Out of the Storm News

• Senate Finance Committee Chairman Max Baucus, D-Mont., plans to have a tax reform package ready to move by the August recess: Washington Post
• The Florida Hurricane Catastrophe Fund is selling $2 billion of taxable bonds this year, the state’s largest muni debt offering since 2007: Bloomberg
• Credit union trades are called in by House Ways and Means Committee to discuss the industry’s federal tax exemption: Credit Union Times
• U.S. Rep. Candice Miller, R-Mich., introduces bill to privatize National Flood Insurance Program: Insurance News Net
• U.S. infrastructure isn’t “crumbling”; it’s merely mediocre: Bloomberg View
• Florida state Rep. Bryan Nelson distributes wine from with “scary” vintages: Florida Business Observer
• Attractive catastrophe bond pricing may help bring down North Carolina homeowners’ insurance rates: Triangle Business Journal
• Storm forecasters expect an active hurricane season ahead: PropertyCasualty360

 

In a truly stunning announcement, last week, the U.S. Food and Drug Administration announced its intention to lift many restrictions on labeling of over-the-counter Nicotine Replacement Therapy drugs; allow multiple NRT products to be used concurrently, and concurrently with cigarettes; and to substitute the current firm limitation of 8 to 12 weeks with a squishier recommendation that, if needed for longer durations, the user should consult his or her physician.

This was in response to citizen petitions from Tobacco Free Kids, the State of New York and multiple other parties alleging the safety of these proposed changes and that such action would enhance the efficacy of NRT products in curbing cigarette smoking. Even though the FDA found the referenced studies weak, inconclusive or technically flawed,it accepted the major recommendations of these citizen petitions on the basis of “30 years of experience” with these products.

If I understand the response correctly, these products are now to be available basically without warnings or restrictions, and, as they have been in the past, with no age restrictions for purchase or prohibitions on TV or other media advertising.

In addition, the FDA approved their being made available at much lower cost in single-day packaging without considering how this might be seen by teens attracted to possible nicotine use.

While I agree in general with the thrust of the citizen petitions and the steps taken by the FDA with regard to the labeling requirements on these products, I wonder if the practical effect is to move these products into the realm of recreational drug use. Certain elements of their action may be worthy of reconsideration.

The other aspect of this is what it implies for manufacturers and vendors of e-cigarettes and other smoke-free, relatively low risk tobacco products. Should they all submit drug applications, or will FDA use this opportunity to rethink the provisions of the tobacco control law that prohibit these manufacturers and vendors from advising current smokers and others about the difference in risk posed by these products, as compared to cigarettes?

photo by: goblinbox (queen of ad hoc bento)

I’ve already covered in these pages some of the things the editorial pages of North Carolina’s leading newspapers are getting wrong about S.B. 154, legislation to modernize the state’s system of setting auto insurance rates. But co-sponsor Sen. Jeff Tarte, R-Cornelius, does a better job than I ever could of getting to the heart of the matter.

To refresh your memories, S.B. 154 would allow auto insurers to opt out of setting their rates collectively through the North Carolina Rate Bureau, the last “pure” auto insurance rate bureau system in the country. The change would permit insurers the option to offer a range of products and discounts not currently possible under the one-size-fits-all rate bureau system.

The insurance commissioner would continue to have authority to disallow rates deemed to be excessive, inadequate or discriminatory, but regulators would need to show cause to challenge proposed rate increases of less than 12 percent.

Opponents of the bill have seized on that change to argue that the new system would lead to massive rate increases in what has been undeniably a relatively affordable state for auto insurance (albeit one in which lower-risk are bearing a disproportionate amount of the costs generated by higher-risk drivers.)

In a letter to the Charlotte Observer, Tarte explains a serious flaw in that prediction:

Some people have suggested that the N.C. Rate Bureau is responsible for keeping North Carolina’s car insurance rates low. But consider this, N.C’s commercial auto insurance market does not use a rate bureau to set rates. Are commercial rates significantly higher? No. North Carolina enjoys some of the lowest commercial auto insurance rates in the nation.

Indeed, as Alan Smith and I note in a new primer published by North Carolina’s John Locke Foundation, there are any number of reasons North Carolina has low average auto insurance rates, but the insurance department’s authority to set price controls are not among them. In reality, auto rates are low throughout the Southeast. Rates in North Carolina and other nearby states are lower than the national average for a variety of reasons, including caps on tort damages, reasonably tight enforcement of vehicle safety standards, demographics, and relatively low traffic density.

Tarte also offers a concise summary of why the system needs reform:

More important, hidden fees that are charged to every driver to help cover the cost of insuring risky drivers would be eliminated. Did you know that this fee by state law cannot be mentioned on your insurance bill? It cost North Carolina residents nearly $900 million over a five-year period, and most drivers never knew that they were being charged.

This hidden fee is only necessary because our state has insurance companies lump good drivers together with high risk drivers through the N.C. Reinsurance Facility. This practice leaves all drivers with the responsibility for insuring risky drivers, while the insurance company makes a guaranteed profit for servicing these accounts. Does your business get a guaranteed profit for taking on risky business?

North Carolina consumers deserve better. We deserve a system that lets good drivers take advantage of discounts and does not force us to pay hidden fees to help insure risky drivers.

This is how everyone else in the country does business – not because it is good for insurance companies, but because it is fair to every driver.

When it comes to property insurance reform in Florida, everyone is basically focused on proposals that deal with the Florida Hurricane Catastrophe Fund, Citizens Property Insurance Corp. and the (over) regulation of private insurance carriers in the state.  Some bills dealing with these issues are crawling through the process, but it is still too early to tell whether or not they ultimately will be enacted by a Legislature that has historically viewed them through a very skeptical lens.

However, a property insurance bill that appears to be sailing through the Legislature is one that deals with FIGA, a little-known state insurance mechanism with no apparent problems or need for reforms.

When insurers are on the verge of insolvency, they must either be rehabilitated or liquidated by state government.  When they are liquidated, the Florida Insurance Guaranty Association (FIGA) assumes and pays any outstanding claims belonging such insurers so that consumers who bought an insurance policy in good faith are not left with their claims unpaid.  It’s like the FDIC for insurance companies.

FIGA obtains its funding to pay claims primarily in two ways: through the liquidation of assets of insolvent insurers and by levying assessments on insurance companies.

Like Citizens and the Cat Fund, FIGA can levy assessments onto essentially every property/casualty insurer in the state.  Specifically, FIGA can levy up to a 2%-of-premium assessment for each of the two accounts it has for a maximum of 4% per year.  When the FIGA board determines the need for an assessment, the Office of Insurance Regulation approves it and orders each insurance company to pay the assessment upfront to FIGA within thirty days.

If it is an “emergency” assessment (due to a hurricane), the board at its discretion can spread the assessment over 12 months or collect it upfront, depending on whether it needs the funds quickly. “Regular” (or non-hurricane) assessments must be paid upfront within 30 days. Regardless, insurance companies recover the assessment from their policyholders at renewal or issuance. This is how just about all other states pay for their insurance guarantee funds.

