Alan Greenspan closed his 18-year tenure as Federal Reserve Board chairman on January 31. Word is he already is working on a memoir and he is giving speeches at $150,000 a crack. Well, good for him.
During a period of unprecedented change, Greenspan navigated well, establishing credibility instantly with his deft handling of the Oct. ’87 stock market crash. Since that time, interest rates have come down, as have unemployment rates, while productivity has gone up. Should Greenspan be credited with these developments? Much of the financial press seems to be willing to give him the credit.
One thing I know for sure: We will never see another Fed chairman quite like the Maestro. The world has changed so much in the last 18 years that I doubt future Fed chairmen will be able to achieve the “superstar” status that some seem willing to give Greenspan. For the sake of his legacy, Greenspan may be getting out of the game at just the right time.
Consider first how much faster information flows today compared to the late 1980s. Remember the time before the Internet? Faster flows of information should lead to more accurate economic analysis, but it also requires greater transparency. It is much harder today for the Fed to operate in secrecy than it was in the 1980s. Today, the Fed is operating in a much more open fashion, telegraphing most of its interest rates moves, making the significance of individual FOMC meetings much less dramatic.
Second, think of how easy credit has disrupted classic economic patterns. For example, it used to be that people spent more money when they earned more money. Now they just spend more money, regardless of their incomes. The ease with which we can tap into our home equity, not to mention the atrocious spending example set by the federal government, has really skewed normal income and spending relationships. How do you control an economy when the normal rules don’t apply?
And third, the economy is a worldwide enterprise today, where international boundaries don’t mean much. As foreigners finance more of our debt, I believe we grow more vulnerable to foreign influences in our economy. We certainly see that with the long bond rate, which seems almost entirely immune to movements in the Fed Funds rate.
Ben Bernanke, who was sworn in as Fed chairman on February 6, has talked about inflation targeting. Many other countries already use a system where an acceptable level of inflation is articulated and the central bank works to keep interest rates at that level. It is an approach that gives more power to lawmakers and reduces the role of the Fed. I don’t know whether this will help or hurt our country in the long run, but I do suspect that it means we’ll never have another superstar Fed chairman.
Monday, February 20, 2006
Saturday, February 18, 2006
Health Savings Accounts are a promising approach for managing health insurance
President Bush promoted health savings accounts during his State of the Union address last month and while I am not an expert on the economics of the nation’s health care system, I believe strongly that HSAs are making it possible for many companies to offer health insurance to their employees.
My company, NFR Communications, is small but has offered health insurance to its full-time employees for years. Currently that is only two people, but our staffing fluctuates and at one time, we had five full-time employees. Typically, the company paid 85 percent of the premium on a comprehensive health insurance plan that had small co-pays and very low deductibles. It was a Cadillac plan. Annually for the last several years, my insurance representative would show up at our office and inform me that the premium was “only” going up this year by 14 percent or some such figure. I know this has been happening at companies all over America. Nobody with health insurance can claim that their wages have been frozen for the last several years because the increase in health insurance premiums represents a substantial increase in wages to anyone who is getting that benefit.
The price increases were causing a real issue for NFR Communications, so about a year ago we took a good hard look at HSAs. I wasn’t real optimistic, having previously considered medical savings accounts only to discover that they wouldn’t work very well for us. Here’s what I discovered. My insurance company offered a high-deductible health insurance plan with a premium that was substantially lower than what we were paying for that Cadillac plan. The company could pay 100 percent of the premium and still save money. The employees no longer had to pay their 15 percent portion of the cost and they could choose to deposit some or all of that money in their own individual health savings accounts. This would give them the opportunity to use this money -– pre-tax -– to pay those additional deductibles. Any money in those accounts they don't use remains their money. Once they reach retirement, they can use that money for anything they want. And they will never have to pay taxes on that money -– neither as income nor on the interest that the principle accrues. For employees who don’t have a lot of medical expenses, the company health insurance plan becomes partly a retirement plan.
So in 2005, we went to HSAs. The company benefits because we are now spending less on health insurance; the employee benefits because he or she gets a lot more choices about their health care and they have the potential to add to their retirement savings.
HSAs do put more responsibility on employees. There are going to be situations where they will have to make a decision about whether to go ahead with a particular medical procedure. In the past, when everything was covered by insurance, employees were incented to accept every medical procedure offered. But now, since the first dollars come out of the HSA -– money that the employee could keep if he or she doesn’t use it –- the employee really has to think whether the medical procedure is necessary. The employee might actually ask the doctor or the clinic about the cost of the procedure. This makes the medical personnel think a little bit too. The insurance approach that automatically covers everything requires no accountability on the part of the medical world nor the patient. Some obligation on the part of the patient engages everyone in the process more, and that is a good thing.
