The Amateur Financier

Every so often, I have a stunning flash of brilliance.  An idea that is so simple, seems so obvious, that I’m sure there’s something that I’m missing.   An idea that, if implemented, seems to solve not one, but several large social problems at once, making me a huge hero to the entire country, or possibly the world.

But then I take a step back, and really think about how that would work.  How could I, a normal mid-twenties guy, come up with a solution that’s alluded our policy makers and government leaders?  (On second thought, don’t tell; I’m pessimistic enough about the government already.)

In the spirit of sharing my money insights (one of the goals of this blog, after all), here’s the idea I recently had to fix unemployment and government spending, all in one swoop.  If I’m missing something, or being too optimistic about how some of these changes would actually affect things, be sure to let me know; I can’t present my new proposals to President Obama and the Congress if it’s filled with obvious bugs.  Here we go:

1) End the minimum wage: There are plenty of companies out there that would gladly employ more people if it didn’t cost them so much.  It’s Econ 101: the higher the cost, the lower the demand, and it works for employees as well as other goods and services.  If you’re forced to pay $7 an hour per employee, you as a business owner are going to want fewer employees than if you can only pay $4 an hour, which in turn is fewer than you would have if you could pay $1 an hour.  (Don’t worry, minimum wage workers, we’ll get you more money in just a bit.)

2) End current federal welfare programs: There’s currently a morass of federal programs that provide aid to the poor and those in the lower middle class.  (Although, there’s some argument about that point.)  Eliminate all those disparate programs (with the possible exception of Social Security, which is based on how much money you put into the system, at least in theory), to clear the way for something much simpler.  (For that matter, if you can eliminate most or all of the state and local welfare spending, we can really attempt to streamline the process.)

3) Change the poverty line: As mentioned yesterday, there’s much disagreement about the current poverty lines, which are just the inflation adjusted poverty lines first calculated back in the 1960′s.  Society and our spending habits have greatly changed in the mean time, and the previous poverty line levels don’t seem to be accurate (to say nothing of the fact that they don’t provide much in the way of adjusting for the different costs of living in different parts of the country).  The likely result will be to increase the poverty threshold, also increasing the number of people considered to be living in poverty.

4) Create a new benefits system: Now, if we want to make a simpler, easier system for public benefits, the easiest thing to do is to set up a single welfare program that will give out weekly (or biweekly, or monthly) checks to everyone who is unemployed or unable to work.  These checks will add up to the new poverty line for each person, which should (if we set a more realistic poverty line) be enough to allow them a decent chance to make a place for themselves.

5) Encourage work: Too many programs currently in existence suffer because they promote less work from recipients; if you work and bring home money, you end up getting less in government benefits.  To combat this, our new welfare program should encourage work, allowing people to increase their total income by working.

As the number of hours worked increases, the total amount the person earns (in wages plus benefits) should rise as well.  If someone is working twenty hours or less, the benefits they get should bring their total income to an amount higher than the poverty line, say 110% of the poverty line.  Working twenty-one to thirty-nine hours a week, and you’re guaranteed total compensation of 130% of the poverty line, while working forty or more hours a week (that is, full time) ensures that you’ll get 150% of the poverty line.  (Note: this would be total work time; if someone found two twenty hour a week part time jobs, they’d be able to collect the full-time benefits.)  No more worrying that working will decrease your government benefits; any job you take, no matter what the pay, will increase the money you take home.

6) Change who pays for welfare: You might have noticed one fly in the ointment up to this point: with the government covering the slack for businesses who pay their employments a wage less than the poverty line and no minimum wage, there’s not much incentive for companies to increase their wages.  They can pay $1 an hour, and their workers won’t complain (well, more than workers normally complain) because the government (that is, taxpayers) will pick up the tab.  Great news for businesses, not so great for tax payers.

To make this whole thing work without sticking it to the taxpayers, we need to change who is paying for this whole thing.  Our new welfare program will be paid for with taxes on corporate profits, for all corporations.  If discount stores and other currently minimum wage employers drive down wages for their employees, the tax that they, and all other corporations, pay will have to rise as a result.  Between the tax burden on their own bottom line, the tax advantages of paying out more money as wages (since they’d be company expenses and above the line deductions) and pressure from other companies who want to lower their taxes, there should (hopefully) be a fairly small drop in what companies actually pay their emplyees, even those on the bottom rungs of the corporate ladder.

Altogether, this plan should increase the number of people who are employed, simplify government spending, and encourage work, all while minimizing the tax implications for individuals.  Not bad for a sudden flash I had late last night, eh?

So there you have it; my plan in a nutshell.  Are there any flaw that I’ve missed?  Has anyone proposed a plan like this that I simply haven’t heard before?  Anyone have something they’d consider changing or adding?

If you’re an American and haven’t been hiding in the woods, away from all forms of media for the past few years (which seems like a better idea every day, to tell the truth), you’ve probably heard about this push to pass a health care bill to expand coverage here in the good old USA.  Just in case you were crushed under a rock for the past week or so, here’s the latest updates: a reconciliation bill was passed in the House on Sunday, the Senate passed their reconciliation bill today, and as of this writing, the House needs to pass the Senate bill (with its changed language) before it can be signed into law.  Barring something major happening to derail it, it looks as if the bill will be signed into law before this weekend is out.

Obviously, with such big changes being enacted that will affect health care, the economy, and OUR pocketbooks, lots of people have been throwing out their opinions about the whole situation.  Financial Samurai, for example, is in favor of the bill (or at least, the concept of expanding health care), Darwin of Darwin’s Finance opposes it, Kevin of 20s Money maintains that it will be much more expensive than currently expected, and Evan of My Journey to Millions asks if the bill is even constitutional (more on that below, as well as filling the airwaves over the next few months), just for a few examples.  With so much information flying around, I thought I should give the bill a peek under the hood, as well.