S.B. 324 and H.B. 211 change the manner in which the assessment is levied onto the insurance companies. Instead of an upfront payment, regular assessments would be gradually collected directly from policyholders at renewal or issuance. Emergency assessments would likewise be collected directly from policyholders at renewal or issuance, unless the FIGA board determines it needs the funds immediately and cannot “reasonably” obtain financing.

At first glance, this appears to be a decent proposal that would save insurers from having to tap into their surplus to pay a FIGA assessment. Insurance companies like this for accounting purposes, not to mention the interest they can continue accruing on that money.

However, the proposal appears to bind the FIGA board to the new “pass-through” levy rather than give it more flexibility.  Indeed, in the case of an emergency assessment, FIGA may elect to levy it upfront (per current law), but according to language in the bill, to do so, the board must demonstrate that “financing is not reasonably available” in order to make that decision.

“Reasonably available” is inherently vague.  If “reasonably available” pertains solely to availability without regard to cost, then this bill would in essence always force FIGA to finance regardless of the cost.

Remember when the Charlie Crist Administration paid $224 million to Warren Buffett’s Berkshire Hathaway for a mere pledge to buy $4 billion in Cat Fund bonds back in 2008 when the bond markets were frozen? The moral of this flashback: financing is always available even in hard times—at the right price.

If after a sufficiently bad hurricane season there are multiple insurance company insolvencies and Citizens, the Cat Fund, and neighboring states also impacted by hurricanes simultaneously go cap-in-hand into the bond market, FIGA may very well find itself in a situation where financing may not come cheap.

And what does this mean? The cost of financing—potentially expensive, high-interest financing—would be passed through directly onto policyholders (read: consumers) instead of insurance companies paying their FIGA assessment upfront as current law prescribes, which incurs no finance costs.

Paging Rep. Fasano!

However, a few tweaks can avoid such a scenario.  Two possible changes that preserve the spirit of the current legislation are:

• Removing the requirement that “financing is not reasonably available” and giving the FIGA board the discretion to determine if circumstances merit an upfront assessment payment or a gradual pass-through assessment payment; or
• Allowing the insurance carriers to decide.  They can be given, say, 30 days to decide whether to remit the full assessment amount as current law prescribes or to remit it gradually as a pass-through as the bill prescribes. Those electing the gradual pass-through option would subject their own policyholders to applicable financing costs, if any.

These are commonsense suggestions to fine-tune well-intentioned legislation that, if enacted without changes, may very well have the unintended consequence of raising insurance costs on consumers.

I was in North Carolina last week. North Carolina is, I believe the only state in the union where the Monday after Easter is a state holiday to allow people to celebrate the twin religious ceremonies of the Christian Easter and the state high school basketball championships. 

As a committed basketball state, and since one of the local university teams was selected to play in the national college tournament (that produces, and I am not making this up, the lowest productivity of any regular work day in America) naturally there was some discussion about their trip to Dayton, Ohio to confront Temple, and then perhaps the winner of the Indiana-James Madison game.

One of the players interviewed on television disclosed that James Madison University was unknown to him as a college, but remembered that Madison was a “big name.”  “Somebody who signed the Declaration of Independence or the Emancipation Proclamation or something.”  If the odds were beaten, and North Carolina State faced a giant-killer that dispatched a number one seed, maybe he would look it up.

Upon returning home, I was greeted at the airport by my wife, who tells me that the desperation to do something about the kids who are failing elementary school in our little community has produced a proposal by our school board. To supplement the homework help and additional benefits already offered to these struggling children, we taxpayers are in discussions about also providing them with free summer school.  We will try almost anything to keep them advancing through the system which has the potential to give them a shot at a decent life in the 21st Century.

Summer school doesn’t come with a free breakfast and lunch, however, so it’s no sale so far.  First conversations about the extension of the educational safety net indicate that the parents of these at-risk children might not be willing to send them unless they get free meals.

As a comparison, a couple of Americans who founded and run Project Ethiopia are providing a corrugated roof and a concrete foundation for school buildings for young African children who don’t have one.  The parents, to get this help, pound rocks into gravel for the concrete, build the walls out of local materials and dig a 40-foot well by hand.

There is a lot of debate these days about taxpayer-provided benefits, which seem to beget twin torrents of statistics about need and “fair share” matched against warnings of what further dependency on the government could do to the economy and the American future.  Entitlement debates are mainly about the inexorable arithmetic these days. Perhaps they should increasingly be about a society that doesn’t appreciate its history or a basic human need for dignity satisfied by “earned success,” as Arthur Brooks, president of the American Enterprise Institute often puts it.

Also evident is the replacement of gratitude and determination in response to “a hand up” – the traditional standard for help by a community to its less fortunate members – with a less thankful instinct that views elimination of all inequalities as cultural and increasingly legal imperatives.

In the same way that the pursuit of happiness envisioned by the patriots who founded this nation has morphed into a demand, “charity” has undergone a transformation — first to “welfare,” and now to mandated benefits and transfer payments which reportedly comprise about half of nonmilitary federal spending.

Health and Human Services Secretary Kathleen Sebelius just last week offered her public opinion that the states who are nervous about expanding a troubled and expensive Medicaid benefit to more citizens will be eventually forced to knuckle under to provider pressure and the 100% federal match lasting until the end of the president’s term. The federal carrot sometimes turns quickly into a stick, as it did with serial use of lower speed limits, drunk driving laws and seat-belt use to threaten states’ federal highway money. Moreover, HHS is notorious for not granting permission to states that have developed programs that have been shown to be more effective in maintaining the public health, like our neighbors in Indiana, because they sometimes charge a small co-pay or use a deductible.

What happens if a “grand bargain” or something like that is struck on the federal budget, and the feds fall back on their share of the funding?

Well, several million more Americans have a bone to pick with their member of Congress, for openers.

The best-selling Hunger Games trilogy by Suzanne Collins is all about a self-absorbed and demanding capital district that controls all production, including agriculture and mining, law enforcement and justice, and broadcast communications for all of the other districts in the nation.  I hope the Hunger Games series weren’t meant to be textbooks.

photo by: KendraMillerPhotography

My home state of New Jersey has been the scene of a number of historic events over the years, both famous and infamous: the invention of the incandescent light bulb, the first recorded baseball game, the Hindenberg disaster, the discovery of the Big Bang, the duel between Alexander Hamilton and Aaron Burr.

But earlier this week, the New Jersey state Senate topped them all, with its proclamation of a newly derived fundamental human right: the right to own beachfront property.

Garden State lawmakers would perhaps quibble with that characterization, but it’s difficult to imagine any other justification for S.R. 102, which passed the upper chamber March 18 by unanimous voice vote. The resolution declares the Legislature’s sense that Congress and the White House ought to “take all appropriate legislative and regulatory action necessary to increase subsidies for premiums paid for flood insurance through the National Flood Insurance Program, especially for property owners who have suffered frequent losses.”

