly looks like it's in a sturdier place than it was a few months ago, but even if the GOP wasn't coming for it with an ax, there would still be lots of open questions about the law's future.

Here's why there's real reason for optimism. After this year's premium increases, it seemed as if Obamacare might be getting closer to a lethal death spiral, where rising prices would lead to falling enrollment and the eventual implosion of the individual health care market. That obviously isn't happening. Instead, more Americans than ever are signing up, possibly because they're trying to avoid the individual mandate's tax penalty for not having insurance, or perhaps because they've learned about Obamacare's subsidies. The more people who enroll, the steadier the insurance markets will become—especially if those new customers are on the young and healthy side—and the smaller future premium increases will be. But that doesn't mean it's reached stability.

That's because insurers are still losing money, and may continue to for a while. In its research note, S&P looked at 32 Blue Cross and Blue Shield carriers, and found that as of Sept. 30 they had spent about 90 cents of every dollar they received from premiums on medical care for their customers. That's an improvement from the same period in 2015, when they were spending $1.03 for every buck they'd earned, but still high enough that many will likely end up in the red after they factor in administrative expenses. The analysts still think it will be a few years before these companies are consistently breaking even or hitting their target profits. More from that report:

For 2017, we believe the continued pricing correction and network design changes, along with regulatory fine-tuning of ACA rules, will result in closer to break-even results, in aggregate, for the individual market, and more insurers reporting profits in this segment. But most will remain below their target profitability levels (low single-digit margins for the Blues) in 2017. It will take another year or two of continued improvements to get to that target.

Of course, this is just one, somewhat optimistic forecast, which could be off. For instance, we don't now if carriers raised their prices enough to deal with the expiration of Obamacare's temporary reinsurance program, which cushioned companies against losses by insuring the insurers. Obamacare is in a better place than it seemed a couple months ago. But it's too early to tell whether it's out of the woods. And keep in mind, at this point we're just talking about baseline functioning—not about whether it's insuring as many Americans as Democrats hoped, or providing the types of affordable coverage it was intended to.

And there's a good chance we'll never know for sure whether Obamacare would have worked long term in its current form. Unless Republicans hold off entirely on repeal, any action they take to weaken the law will likely scare off some insurers and jostle the market. Even the repeal and delay strategy Republicans are embracing, where they'd pass a bill sunsetting Obamacare in two or three years, giving Congress time to vote on a replacement, would probably lead many insurers to drop out of the market knowing they are never going to profit off it (Republicans have talked about offering those companies money to stay on, but that seems unlikely given the GOP base's aversion to anything that smells faintly of a bailout, and in any event isn't the same as letting the ACA run its natural course).

Obamacare has been a fascinating policy experiment. It's too bad we'll probably never get to see the final result.

Dec. 22 2016 1:01 PM

Carl Icahn Is a Good Investor. But He Has No Business Being Donald Trump’s Regulatory Scourge.

President-elect Donald Trump has appointed Carl Icahn, an old-fashioned stock operator, to be his part-time regulatory scourge. According to the Wall Street Journal, Icahn, an activist investor, asset manager, and occasional stand-up comedian, won’t take a government post. But Icahn will be a “special adviser to the president on overhauling federal regulations,” the Journal reports.

This would be a great idea if Carl Icahn actually had a wise view of regulations and their impact on the American economy—and if he had a broad-minded sense of the public interest. But he doesn’t. Like pretty much all the other businessmen Trump has surrounded himself with, Icahn hasn’t spent much time articulating a sense of what public goods are. Indeed, he typically views regulations through the lens of his portfolio of stocks and companies. And his concern is less for the investing public than for himself.

Icahn is both an extremely smart guy and an extremely shrewd one. He has learned to play the markets, the American system of corporate governance, and the financial media like so many fiddles. He has been one of the more enduring figures on Wall Street—he’s 80 and at the peak of his influence—and has shown an ability to reinvent himself. (He also endowed the cool track facility, Icahn Stadium, on New York’s Randall’s Island.)

