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Oct 15, 2011

Insane Budget Savings

Official One:  The CLASS Act was intended to provide long-term care insurance to everyone. I'm sorry to report that we will not be implementing it. It is too expensive.

Official Two:  Even worse, we won't be able to save $86 billion by implementing it.

Mike:  Too expensive, but it was going to save money. Are you nuts?

The Wall Street Journal reports that the US Department of Health and Human Services (HHS) has abandoned a part of ObamaCare.

[edited]:  The CLASS Act was intended to provide long-term care insurance for people who become unable to care for themselves.

HHS has re-examined the program as being too costly over the long run. It stopped implementation and reassigned the staff last month. HHS Secretary Kathleen Sebelius informed Congress that she does not see a viable path forward.

Fire Dog Lake explains more.

[edited]:  The Obama administration always thought that this program would need taxpayer subsidies to operate in the long-term.

Cancelling the CLASS Act forfeits $86 billion in savings [?] in the Affordable Care Act. The CLASS Act was scored by the CBO as providing revenue in the ten-year window of the legislation, because it collected more in premiums than it paid out in the early years.

The CBO is the Congressional Budget Office. "Scoring" is its official determination of the costs and savings of legislation.

US Senator Judd Gregg (R. NH) had amended the law to require that CLASS be self-sustaining for 75 years without taxpayer funds. HHS had to work within those guidelines.

My  ?  above marks a contradiction. CLASS could only be implemented with government subsidies from taxes, but the CBO scores CLASS as saving $86 billion dollars. This contradiction illustrates an insane, dishonest, and immoral budget process. This budget accounting trick is so common that officials and the mainstream press don't give it a thought.

The Wall St Journal  -  The Definition of Insanity
Why Democrats won't repeal a program that everyone in Washington knows is a fraud.

[edited]:  Democrats added CLASS to ObamaCare as a budget gimmick among many. These create an illusion that trillions of dollars of new spending will somehow reduce the deficit [save money].

CLASS was supposed to start in 2012. People who signed up would pay premiums immediately, but could not receive benefits for the first five years. Democrats planned to spend these premiums immediately on other things, as if the future payments to beneficiaries would never come due.

About $86 billion would have accumulated between 2012 - 2021 to help finance the rest of ObamaCare. CLASS would then go broke a few years later. That would be somebody else's problem.

The CBO estimates the revenue and cost of a proposed law over 10 years. This is usually adequate for a fair evaluation. But, social programs have a much longer life. Democrats routinely propose laws which collect money now to fund promises more than 10 years in the future. This shows up as a budget "savings" now, because it ignores promises due after the 10 year window.

Thankfully, Sen. Judd Gregg especially applied a 75 year evaluation period to CLASS. Team Obama could not work around this appeal to reality. Strangely, the zombie of the "savings" scored by the CBO still lives within the fantasy world of 10-year budget accounting.

So, HHS will not implement CLASS because it would cost too much money in reality. But, HHS will not officially kill CLASS because it is tied to a fantasy savings of $86 billion.


The budget process is immoral. Democrats have passed programs into law which cannot be funded as advertised. This puts at greater risk any person who relies on them, and it prevents partial solutions from the private market.

A proponent might say "These plans give aid to the needy in the short run. That is good, even if the long run solution will require much larger taxes on everyone, and especially the rich".

I say that such programs involve a growing number of people who will rely on them until the time that they fail. A plan for the future is not "We will do this now, and then we will hope".

Our government (politicians) pretends that it is planning for the long-term, but it uses fraudulent accounting to justify short-term plans which are destined to fail in as little as 10 years.

Long Term Care Insurance

Private long-term care insurance (LTCI) is a variation on life insurance. The insurer enrolls a person who is not already in dire health and charges him a monthly fee (the premium) based on his current health and age. The insurer agrees to pay to him a monthly support payment for as long as he is disabled, after he suffers future ill health or an accident.

Private LTCI applies immediately after the person is accepted. For example, it would pay toward nursing home care after an accident which occurs a few days (or 20 years) after acceptance. No state would approve a plan with a five year waiting period such as CLASS.