Those who don’t follow the ins and outs of the NFIP closely might not immediately apprehend why that sentiment borders on self-parody. The NFIP has been offering overly generous subsidies to residents of flood-prone regions for more than 45 years, and the roughly 1% of policyholders who suffer “repetitive losses” (90% of whom were paying deeply discounted “grandfathered” rates ) have accounted for more than a third of all the program’s claims.

The result of this system, which the N.J. Senate apparently would like to see expanded, has been nothing but environmental catastrophe and financial ruin. To put it frankly, the NFIP is flat-broke, and has been ever since 2005, when hurricanes Katrina, Rita and Wilma forced it borrow more than $19 billion from the U.S. Treasury just to pay its claims. There was little chance the program ever would be able to pay down that debt, and what little progress it did make was quickly erased by Hurricane Ike in 2008 and Tropical Storm Irene in 2011.

But with claims still coming in from last year’s Superstorm Sandy, whatever hope may once have existed of the NFIP returning to fiscal sustainability has long since been swept away. When all is said and done, the Sandy claims are expected to put the program more than $30 billion in the hole, with no hope of ever digging itself back out.

Someday, some future Congress will have to bite the bullet and forgive that debt, which exists essentially as an accounting fiction. In the meantime, a strong bipartisan consensus has emerged in favor of reforming this broken system which, in addition to flushing billions of taxpayer dollars down the drain, has served to encourage development in the most risk-prone and environmentally sensitive regions, contributed to wetlands depletion, threatened endangered species and led to the overdevelopment of barrier islands that serve as natural buffers against hurricanes.

Last year, Congress capped nearly eight years of debate on flood insurance reform by passing the Biggert-Waters Act. It incrementally moves the program toward greater solvency by phasing out premium subsidies for second homes, commercial properties and properties that have seen severe repetitive losses. It raises the cap on annual rate increases from 10% to 20%. It asks the program to begin building a catastrophe reserve fund and permits it to leverage those funds through purchases of private reinsurance.

It’s not a perfect piece of legislation. It doesn’t address the program’s debt, or what the GAO has identified as lax oversight of its Write Your Own program. We’re still a long way from bringing the program to true actuarial soundness, much less to the full privatization that we at the R Street Institute would like to see.

But even the modest steps Biggert-Waters does take clearly trouble some coastal lawmakers. Like, for instance, state Sen. Christopher Connors, R-Forked River, author of the New Jersey resolution. Following the state Senate vote, Connors told The Press of Atlantic City:

“A perspective a lot of people didn’t realize is that the federal government realized they had a failed program for years and what they attempted to do to adjust the program was removing the subsidies so those in higher-risk areas would be paying higher rates,” Connors said Wednesday.

…“Removing subsidies is only ensuring that people who will be living near the water are very rich people. If you raise these costs and shift this burden onto them, you will drive out the middle class dream of living on the water,” Connors said.

One must at least credit Connors for his honesty. He recognizes that the program is failed. He concedes that the goal of reformers is to make those who live in high-risk areas pay more, in accordance with the basic principles of insurance. He’s a bit confused on the demographic distribution – in truth, research by the Institute for Policy Integrity shows that the wealthiest counties in the National Flood Insurance Program filed 3.5 times more claims and received $1 billion more in payments between 1998 and 2008 than the poorest counties – but the basic gist of Connors concern is pretty clear.

His concern is that folks in coastal communities have been having their lifestyles subsidized by the rest of the country for a very long time, and they don’t want to see anything change that.

In the Book of Matthew, Jesus compares those who hear his words and do not act upon them to “a fool, who built his house on the sand.” But who is the bigger fool, the one who builds his house on sand, or the one who chips in to rebuild it, over and over again?

The NFIP is a sucker’s bet, a three-card monte, of the sort that boardwalk hustlers have been peddling down the Jersey Shore for more than  century. In that sense, the state Senate is just taking part in a long and storied Jersey tradition – playing out the long con.

photo by: Rich Anderson

In a Jan. 31 BMJ blog post, Dr. Ruth Malone, editor of Tobacco Control, excoriated the Food and Drug Administration for proposing “facilitated dialogue” with the “tobacco industry.” This assertion was based on her perception that such dialogue would lend the “tobacco industry” legitimacy that they do not deserve. She further denied that the “tobacco industry” should be referred to as “stakeholders,” and denied the possibility that they might have goals in common with the public health community.

While this statement of righteous indignation reflects a view held by many within the tobacco control community, it is both technically incorrect and dysfunctional from a number of perspectives.

In her ruling, U.S. District Court Judge Gladys Kessler, of the D.C. District, found seven major cigarette manufacturers guilty of racketeering. While these companies are the largest and most visible cigarette manufacturers, they do not represent the larger “tobacco industry.” The tobacco industry consists of hundreds of other companies manufacturing and selling a wide range of tobacco and tobacco-related products. Dr. Malone, in her stereotyping the entire industry on the basis of criminal activity by seven firms, showed a profound lack of understanding of the structure and dynamics of the larger tobacco industry.

Even worse, by painting the entire industry as guilty of racketeering, Dr. Malone strengthens the hand of the guilty cigarette companies by effectively silencing the many others within the tobacco industry who are ready and able to work with the public health community in pursuit of public health objectives.

In her post, Dr. Malone references action by tobacco companies as “creating divisions within the tobacco control community.” She seems unable to imagine the possibility that, by gaining a better understanding of the dynamics of the larger tobacco industry, that we, in public health, could exploit similar divisions within the industry in a manner supportive of public health objectives.

It is not the FDA who has given the seven cigarette companies the cloak of social responsibility.  It is the larger tobacco control community, which has offered total and unquestioning support of the FDA Tobacco Control Act that provided this benefit to the racketeering companies. They knew, or should have known, at the time this bill was making its way through Congress, that Altria/Philip Morris helped draft major sections of the bill. In the name of protecting children from nicotine addiction, multiple provisions were written into the bill to protect both cigarette and pharmaceutical companies from competition from far less hazardous and likely less addictive tobacco/nicotine products.

Perhaps the greatest fault of Dr. Malone’s post was her failure to recognize the realpolitik and power dynamics of tobacco-related issues in the United States in this second decade of the 21st Century. For the past half century, the tobacco control community, both in the United States and internationally, yearned for a “tobacco-free society.”

During the 1990s, under the leadership of then-FDA Commissioner Richard Kessler, we attempted to secure federal legislation that would have empowered the FDA to ban at least some tobacco products. That was not to be. We only secured FDA authority to regulate tobacco when Congress and the president were presented with a bill that carried the strong support of the largest cigarette company. With passage of that bill, that question was put to rest. Our society will not be tobacco-free.

That being the case, the FDA is not “unwittingly acting as an agent for the tobacco industry…and undermining a strong tobacco control strategy.” The FDA is realistically taking the action needed to reduce tobacco-attributable illness and death and further our efforts to reduce teen initiation of tobacco/nicotine use.

Dr. Malone is not alone in her failure to recognize the manner in which the advent of the FDA tobacco law changes the American tobacco control landscape. If used wisely by the FDA and others in the tobacco control community, these changes can secure more rapid and more substantial reductions in tobacco-attributable illness and death than previously imagined, and most likely do so while further reducing teen initiation of tobacco products. If used unwisely, this law will do more harm than good, in terms of these public health objectives.