What’s In This Thing

If there’s one thing I think I can say for certain about this bill, it’s that most of the people currently commenting on it (myself included), most of the people who will be affected (that would be just about everyone in America), and even most of the Congresspersons and Senators who voted on this bill, haven’t actually read it.  That’s the problem with trying to discuss a 2,409 page bill; unless you have superhuman reading speed (side note: Worst. Superpower. Ever.), you’re just not going to make it through the whole thing.  Luckily, there are diligent groups with teams of readers to do just this sort of thing.  Here’s a summary from Health Insurance Providers that sums up the major aspects of this bill and when they go into effect:

There’s plenty of other sources out there for further review and consideration of this bill; here’s an article from Consumerism Commentary about how the changes included in this law will affect your pocketbook.  If you want to know a bit more about ten changes that are coming this year, here’s a detailed list from Alternet (a left-leaning website); if you’re wondering why anyone could be so cynical about this bill, Investor’s Business Daily has a list of ‘tough’ new rules that will apply, particularly to physicians and business owners.  (Of course, as is often the case in our sharply divided political world, many of the same points are included on each list; what the Left considers a victory, the Right considers a travesty.)

How Will This Affect ME?

Ah, the big question, how will this affect you?  The truth is, there’s no way to know with absolute certainty what will happen (which is why predicting the future is always such a crap shoot), but we can make some educated guesses.  Here’s a few possibilities:

• A young person who don’t want health insurance: Given the fairly low proposed penalties for not having health insurance (starting at $95 in 2014 and rising to $625 (capped at 2.5% of your Adjusted Gross Income) by 2016), there’s a good chance that many of the youngest, fittest people will choose to continue foregoing insurance and just pay the fines.  In other words, this won’t affect you much at all.  (We’ll see how this can cause trouble in just a moment.)
• A person with ‘pre-existing conditions’: Good news for you; as of 2014, you’ll have to be issued health insurance, regardless of your current state of health.  Bonus: you can’t even be charged more because of your health status, so no* worries that you’ll be bankrupted by hospital bills. (*Asterisk added because you’ll still need to pay the ‘regular’ insurance rates, which brings us to…)
• Someone young and healthy, who wants health insurance ‘Just in Case’: Well, here’s the thing: health insurance companies can no longer lock out those who are bad risks (our ‘pre-existing condition’ friend up there), nor charge him or her higher premiums to reflect the greater risk that they will need medical care in the future.  Add in the people like our first example who decides to skip insurance coverage to save money (at least, until they get really sick and fall into category two, then get insurance since they can no longer be denied), and the level of risk in the insurance pool is going to be much higher, with rates that reflect that.  Bottom Line: higher rates than we see now for the young and healthy, the older and sicker, basically everyone.
• Someone getting insurance through their employer: This is possibly the toughest case.  In theory, little may change; with your employer footing much of the bill and agreements with the insurance company regarding coverage for employees, there may not be much of a noticeable change on your end.  On the other hand, with higher levels of risk from individual insurance policy holders and the need for more income to level things out, health care costs could rise for you and your employer.  Add in fairly mild penalties for not providing coverage to employees, and there’s a good chance that some firms will drop health care coverage to save money.  (Which drops you into the category right above this one.)

Again, I remind you, this is just an educated guess on my part; with human nature being what it is, unforeseen events could make the results much better, or even worse.  Of course, we are getting a bit ahead of ourselves here; the bill still has one or two legislative hurdles to jump (and that’s assuming everything comes together), and even then, there are obstacles to clear…

What’s This About Unconstitutionality?

The next battlefield, assuming that all the needed votes are in favor and the bill is signed by Obama (which, if you remember the old School House Rock song, will make our sad little bill friend into a law), then there is the almost certainly going to be someone who takes the case to court on Constitutional grounds.  The main argument, as illustrated in this Cato Institute piece, is that punishing someone for something they did NOT do (in this case, those people who do not buy health insurance) is unprecedented in American history, and may be stretching Congressional law making power too far.

I’ll be completely honest with you: I’m no legal scholar, and while the argument made above sounds reasonable, I have no idea if it will pass the constitutionality test.  If it comes to that, and I think it will, we’ll just need to wait for the court’s decision, and go from there. (Of course, if the court rules that fining someone for not having health insurance is unconstitutional, and this bill is still passed with only those parts excised, the problems illustrated in the examples could end up being far worse.)

My Opinion

Now, finally, it’s time to share my opinion on this bill.  After much thought, I have to say, I’m not in favor.  Don’t get me wrong, I agree with FS on the importance of helping expand coverage so more people are protected.  I just see too many ways that this bill could have the opposite effect, causing insurance rates to shoot up drastically, leading employers to drop coverage, and causing the young and health, the ones most needed to stay in the system to keep it solvent, to leave and fend for themselves, continuing the cycle of rising rates and coverage being dropped.  (I don’t see this as plot to drive insurance companies out of business and leave the government to institute truly socialized medicine, as some have claimed; but it does seem to be a pretty serious flaw in the system.)

All of that being said, though, I’m going to try to hope for the best.  The advantage of being a pessimist is that you’re always either right, or pleasantly surprised; here’s hoping I get pleasantly surprised in this case.  To end on a lighter, more upbeat note, here’s a story about people celebrating the passage of the health care bill like it was Christmas; with any luck, we might all look back and celebrate one day.