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Straws In The Wind

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Sometimes you can tell more about the future by examining related issues, so-called “straws in the wind,” than by the direct extrapolation of an issue. A good example of a predictor of future trends and needs is the study of demographics. A surge in births is a certain predictor of the need for more schools and funding in 5 or 6 years. Sadly such straws in wind are not always factored into future planning.

An issue today that is of great public concern is the safety and soundness of our economy because warning flags are flying in many places. A straw in the wind that has received little public notice is the ability of some major businesses to borrow money at lower rates than the federal government. When organizations like Warren Buffett’s Berkshire Hathaway are a better credit risk than the U.S. government, there is reason enough to be concerned.

Perhaps a more ominous straw resides in our Social Security system. For more than 20 years Social Security taxes have exceeded payments for benefits and the excess, $2.5 trillion, has been deposited in the Social Security trust fund. This year the day of reckoning has arrived; benefits will exceed Social Security taxes by almost $30 billion, requiring the government to tap the trust fund by that much. Unfortunately they have already tapped the fund and will have to borrow the money to pay full benefits. More debt to put a drag on the economy.

A straw raising considerable controversy is the write-down of future earnings by major companies. Caterpillar started it with its write-down of $100 million and was quickly joined by AT&T with its write-down of $1 billion. Other major companies have released their numbers and one benefits organization estimates the total for all major businesses will be $14 billion and all because of the costs associated with the new health care law. Commerce Secretary Gary Locke, in a piece in the April 1 Wall Street Journal, challenges the write-downs, claiming savings in the bill affect the alleged company cost. The fact is the companies are required by law to state such cost in order to comply with accounting standards. Given the use of fuzzy math in selling this legislation, one can’t help but wonder if the Locke article was just an April Fools Day prank.

From my perspective, not all straws in the wind are destructive. The 2010 census, now underway, will change the political landscape just a bit. States scheduled to lose representatives in Congress are from the liberal bastions of New York, Massachusetts and Michigan. Arizona, Texas, Georgia and Utah will likely gain seats, which may bring a slight more moderate approach to future legislation.

One of the values of having 50 state governments is that you can try new initiatives without upsetting the whole country if they do not succeed. Conversely, useful experiments can readily spread to other states.

An example of this is currently playing out in two of our states. In 2006, Massachusetts implemented universal health care for its citizens. In addition to covering everyone, the plan purported to bring down health care costs. The results so far are not encouraging.

The goal of covering everyone has not been reached and one-third of those with private insurance have experienced rate increases. The average premium cost for a family of 4 is $13,788, the highest in the nation, according to a WSJ article by Grace Marie Turner, president of the Golen Institute. The article also claims that some local hospitals are facing bankruptcy because of the cost pressures and the average wait for new patients to see a primary care doctor is 44 days. This is hardly a success story and the plan is frighteningly similar to the new plan just passed by Congress.

By contrast, Indiana, according to Gov. Mitch Daniels, has installed a plan for state employees that is being hailed as a success. The plan combines an employee health savings account with a major medical plan to cover expenses over $8,000. So far the program has accumulated a surplus of $30 million in employee accounts, utilization of health services is down and an additional surplus of $8 million is projected for 2010. The plan is voluntary with 70% of state employees participating. The state also expects to save $20 million. Too bad the planners in Washington did not heed these two straws in the wind.

Under the guidance of Sen. Chris Dodd, legislation to reform (whatever that means) financial institutions is slowly making its way through Congress. The reported objective is to close the doors that let in activities that led to the recent financial meltdown. Among the doors that need to be closed is the one the Congress itself opened in the Clinton era.

Starting in 1933, the Glass-Steagall Act placed a barrier between banks and commerce operating as one. In an act of corporate arrogance, Citicorp defied the ban and merged with Travelers using an available loophole, then lobbied Congress to make it all legal on a permanent basis. Congress obliged by passing the Gramm-Leach-Bliley Act in 1999, thereby bringing down the fence between banks and commerce.

A few voices are being raised to restore the boundary between banks and commerce. Most notably among them, Paul Volcker, former chairman of the Fed and presently, chairman of the President’s Economic Recovery Advisory Board. A few senators are also weighing in on the issue. Now that Citi has divested itself of Travelers and its Primerica unit, perhaps bank opposition to closing the door may not be so strong. For now, just a straw in the wind, but a gain in momentum could return banks to focusing on their essential role and to the betterment of all.

One should never tear down a fence until you know why it was put there in the first place. Sometimes a straw in the wind can be a great teacher.


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