Wise use of the power given to the FDA under the new law will require facilitated dialogue between the public health community and all within the tobacco industries who care to engage in such dialogue. Central to this discussion will be consideration of tobacco harm reduction – the potential means by which relatively low risk, and possibly less addictive tobacco products could be used to displace cigarettes as the dominant means of nicotine delivery in the United States.

Wise use of this power will enable us to take advantage of natural market forces, in addition to strict regulation and frank health education, to pursue our public health objectives. How we collectively manage the skyrocketing popularity of e-cigarettes will be the first real test of our ability, as a tobacco control community, to adapt to a radically changed tobacco policy environment and use these changes to benefit the health of the public.

For four out of the last seven years, the Florida Hurricane Catastrophe Fund has been projected to have a shortfall should a major hurricane impact the state and cause the fund to pay out to its coverage limits.  This is one of those years. Currently, the Cat Fund is projected to experience a shortfall of $1.5 billion year should a sufficiently bad hurricane strike Florida this year.

What does this mean for the average Floridian?

Some background: The Cat Fund sells reinsurance to every property insurer selling coverage in the state of Florida.  Reinsurance is insurance for insurance companies. Florida law requires property insurance companies to purchase a minimum amount of this coverage from the Cat Fund, and the rest they can purchase from the private reinsurance market. The purpose of requiring insurers to purchase some of their reinsurance coverage from the Cat Fund is to keep insurance prices relatively stable for consumers, as the price of private reinsurance can fluctuate from year-to-year.  As such, the Cat Fund is meant to stabilize the Florida insurance market.

However, a potential shortfall of the Cat Fund would be anything but stabilizing. Because every insurer in the state relies on the coverage they purchase from the Cat Fund to pay claims in the event of a storm, if the fund is unable to pay out what it has promised each company after a hurricane, then quite simply, consumers may not get their claims paid in full.  On a larger scale, the consequence would be that many of the state insurance companies would themselves become insolvent (aka: broke) or close enough to it that the Office of Insurance Regulation would have to take some type of action.

Needless to say, mass insurance company insolvencies after a hurricane and the resultant inability of storm-ravaged areas of the state to quickly rebuild would have a catastrophic impact on the state’s economy, not to mention the thousands of families reeling from the aftermath of a hurricane who expected their insurance companies to make good on their promises.

This week, a House committee is scheduled to consider legislation that would gradually decrease the amount of coverage the Cat Fund can sell to a level where it could be reasonably expected to pay.  Currently, the law requires the Cat Fund to sell $17 billion worth of coverage. It has roughly $8.5 billion in reserves and would have to go out into the bond market and sell another $8.5 billion in bonds to pay out the full $17 billion.  However, the Cat Fund’s internal managers and outside firms alike believe that it will only be able to sell roughly $7 billion in bonds, which would leave a $1.5 billion shortfall.

Legislation up for consideration would gradually decrease the fund’s capacity from $17 billion to $14 billion over three years. Similar legislation was filed last year, but was rejected by the Legislature because decreasing the Cat Fund by $3 billion would have required insurance companies to seek that coverage from the private reinsurance market, which is generally more expensive than the state-run Cat Fund.  As such, this would have driven-up insurance rates, albeit by just a little more than 1 percent per year.  Florida’s Insurance Consumer Advocate Robin Westcott also opposed the legislation on these grounds.

This year, however, private reinsurance rates are projected to continue declining (by a projected 7 percent), which would make it an ideal time to consider right-sizing the Cat Fund.  In fact, the aforementioned Ms. Westcott favors this year’s legislation.  After running the numbers with the projected decreases in private reinsurance, her office actuary projected that property insurance rates would either remain the same, but more than likely would decrease if these reforms were enacted by the Legislature.

As such, legislators in the House and Senate insurance committees no longer have last year’s hard choice to make between slightly higher rates and gambling with the state’s economic future. This year, the choice is a lot easier: they can secure the state’s economic future without raising rates; or do nothing and continue peddling false, phantom coverage at great risk to the state.

The choice would be a clear no-brainer… if this wasn’t Tallahassee.

photo by: akeg

Later this week, the Senate is likely to vote on a “deficit-neutral reserve fund” amendment regarding internet sales taxes, couched in terms of state sales and use tax laws. As is frequently the case with such resolutions, it will contain plain language that is sufficiently generic as to hide its true intention: to corner conservatives into a proxy vote on the “Marketplace Fairness Act,” a flawed bill opposed by most of the conservative movement. If a vaguely-worded resolution draws significant support, then sponsors like Senator Dick Durbin (D-IL) will point to it as proof that his misguided legislation to dramatically expand state tax collection authority should get an immediate vote on the Senate floor. Supporters of limited government should oppose the Marketplace Fairness Act and any “reserve fund” scheme to aid its passage because it is bad policy for conservatives and even worse politics.

First, a brief reminder of why this bill is misguided. It would allow states to tax businesses beyond their borders for sales made online, setting a terrible precedent for other areas of tax policy and subjecting businesses to huge compliance burdens. It also imposes an “unlevel” playing field by allowing brick-and-mortar sales to collect tax based on the business’ location while forcing online sales to collect tax based on their customer’s location (a much more burdensome and complicated standard). Third, it creates real interstate commerce burdens of the kind that Congress should be actively avoiding.

But let’s focus on the politics. This is, after all, the United States Senate we’re talking about. Simply stated, the next Republican Senator to get in electoral trouble for being insufficiently supportive of expanding tax collection on businesses across state borders for internet sales will be the first. It’s true that there’s a lot of noise about this bill; that much is undeniable. Big box retailers have poured tens of millions of dollars into a high-powered lobbying and PR blitz to support the Marketplace Fairness Act because it would advantage them against their competition. But I haven’t heard much from what you could call “regular” folks without a business or lobbying interest in the bill saying, “Yes, please. Let’s give state revenue collectors the authority to target businesses outside their borders and levy their complicated taxes on my internet purchases.” In fact, polling on the matter pretty consistently shows that the public opposes the concept behind the bill, including upwards of 75% of conservatives.

A “no” vote on a “reserve fund” scheme might annoy lobbyists in gleaming penthouse offices on K Street, but so what? Regardless of one’s feelings on the underlying issue, a “no” vote is easier to defend back home because a failed reserve fund amendment does nothing to materially impact the fate of the Marketplace Fairness Act (it can always be brought up later) while a successful resolution helps to manufacture pressure to pass the bill ASAP, before committees can fully vet it and before the eyes of the world are truly set upon it. Any Senator with questions about the bill or who has yet to make up his or her mind on it should vote “no” by default, since there is no deadline that must be met and the bill has not been subjected to enough analysis on the Hill.

Beyond the lobbying game, a Republican Party that sees itself as resurgent on thwarting government intrusion on technology policy (witness conservative engagement on cybersecurity, wireless spectrum, and copyright issues) would look awfully strange simultaneously supporting greater tax collection authority via the internet. Some conservatives have made real inroads into tech-focused communities by being consistent opponents of unwarranted government involvement, something quite at odds with the Marketplace Fairness Act.