So I am very high on HSAs. I know after the State of the Union address I heard a lot of media commentary about the shortcomings of HSAs. Some people view them as an insult to people who now get comprehensive health insurance plans from their employers. Of course, if you give someone an option of being given everything they want, or of being given only some of what they want and then the means to decide whether you really need any more, they are going to choose the former. It is so much easier. There is so much less thinking. But it is impractical. And it is unsustainable. It certainly was at NFR Communications, and our company is no different than any other company.
Ultimately, health insurance has to go back to being insurance; that is, it should be there to cover unexpected disasters. Over the years, health insurance has evolved from a true insurance system to a comprehensive pre-pay system. It is not really insurance when you use a system to pay for doctor visits you know you are going to need or that may be optional. It’s kind of like using home-owners insurance to pay for routine maintenance like painting and re-roofing instead of only for rebuilding in the event of a fire or other unanticipated disaster.
Insurance that requires nothing of patients is not good for the nation’s health care system either. Doctors and medical personnel at clinics end up spending a lot of time on marginally necessary, if not entirely unnecessary, medical procedures and exams. It’s good if the patient has some financial stake in the services being offered if those services aren’t absolutely necessary.
Right now, some of the big companies offer HSAs as one of many health insurance options for employees. But my guess is in a few years, it will be the only option offered employees. There will be a lot of whining and complaining about it in some circles as some people make comparisons and conclude they are getting a less attractive deal. But those will be entirely self-centered analyses. If you look at your own individual situation and factor in the impact of HSAs on the viability of the company providing your employment and the strength of the nation’s health insurance system, HSAs emerge as the obvious way to go.
My company, NFR Communications, is small but has offered health insurance to its full-time employees for years. Currently that is only two people, but our staffing fluctuates and at one time, we had five full-time employees. Typically, the company paid 85 percent of the premium on a comprehensive health insurance plan that had small co-pays and very low deductibles. It was a Cadillac plan. Annually for the last several years, my insurance representative would show up at our office and inform me that the premium was “only” going up this year by 14 percent or some such figure. I know this has been happening at companies all over America. Nobody with health insurance can claim that their wages have been frozen for the last several years because the increase in health insurance premiums represents a substantial increase in wages to anyone who is getting that benefit.
The price increases were causing a real issue for NFR Communications, so about a year ago we took a good hard look at HSAs. I wasn’t real optimistic, having previously considered medical savings accounts only to discover that they wouldn’t work very well for us. Here’s what I discovered. My insurance company offered a high-deductible health insurance plan with a premium that was substantially lower than what we were paying for that Cadillac plan. The company could pay 100 percent of the premium and still save money. The employees no longer had to pay their 15 percent portion of the cost and they could choose to deposit some or all of that money in their own individual health savings accounts. This would give them the opportunity to use this money -– pre-tax -– to pay those additional deductibles. Any money in those accounts they don't use remains their money. Once they reach retirement, they can use that money for anything they want. And they will never have to pay taxes on that money -– neither as income nor on the interest that the principle accrues. For employees who don’t have a lot of medical expenses, the company health insurance plan becomes partly a retirement plan.
So in 2005, we went to HSAs. The company benefits because we are now spending less on health insurance; the employee benefits because he or she gets a lot more choices about their health care and they have the potential to add to their retirement savings.
HSAs do put more responsibility on employees. There are going to be situations where they will have to make a decision about whether to go ahead with a particular medical procedure. In the past, when everything was covered by insurance, employees were incented to accept every medical procedure offered. But now, since the first dollars come out of the HSA -– money that the employee could keep if he or she doesn’t use it –- the employee really has to think whether the medical procedure is necessary. The employee might actually ask the doctor or the clinic about the cost of the procedure. This makes the medical personnel think a little bit too. The insurance approach that automatically covers everything requires no accountability on the part of the medical world nor the patient. Some obligation on the part of the patient engages everyone in the process more, and that is a good thing.
So I am very high on HSAs. I know after the State of the Union address I heard a lot of media commentary about the shortcomings of HSAs. Some people view them as an insult to people who now get comprehensive health insurance plans from their employers. Of course, if you give someone an option of being given everything they want, or of being given only some of what they want and then the means to decide whether you really need any more, they are going to choose the former. It is so much easier. There is so much less thinking. But it is impractical. And it is unsustainable. It certainly was at NFR Communications, and our company is no different than any other company.
Ultimately, health insurance has to go back to being insurance; that is, it should be there to cover unexpected disasters. Over the years, health insurance has evolved from a true insurance system to a comprehensive pre-pay system. It is not really insurance when you use a system to pay for doctor visits you know you are going to need or that may be optional. It’s kind of like using home-owners insurance to pay for routine maintenance like painting and re-roofing instead of only for rebuilding in the event of a fire or other unanticipated disaster.
Insurance that requires nothing of patients is not good for the nation’s health care system either. Doctors and medical personnel at clinics end up spending a lot of time on marginally necessary, if not entirely unnecessary, medical procedures and exams. It’s good if the patient has some financial stake in the services being offered if those services aren’t absolutely necessary.