Icahn emerged as an activist investor in the 1970s, acquiring small stakes in publicly traded investment vehicles and companies that were underperforming and then pushing the boards and chief executive officers to change personnel, give him a few seats on the board, change practices, or sell units. (Here’s a good brief history on Icahn’s early years from Investment News)  And if they didn’t want to do any of that, management could simply buy back the shares he had bought at a higher price to make him go away—a practice that became known as greenmail.

In the 21st century, Icahn has transformed himself into a fund manager and a folksy, self-deprecating menace to entrenched management and boards. With the timing of a comedian, he delivers speeches at conferences in which he makes fun of the many foibles of the arrogant CEOs and clueless boards he’s encountered over the years.

Icahn relishes getting into public spats with other investors. When hypomanic hedge fund manager Bill Ackman waged a highly public short-sale campaign against nutritional supplement maker Herbalife, Icahn publicly took a long position on the company and proceeded to browbeat Ackman in a CNBC interview. (Icahn’s involvement in the imbroglio prompted hedge fund manager Dan Loeb famously to post: “New HLF product: The Herbalife Enema, administered by Uncle Carl.")

But Uncle Carl doesn’t just talk. He does. Through his public vehicle, Icahn Enterprises, he has bought outright control of, or large positions in, several companies. These include the auto parts store Pep Boys, CVR Refining, American Railcar Leasing (which he just sold), and the gambling company Tropicana Entertainment. In 2014, Icahn Enterprises gained control of the bankrupt Trump Entertainment Resorts, which owns the ill-fated Trump Taj Mahal casino in Atlantic City. It was shut down in October.

Here’s the thing. Icahn is a very good businessman. But his interest in good governance and in regulation is purely situational. When he gets involved with a company as an activist shareholder, he typically doesn’t have deep thoughts on how they can improve their businesses for the long term. After he acquired a small stake in Apple in 2013, his big idea for how one of the most successful and innovative companies of the past century could increase shareholder returns was … to borrow money and buy back shares. And once he sells his stake, like any money manager, he loses interest in the company.

Icahn’s interest in regulations is similarly situational. He shows no evidence of having thought through the issues of how professional licensing impacts lower-income workers, or how cost-benefit analysis can or should apply to the promulgation of new regulations, or how mechanisms like cap and trade could work. Rather, he has complained about how Environmental Protection Agency regulations on the use of ethanol and biofuels are cutting profits at his refining business. Oh, and he is for keeping Dodd-Frank.

As for the public at large, Icahn has offered them the ability to benefit from his financial acumen. Individuals can buy shares of publicly traded Icahn Enterprises. Over the past three years, the stock of Icahn Enterprises has massively underperformed the S&P 500.

Dec. 22 2016 11:31 AM

Why It’s Getting Harder for Uber to Break the Law

Like a parent snatching away the car keys, the California DMV has put the kibbosh on Uber's autonomous vehicle trial in San Francisco.

On Wednesday, an Uber spokesperson said, California stripped the registration from the autonomous Volvos that the company had put into service in San Francisco. The trial has ended, though the company says it will find a way to "develop workable statewide rules" in California going forward. It will seek to deploy its autonomous vehicles elsewhere in the interim.

It's a humbling moment for the San Francisco-based taxi giant, which had maintained that its autonomous vehicles did not require a special permit under state law. They were not actually autonomous because they could not drive without human monitoring, the company's AV czar Anthony Levandowski argued in a conference call with reporters on Friday. He did not see what distinguished Uber's cars from Teslas with autopilot enabled.

But it's also a crucial test case. Uber has long flouted local laws until they could be bent to suit its operations, or preempted in the statehouse. As the San Francisco case demonstrates, that posture gets harder to maintain as the company shifts from software to hardware. The days of Uber playing the outlaw startup are vanishing as the company acquires millions in fixed assets.

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