A lot of Republican Senators have kept their powder dry on the Marketplace Fairness Act because it’s a complicated issue and there have been much more important battles being fought over the last year or so. This week’s vote seems poised to try to trick them into effectively supporting that bill by instead presenting them a generically-worded deficit-neutral reserve fund. Time will tell whether or not they make the right choice, but rest assured that conservatives will be watching very closely.

photo by: woodleywonderworks

The Conservative Political Action Conference is clearly not as energized as last year, due largely to the intervening national election, which  many of these folks had thought would end the reign of terror for conservatives by restaffing the White House and executive branch.

There are two main classes of politically aware folks that predominate these days.  The first are people who believe that global warming and income inequality are the spinning out-of-control dangers that will eventually render civilization unrecognizable, and sleep-depriving in the meantime.  They don’t worry at all about the national debt or sovereignty, and are inclined to care more about our harmonization with other countries and universal precepts than protection against either intruders or radical Islam.

The people at CPAC are in large part the mirror image. Global warming doesn’t keep us up nights, but owing China a trillion dollars does. We stick with the observations and arithmetic to undergird our worries, and CPAC provides plenty of information about bad trends and unintended consequences.  (This morning’s pick – apparently increased use of ecologically correct cloth shopping bags instead of plastic bags for groceries has  increased the E. coli infection by 25% in some jurisdictions and precipitated some real life martyrs to the green cause.)

A heavy sense of resignation lies on the CPAC audience this year. Although the mainstream media hasn’t mentioned this, 2012 featured the first American president since every state started relying on popular vote to determine the Electoral College to be reelected with fewer votes than when he was first elected.  A president reelected after producing virtually no progress on the slowest recovery in the modern era and having presided over a nation with only 58.6% of its citizens working and the first credit downgrade  in history. A president who we now know chose not to ask the American military to defend our embassy in Libya while it was under attack for seven hours because of the optics of possible additional casualties just before the election.

The White House seems to be pursuing its agenda with increased intensity, and conservatives fear that the unthinkable might be possible in a world where John Kerry is secretary of state and Gina McCarthy runs the Environmental Protection Agency.  There is real concern that the United States might sign onto the Law of the Sea treaty, which is a mammoth wealth transfer to poorer countries, or that the administration might be able to arrange a deal to trade the Keystone pipeline in return for enhanced subsidies on alternative energy projects which mostly  brighten the futures of only the early investors.

Even though many of the elected champions like Rep. Paul Ryan, R-Wis., and Sens. Marco Rubio, R-Fla., and Rand Paul, R-Ky., are here, the only repeated standing ovations I’ve seen so far were for the executive director of the National Rifle Association and the last movie to feature the work of Andrew Breitbart.

New Jersey Gov. Chris Christie was not invited, which I’m sad about, because it is hard to see how conservatives can win by riding any other horse than the GOP, and he appears likely to redefine Republican executive electoral success in one of the bluest states around. The 30 Republican governors have been mentioned several times as a hope for the party.   I think the hope of the nation as well may depend more and more on these men and women state executives engaging 21st century challenges in our state capitals.

photo by: Gage Skidmore

The R Street Institute, a (small-l) libertarian think tank in Washington, D.C. wants to hire a social media and marketing manager.

We’re looking for someone who not only knows the tricks to hoarding a bazillion Facebook likes and Twitter followers, and who can tell a Fark from a Reddit from a Newsvine, but most importantly, someone who can originate and implement innovative online marketing campaigns from start to finish. We need someone who can identify the right audiences, set the right goals and track the right metrics, all while integrating our marketing efforts with our content calendar and our social media strategies with those of our coalition partners.

Experience with basic video production and editing is also a major plus.

An ideal candidate should have an understanding of the free-market movement and demonstrated experience doing the things we want done. This job requires you to be a self-starter. While somebody antagonistic to free market goals couldn’t do this job, agreeing with all of our political views probably isn’t necessary. That’s a long way of saying that you don’t have to identify as a libertarian to work with us.

We’ll offer a chosen candidate tremendous freedom to figure out how to achieve goals like building our social media followers and getting more traffic for our website. We’re not micro-managers and a person who achieves goals can expect tremendous freedom to pursue them.  One of our major initial efforts associated with this position will be a social-media based campaign to educate conservatives and libertarians about wasteful, environmentally destructive spending related to agricultural subsidies.  If you know the farm subsidy landscape, that’s an advantage but, in the end, your social media skills—not your subject matter knowledge—are what really matter.

We think we offer a pretty good work environment. We have a strict rule against holding any standing internal meetings. (Honestly, we have NONE. Ever.) We try to pay more than any other free market non-profit and offer better benefits. Among other things, we pay 100 percent of all health insurance premiums, offer fully employer-paid disability insurance, a 401(k), and a bonus potential that’s unparalleled in the free market movement. There’s free soda and coffee in our office all the time. Our leave policies are also the most generous in the business and you’ll get a employer-paid iPhone as well as whatever laptop computer you want.

To apply, send us a resume, a cover letter, a writing sample to jobs@rstreet.org.

Earlier this month, the New York Times published and op-ed penned by Richard Daynard of Northeastern University titled “Stubbing out Cigarettes for Good.” Professor Daynard is president of Northeastern Law’s Public Health Advocacy Institute, and a prominent anti-tobacco crusader. I wrote the following response, and sent it to the Times, but they declined to print it.  I also shared copies with Daynard and Mark Gottlieb,  his colleague at the Public Health Advocacy Institute. 

In reply, Gottlieb shared some research findings relative to the “light” cigarettes, noting that they contained the same amount of nicotine as full-flavored cigarettes, but were designed to hide nicotine content from the then-prevalent “FTC method” machines used to measure tar and nicotine content. Smokers could access the additional nicotine by inhaling longer and more deeply. His proposal for a low-nicotine cigarette would, per their limited studies, result in minimal compensatory behavior by smokers since such compensatory behavior would not yield more nicotine.

He acknowledged the legitimacy of the other points I made, but disagreed that, if implemented, they would likely do more harm than good.  He also acknowledged the potential value of adding a tobacco harm reduction initiative to current tobacco control programming, and correctly noted that the initiatives Daynard recommended and tobacco harm reduction are not mutually exclusive.

****************

The first of his two proposals – reducing the nicotine in cigarettes to non-addictive levels — ignores what we have learned over the past 30 years about light and low-tar cigarettes. These cigarettes dramatically lowered both tar and nicotine. Their message was so effective that such cigarettes now account for more than 99% of American cigarette sales. They have done nothing to reduce the prevalence of smoking in the United States and appear to present a risk of lung cancer greater than the full-flavor cigarettes they replaced. In order to securing the desired dose of nicotine, smokers appear to have inhaled the smoke deeper and held it longer within the lung.