LTCI is like fire insurance. Each participant pays in enough each month to pay for the costs of sudden disability for a few unlucky people like him, say from stroke or accident. Each person pays according to his own risk, averaged among people with the same risks as he has.

Note that he is not paying for the care of people who are much older or sicker, in the hope that younger people will pay for him when he is himself older and sicker. Voluntary insurance cannot force him to pay more in order to support people in higher risk categories. An insurer who tried this would find that other companies are charging lower premiums, attracting away new business and the insurer's healthy clients.

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CBO:  Social Security Trust Funds
Feb 2011 - Easy Opinions

The accounting fraud in CLASS above is to spend "excess" premiums while ignoring future promises which justified those premiums. Sadly, Social Security is a much larger and more serious fraud of the same type.

There is nothing real in the Social Security and Medicare "trust funds" (or in any US Treasury trust fund). The special Treasury bonds in these "trust funds" are only a political promise to find the money somewhere.

The shortfall is about $66 trillion in today's dollars for the combined promises of Social Security, Medicare, and Medicaid. This is about four times the entire yearly income of everyone in the US. That promise is much more than what is recorded in the trust funds, which is itself only an unfunded promise. The trust fund bonds are a promise, but they don't help to pay for themselves.

The Social Security and Medicare trust funds are only a record of what was collected and then immediately spent for things other than Social Security and Medicare.

Reporters assume incorrectly that something called a "trust fund" must have something valuable in it. These "funds" were created and named by politicians. They only hold IOU's from the Treasury to itself. Call it a reminder of what the Treasury took out of the fund to buy other things and is supposed to put back someday.

Oct 7, 2011

Fooling the Future

Government Planner:  Our next stimulus plan is really, really targeted at creating jobs and prosperity.
Mike:  What about the last stimulus plan?

Planner:  That was only sort of, kind of targeted at creating jobs and prosperity. We were distracted.
Mike:  How long will this new stimulus work?

Planner:  For about a year, probably past the next election.
Mike:  Then what?

Planner:  We'll have another stimulus plan ready, to continue the good works of the last two.

Future Economic News:

Federal Reserve Chairman Ben Bernanke has announced that Quantitative Easing Eight combined with Stimulus Six has not achieved the results that "were expected by now-fired Fed analysts". This is despite recent reports of an IRS program to increase tax audits unless "businessmen borrow money and invest in job-creating expansion, like it or not".

Quantitative Easing plus Stimulus is the following strategy:

(1) Increased government purchases and salaries cause increased demand for filing cabinets and restaurant meals. This starts a virtuous cascade of money throughout the society, leading to an explosion of wealth and prosperity.

(2) Small businessmen with "more luck than brains" are fooled into investment and expansion by a six-month, 5% increase in business. They will naturally hire more workers, at least until the six-month government buying spree ends.

"It is mystifying that this plan has yet again failed" said Bernanke. "We have run out of traditional economic levers to pull. Very few businessmen have a degree from Harvard. Yet, manipulating money and credit is failing to fool businessmen in any significant way."

"We are now forced to use non-traditional methods. We are making huge ad buys in major markets. Our message is that it is patriotic to lose money, if necessary, by expanding business and hiring workers in the current environment of regulation, taxes, and medical mandates. That is the carrot."

"We accept that business owners are unhappy. We will make it clear just how much more unhappy business owners will be if they don't do what we say. We are fundamentally pro-business. We want businesses to prosper by doing exactly what we tell them to do. One for all and all for one. That is the stick."

Wags have unfairly and mindlessly compared government policy to the South Park cartoon  Underpants Gnomes:
(1) Collect underpants.  (2) ???  (3) Produce huge profits.

(See the video starting from 17:40. Sorry for the 30 second commercial.)

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Cause and Effect
EO -> 10/11/11 - Knowledge Problem by Michael Giberson
( Click the link above, then see the further link at the upper right. )

The oil price increases of the 1970s prompted politicians to raise interest rates in an attempt to control inflation. The economy slowed. Was this because of the oil price increase, or the result of the higher interest rate?

This seemingly simple economic question is actually hard, with uncertain answers, like most questions about the economy.

Motto: We don't really know, but we are willing to guess.