Right now, some of the big companies offer HSAs as one of many health insurance options for employees. But my guess is in a few years, it will be the only option offered employees. There will be a lot of whining and complaining about it in some circles as some people make comparisons and conclude they are getting a less attractive deal. But those will be entirely self-centered analyses. If you look at your own individual situation and factor in the impact of HSAs on the viability of the company providing your employment and the strength of the nation’s health insurance system, HSAs emerge as the obvious way to go.
Tuesday, February 14, 2006
Inflation? It depends on who you talk to
Are we in an inflationary economy? The answer depends on whom you talk to. I recently talked to two economists who have completely different views on that question. Stephen Happel, an economics professor at Arizona State University, told me last week that the economy is booming and the Federal Reserve Board needs to raise rates to hold the line on inflation. Alan Polsky, an economist with the Minneapolis investment firm of Dougherty & Company, told me last Saturday there is no inflation in the economy and that he doesn’t expect any inflation in the coming year.
Happel said the consensus among Blue Chip economists is that 2006 will see GDP growth of 3.4 percent. A drop in capital expenditures and government spending contributed to a GDP figure of 1.1 percent for the fourth quarter; Happel said he expects a bounce in the first quarter of this year that could put the rate at 5 percent.
“Things are growing, growing, growing,” Happel said. “The biggest problem facing the country now is inflation.”
Happel predicted the Federal Funds rate will go to 4.75 percent or 5 percent. (It is 4.5 percent now.) New Federal Reserve Board Chairman Ben “Bernanke is an inflation fighter,” Happel said. “He will fight inflation. He is not going to let the legacy of Greenspan and Volcker go down the tubes.”
Polsky’s outlook was more sedate. “We really don’t have inflation now and I don’t think we are going to see of lot of inflation in the economy over the next year or so,” Polsky said. Rising prices in some areas are not having the inflationary affect one might expect, he said.
While energy prices are high, he said airlines and landlords are in competitive situations that prevent them from passing those rising costs onto consumers, thereby deadening their inflationary affect.
Polsky said he also expect the Fed Funds rate to go to 4.75. “If they push to 5 percent, that could be too aggressive,” he said.
Polsky commented that the yield curve is “too flat,” and said it indicates that the Fed Funds rate is too high.
Happel noted general migration trends across the country where recent college graduates and retired people are moving from the Northeast and Midwest to the West Coast and Southwest. These population cohorts are the largest in the country, and they are made up of people who typically spend more than anyone else. Happel said he is seeing the consumer confidence and accompanying spending first hand. He said this helps explain why Western economists tend to see inflation and a booming economy while Wall Street economists tend to see less compelling economic activity.
“I am anticipating this to be a boom year,” Happel said. “I see big spending, very strong consumer spending and the creation of two million jobs. This will lead to a rise in income.” Happel said he expects to see GDP growth around 4 percent this year. While he said he “hopes the Fed continues to raise rates to wring out inflation,” Happel said he expects the yield curve to remain flat.
Happel said the consensus among Blue Chip economists is that 2006 will see GDP growth of 3.4 percent. A drop in capital expenditures and government spending contributed to a GDP figure of 1.1 percent for the fourth quarter; Happel said he expects a bounce in the first quarter of this year that could put the rate at 5 percent.
“Things are growing, growing, growing,” Happel said. “The biggest problem facing the country now is inflation.”
Happel predicted the Federal Funds rate will go to 4.75 percent or 5 percent. (It is 4.5 percent now.) New Federal Reserve Board Chairman Ben “Bernanke is an inflation fighter,” Happel said. “He will fight inflation. He is not going to let the legacy of Greenspan and Volcker go down the tubes.”
Polsky’s outlook was more sedate. “We really don’t have inflation now and I don’t think we are going to see of lot of inflation in the economy over the next year or so,” Polsky said. Rising prices in some areas are not having the inflationary affect one might expect, he said.
While energy prices are high, he said airlines and landlords are in competitive situations that prevent them from passing those rising costs onto consumers, thereby deadening their inflationary affect.
Polsky said he also expect the Fed Funds rate to go to 4.75. “If they push to 5 percent, that could be too aggressive,” he said.
Polsky commented that the yield curve is “too flat,” and said it indicates that the Fed Funds rate is too high.
Happel noted general migration trends across the country where recent college graduates and retired people are moving from the Northeast and Midwest to the West Coast and Southwest. These population cohorts are the largest in the country, and they are made up of people who typically spend more than anyone else. Happel said he is seeing the consumer confidence and accompanying spending first hand. He said this helps explain why Western economists tend to see inflation and a booming economy while Wall Street economists tend to see less compelling economic activity.
“I am anticipating this to be a boom year,” Happel said. “I see big spending, very strong consumer spending and the creation of two million jobs. This will lead to a rise in income.” Happel said he expects to see GDP growth around 4 percent this year. While he said he “hopes the Fed continues to raise rates to wring out inflation,” Happel said he expects the yield curve to remain flat.
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