Reducing nicotine to a level that will no longer satisfy current smokers seems more likely to drive these smokers to contraband cigarettes than to quit smoking or to switch to other tobacco/nicotine products. Contraband cigarettes are already a major problem in jurisdictions with high cigarette taxes. Making regulated cigarettes unpalatable to smokers would likely increase the demand for contraband products.

The second of Professor Daynard’s two proposals — to ban sales of cigarettes to persons born after the year 2000 — is and has been in place for many years throughout the United States. Every state now bans cigarette sales to persons under 18 years of age. This has not been effective in preventing 15% to 20% of teens from initiating cigarette use.

New thinking will be required within both the U.S. Food and Drug Administration and the larger tobacco control community if we are to substantially reduce tobacco-related illness and reduce nicotine addiction in the United States.

The first element of this new thinking should be to recognize that we have two separate tobacco-related problems. The first relates to current adult smokers. The second relates to teens at risk of initiating tobacco use.

The 8 million Americans likely to die of a tobacco-attributable illness in the United States over the next 20 years (400,000 per year x 20 years) are current adult cigarette smokers over 35 years of age. The smokeless products that have been on the American market since the 1980s — chewing tobacco, snus, and other snuff products — present a risk of potentially fatal tobacco-attributable illness less than 2% the risk posed by cigarettes. E-cigarettes, strips, sticks and orbs probably present even less risk. Simply informing current smokers of this difference in risk would likely induce large numbers of smokers to switch to one of these lower risk products.

This approach, known as tobacco harm reduction, is currently opposed by the tobacco control community. They refuse to consider use of any non-pharmaceutical tobacco/nicotine product in the context of a public health initiative. In addition, the FDA tobacco law imposes nearly insurmountable barriers to tobacco harm reduction and requires continuation of misleading and technically inaccurate warnings on American smokeless tobacco products: warnings based on hazards posed by tobacco products that are not available in the American market.

Tobacco harm reduction could be added to current tobacco control programming. It would rely on market forces to achieve reductions in tobacco-attributable illness and death not likely achievable in any other way. It would do so in a way that would not increase demand for contraband products.

Experience with e-cigarettes and other bits of scientific evidence suggest that these smokeless tobacco products may be less attractive to teens and easier to quit than cigarettes. This flies in the face of the conventional wisdom in the tobacco control community that informing the public that such products are lower in risk than cigarettes would dramatically increase the number of teens initiating tobacco/nicotine use.

The time has come to seriously consider tobacco harm reduction as a new addition to current tobacco control programming.

photo by: Alex E. Proimos

The debate over how to reform Florida’s Citizens Property Insurance Corp. has been a years-long and arduous political battle. Despite its original mission to act as Florida’s insurer-of-last-resort, Citizens became former Gov. Charlie Crist’s instrument of populist politics du jour, and consequently grew to be the state’s largest insurer due to its artificially suppressed rates.  It has taken the Florida Legislature years to even begin to reverse those ill-conceived policies from the Crist era.

The main impediment to reform has been the loud opposition to increasing Citizens rates, which would organically address most of the problems the state-run entity faces. Whenever there is legislation up that would increase Citizens’ premiums even nominally–increases that would put them somewhat closer to their private market counterparts–telephone lines and email in-boxes are overwhelmed with opposition.  As such, legislators are hesitant (at best) to support such reforms.

One organization that has been on the forefront of promoting reforms to Citizens has been Associated Industries of Florida.  As one of the state’s leading pro-business organizations, it understands the risks the current system poses on Florida’s business community.  As such, they prefer gradual, methodical increases in rates over the enormous post-hurricane assessments that could likely come quickly and severely, and do great harm to the state’s economy.

So to address the concerns of many legislators, they recently released an interactive map that shows exactly the percentage of Floridians in each House and Senate district who are insured by Citizens.  This information has taken Tallahassee by storm, and even some legislators who have historically opposed Citizens reforms have realized they haven’t necessarily been representing a majority of their constituents on this issue.

The data affirms that 77 percent of Floridians are NOT enrolled in Citizens, but are on the hook for the 23 percent who are.

“This is the first time we’ve looked at the data this way, and it’s very telling.  More than two-thirds of residents in a majority of Senate and House districts don’t have Citizens as their property insurer.  Yet, these same homeowners who are dutifully paying their annual insurance premiums are expected to shoulder the financial burden for the other third not paying their fair share.  Many of these Citizens policy holders do not even live in Florida,” said Tom Feeney, the former congressman and Florida House speaker who now serves as AIF’s president and chief executive officer.

Florida bloggers and media outlets have covered the release of the interactive maps. A blogger at Johnson Strategies went a bit further and provided a deeper analysis of the data.  He found that:

• Of 40 total Senate districts, more than 2/3rds (27) have nearly 70% of the households subsidizing lower premiums for the remaining 30% insured in Citizens.
• Of a total 120 House districts, 86 (or 71%) have 30% or fewer households insured in Citizens and subsidized by the rest.
• Not one single Senate district has more than 54% of its households in Citizens.

These are definitely interesting data that should make some legislators reassess their position that has forced a majority of their constituents to cover those who don’t pay their fair share.

Legislation to break up North Carolina’s rate bureau cartel and bring the state’s auto insurance market into the 21st Century has now been introduced in both houses of the General Assembly. This past week, Rep. Jeff Collins, R-Nash, introduced H.B. 265, a companion to Senate legislation introduced late last month by Sen. Wesley Meredith, R-Fayetteville.

Both bills would allow auto insurers to opt out of the North Carolina Rate Bureau, a legally mandated, but privately run organization through which insurers currently set rates collectively. Companies who do opt out would be permitted to consider any rating and underwriting factors they deem appropriate, so long as rates are sufficient and not excessive or discriminatory. There would be a 12 percent “flex band” in which rate increases would be presumed to be appropriate, although even those could be challenged by the Department of Insurance, so long as they provide justification.

The changes would bring North Carolina in line with the competitive markets that are found in most states today, in which insurers have incentive to develop new products and offer competitive discounts to attract business. Predictably, vested interests in the Tar Heel state – both economic and political – are pushing back hard against reform, and it unfortunately appears some of the state’s leading newspapers have taken to regurgitating the old guard’s talking points.

Perhaps the biggest misconception – repeated in recent editorials in both The Charlotte Observer and The Pilot (from rural Moore County) – has to do with the insurance reform record of neighboring South Carolina. Both papers (presumably repeating a “fact” slipped to them by the opposition, which includes the insurance commissioner and the insurer with the largest market share) allege that following passage of reform legislation in 1999, auto insurance rates in South Carolina rose by 25 percent.

Neither paper cites a source for this claim, nor a time frame over which this purported rate hike was observed.  Which is unfortunate, because the claim is flatly untrue.

As this chart from the Insurance Research Council shows, while it is true that average auto insurance premiums have risen in South Carolina in the decade since the state passed reform legislation, that’s because they rose everywhere else too. From 1998 to 2008, South Carolina saw auto insurance expenditures grow by 14.7 percent (not 25 percent), which was slightly higher than the 12.4 percent national average, but still notably lower than 18.4 percent average across all the South Atlantic states.

More importantly, what the North Carolina papers do not note is that in the eight years before reform passed, South Carolina’s rates spiked by a whopping 30.6 percent, compared to 21.9 percent nationally and 20.4 percent in the region. Reform clearly slowed, not accelerated, the rate increases. The IRC estimates South Carolina’s rates today are 4.8 percent lower than they would have been if reform hadn’t been adopted.

The Observer’s editorial adds:

The bill is supported by at least 14 insurers, including State Farm, Allstate, Geico and Progressive.  They argue that a free-market approach would force companies to compete aggressively on price, letting drivers shop around for the best deal. But insurers already compete on price. The rate bureau method sets a ceiling, not a floor; insurers are free to charge less to attract customers, and often do.

This is wrong on at least two counts.

For one, it sets a remarkably low bar on what counts as “competition.” Imagine if the market for autos worked the way North Carolina’s market for auto insurance does.  Ford, Chrysler and General Motors, along with Toyota, Volkswagen, and the whole panoply of foreign car makers, would get together and define what their product – a “car” – should be. They would determine how big it can be, how fast it can go, what color it should be, even how many cup-holders it can have. They’d then come up with a joint recommendation for how much it should cost and send that off to the auto commissioner, who would either give a thumbs up or a thumbs down.

And with that, the market’s terms would be set.  Now, how many folks would define that market as “competitive,” simply because the manufacturers would have the option, if they wanted, to knock a few dollars off the MSRP sticker price every now and again?

It’s almost time for March Madness, an event that brings joy to millions of North Carolinians every year. As this year’s games are played, it’d be useful to take notice of all the auto insurance products that are hawked during breaks in the action – policies with deductibles that drop the longer you avoid an accident, policies that offer discounts for drivers with good credit, policies that give regular rebate checks, policies that offer deep discounts to those who provide real-time driving data to their insurer – all of which remain unavailable in North Carolina because they just simply don’t fit the state’s one-size-fits-all auto insurance system.

But the Observer’s observation gets it wrong in an even more fundamental sense. The rate bureau’s recommendation actually does not represent a ceiling on what insurers can charge for auto insurance. It instead represents a ceiling on what can be charged for a standard liability policy. But many people want more than just a liability policy — they want to insure their car for collision, theft and other damage.

Higher risk drivers who want collision and comprehensive physical damage coverage will generally find in the mail a letter from their carrier containing a “Consent to Rate Form.” This is, essentially, a request by the insurer to charge rates that exceed those recommended by the Rate Bureau. It is relatively common for consumers to consent to these requests, and in those cases, the ceiling doesn’t apply at all. In some ways, the flex band system proposed by the Meredith/Collins bills would be actually be more restrictive than the prices insurers can charge for CTR policies today.

For liability coverage, high risk drivers dumped into the North Carolina Reinsurance Facility, which does not offer physical damage coverage. The rest of the state’s auto insurance consumers get dinged by this system as well, as they are charged surcharges to support these so-called “clean risk” policies.

This is not a small problem. More than a fifth of all North Carolina drivers – some 1.54 million in total – cannot get a standard auto insurance policy. Indeed, while large residual markets used to be fairly common in the days before the use of credit information and advanced computerized underwriting allowed insurers a way to segment and price these higher risks, today, North Carolina drivers represent 81 percent of the 1.9 million residual market auto insurance policies written in the whole United States.

Returning to the South Carolina example, the rapid decline in the size of the residual market – which accounted for more than 30 percent of the policies in 1998, but are now less than 1 percent of the market – is the most remarkable outcome of reform. As the accompanying IRC chart shows, other states that have opened their auto insurance markets to competition, like New Jersey and Massachusetts, have likewise seen steady reductions in residual market policies.

The bottom line is this: Auto insurance is now a highly competitive business in virtually every state but North Carolina. North Carolina drivers have been fortunate that, for a variety of reasons, the underlying costs of that drive auto insurance claims are relatively low. These include caps on tort damages, reasonably tight enforcement of vehicle safety standards, demographics, and relatively low traffic density.  All of these factors combine to make auto insurance premiums relatively affordable.

But the fact that rates aren’t especially high doesn’t make the market competitive. The fact that a reasonably large number of insurers do business in the state, likewise, doesn’t automatically make the market competitive. Indeed, given that state law requires that the insurance commissioner guarantee that insurers earn a “reasonable rate of return,” why wouldn’t they want to do business there? Guaranteed profits are hard to turn down, in any industry.

When prices and terms of coverage are set collectively, when companies have no incentive to innovative or introduce new products, that is, by definition, an uncompetitive market. It is a cartel, and it is time for that cartel to come to an end.

Isabel Sawhill and Harry Holzer correctly identify the cost to society (and also in terms of reduced government services) that’s created by soaring entitlement costs in their Washington Post oped Saturday, but their anodyne suggestions for addressing the problem manifest the difficulty in tackling this problem. The problem has been litigated on this blog before: we have a large cohort of Americans entering their retirement ages, they’re living longer than ever before, and their healthcare costs continue to rise. Holzer and Sawhill diagnose this problem, and point out that this is pernicious from a liberal perspective, because entitlement spending is crowding out all the other things government should do. Coming from two card-carrying members of the liberal intelligentsia, this is a welcome admission. However, when they get to the money paragraphs–namely, telling us what to do about this–they become timid, and suggest that the recent diminution of health care inflation may continue and maybe there’s more to be done there, and then mention some kinds of means testing. Given that we’re not sure why health care inflation has slowed, I think it’s less than a safe bet to assume that the trend will continue, and pointing to the Affordable Care act as a source for further downward price pressures begs a detailed explanation as to what, precisely, those provisions are. Capping the deductibility of employer-provided health insurance would be a big force for good, but under current law it comes too late (2017) and affects too few people to make any difference. Charging the wealthy more for Medicare (which they also mention) is undoubtedly going to be a part of any solution but the deficit is so deep and growing so rapidly that it can never be enough. On the Social Security side–which they skipped over–a progressive indexation of initial benefits is definitely a part of any solution, but that would have to dip down and impact, to some degree, the top 50% or so of all new retirees to come close to getting the system in balance.  Having them point out that progressive indexation wouldn’t cut anyone’s benefit–it only slows the real growth of initial benefits for the wealthy–would have been a positive addition to the debate. It’s heartening to have respected economists associated with the Democratic Party pointing out that the entitlement crisis is real; it would have helped a bit more if they could have made it clear that it can’t be fixed solely by wise bureaucrats or on the backs of the wealthy.

The federal Patient Protection and Affordable Care Act was passed to address both the cost of medical treatment through insurance and the fact that many people didn’t have coverage. The law is such a massive change in the health insurance landscape that it is taking several years to make it happen. The structure is slowly taking shape and there is already little hope that the “cost curve will be bent downward.” (A Newsweek broadcast journalist said while the legislation was progressing through the Congress that an “eight-year old would not believe that we are going to cover all these additional people in the system and save money doing it.”)

In fact, as attention turns toward getting people into the system, the Gallup organization reports that Texas has the highest uninsured rate in the United States, with 28.8% of residents lacking healthcare coverage in 2012. This is the highest for any state since Gallup and Healthways began tracking it five years ago.

How these people get covered is a major topic of discussion in the states these days, and the National Conference of Insurance Legislators considered and passed a resolution today specifying some state lawmakers’ concerns about the “navigators” who will be organizing coverage for the people who have none. Whoever receives the state grants to facilitate coverage will be responsible for articulating the differences between plans; matching family income against the premium subsidies; and, if the states listen to these NCOIL lawmakers, will also accountable for errors and other funny business with their clients’ Social Security numbers and other private information. States are encouraged to consider training requirements, specific enforcement, criminal and regulatory background screenings, along with other consumer protection.

Any group can apply for the navigators grants, and every state is required to have at least two. They could be church or veteran’s groups, the AARP, union or even ACORN (if it still existed), as far as I can tell.

We are entering a different health world with the assistance of the navigators. The states are right to do everything they can to get the uninsured the help they will need from folks who will be full of advice and cloaked in government authority.

photo by: eye of einstein

Senior Fellow Andrew Moylan appeared on the Huffington Post’s HuffPost Live program to discuss Internet sales taxes as part of a “Google Hangout” panel that also included Huffington Post state government reporter John Celock, Kansas state Rep. J.R. Claeys, We R Here Coalition Executive Director Phil Bond and Reason Foundation Policy Analyst Steven Titch.

Joseph Chamie, who recently retired as the chief demographer for the United Nations, has a new piece out that lays out in stark terms the choices that not a few Western European countries may soon face. With plunging birth rates already well below replacement rate and a tired economic engine lacking any momentum, these countries are beginning to realize the awesome promises they have made to their retirees simply cannot be kept. Greece has already responded by increasing retirement ages and chopping benefits, but they’re still far away from an entitlement promise that’s likely to be kept.

What’s the solution? If these countries want to stave off tax increases (which will chase away labor and investment in the EU environment, where workers and capital are free to move), their options are few. Increasing birth rates is easier said than done, and even if a country such as Spain or Italy were to muster the will to buy an increase in birthrates (a la France) it’s not going to matter much for the next two or three decades, beyond the time when their budget exigencies will come to a head.

What’s left? More immigration. Witness the gradual thawing of the EU’s relationship with Turkey, despite the fact that Turkey’s been doing little to help its cause of joining the EU (unless imprisoning journalists is now a virtue in that part of the world.) Why the change? For starters, Turkey’s decade-plus of strong economic growth has moved it from being the weak sister of the continent to the one bright spot in an otherwise economically moribund part of the world. With Prime Minister Erdogan’s turn towards the east, Europe is beginning to realize that they may need Turkey and its 74 million citizens more than Turkey needs the legitimacy of EU membership.

At some point, a European prime minister is going to level with his or her citizens and tell them they have a choice: Higher taxes, later retirement ages, lower benefits or more immigrants — or some combination thereof. If he’s not immediately deposed after his bout of honesty, my money’s on the one option that doesn’t cost people money–the immigrants.

photo by: woodleywonderworks

Those who are following the great sequestration drama might get the impression that, while this kind of federal budget management is not ideal, at least something will be done to begin to straighten out Washington’s mess.  Actually, this is far from the truth.  The 2013 budget still spends more than last year’s; there are no reforms to entitlement programs which will eventually bankrupt our kids; and the military will continue to bear the brunt of budget cuts, even as the world becomes increasingly dangerous.

The sequester is not a management idea at all, and the president is trying very hard to forget that he suggested it.  (I do not believe, however, that Republicans will ultimately win many points by relying simply on reminding folks whose idea this was, since they agreed to it.)  Sequestration is a political threat, and was never meant to be any kind of serious budgetary process, as has been pointed out by nearly everyone who has written seriously on the subject.  It’s not supposed to happen. There is a widely held view that one should never take a hostage unless prepared to sacrifice him, but widely held views do not always matter much on the northeast bank of the Potomac.

In the main, the only actual budget-cutting done by modern presidents is to the U.S. Armed Services, and this round is no exception.  Everything else is a reduction of a proposed increase.  That’s exactly how Bill Clinton and the Republican Congress balanced the budget – actual cuts to the military and hold the line on everything else. There is a formal assessment of military spending every four years, which sets out priorities and funding.  This at least provides a measuring tool and guidelines.  This administration had already cut that back with a new “strategic guidance” within the first year, so the budget numbers were headed downward before this latest Washington stork dance.

Of course there is wasted taxpayer money in the military, just like all bureaucratic operations, including the private sector, but sequestration virtually guarantees more of our money will be poorly spent because of its inflexibility. The sequestration process is a flat percentage in every account. If the Navy, for instance, was going to build five modern ships, you would imagine that the adjustment would be to just build four.  But the federal law says they have to build 13% (this year) less of each one of the five.

The budget reductions in total for this year, $44 billion according to the Congressional Budget Office, are only about a quarter of what we spent to bail out AIG. This amount does not seem very threatening to our overall security, but since you can’t cut payroll except on the civilian side, the reductions mostly impact training and modernization.  We have Air Force pilots today flying the same planes their fathers flew a generation ago.

Local school systems are smart enough to retain the flexibility to threaten band, football and musical theatre productions if they don’t get the money they ask for. The best the feds can come up with is to furlough some air traffic controllers, and hope that the resultant delays anger enough people to push the Republicans to cave in again.

The cognoscenti already know that the deal struck at New Year’s producing additional taxes on high earners, the American Taxpayer Relief Act of 2012, was spent within a couple of weeks on Hurricane Sandy relief. I keep coming back to the same irony.  The more evasion of responsibility and bad decisions we see from the seat of government, the more power they seek to fix things.

A bad bargain, in my estimation.

photo by: AvgeekJoe

This week, two important pieces of legislation began moving through the Texas Legislature. H.B. 1890 was filed by Rep. Phil Stephenson, R-Wharton, and S.B. 784 by Sen. Juan Hinojosa, R-Corpus Christi, was referred to the Senate Finance Committee.

H.B. 1890 is based, in part, on the tough conflict of interest and internal controls standards in the federal Sarbanes-Oxley Act. It would ban financial institutions from advising the Texas Windstorm Insurance Association or Texas Public Finance Authority on their bonding capacity and then participating in issuing those bonds.  There is an obvious conflict of interest if an advisor is paid to give its recommendations for a financial transaction and is subsequently allowed to earn fees facilitating that transaction.  In order to shield our state entities from any appearance of wrongdoing, such a ban on self-dealing is both proper and necessary.

S.B. 784 provides for a sales tax holiday on items essential for hurricane preparedness.  For a three-day weekend at the end of April every year, all Texans would be able to purchase storm shutters, generators, batteries and other products to protect their property tax free.  This bill serves two purposes.  The bill encourages citizens to mitigate property loss and it educates them on the importance of such investments. And although all Texans do not live along the coast, all of the tax free items are helpful during tornadoes and hailstorms that plague the rest of the state.

photo by: diveofficer