Using a Lump Sum to Pay Off the Mortgage Early

For the last few years we have enjoyed some of the lowest interest rates in history. A self evident truth in economic theory is when prices are low, people tend to buy more, and it is no different with home mortgages. In an effort to keep real estate prices high, central banks throughout the world have made great efforts to keep interest rates low.  In fact, an American home buyer is currently looking at 30 year mortgage rates around 4.0%. While it may seem attractive to be borrowing money so cheap, home buyers should understand how  mortgages work so they can make wise financial decisions.

MILESTONE #6: Pay off Home Mortgage

Recently, I have advised several middle-aged couples with substantial cash reserves in their bank savings and checking accounts. When I inquired about their home mortgages, l learned these couples recently re-financed to take advantage of the low interest rates. With $100,000 or more sitting in checking and savings, I was puzzled why their mortgage balances were so high, and their standard answered was: “With interest rates so low, why pay it down?”

There are several reasons why people keep their hard earned money in savings rather than pay down their mortgages. First of all, we have lived in an era of declining interest rates. From our experience, the 4.0% we are paying on mortgages today seems like a bargain compared to the 7.0% we were paying 20 years ago, or the 15% we were paying 35 years ago.  However, 20 years ago we were earning 4% on money market accounts, and 35 years ago money markets were paying 12%.  Currently, banks are paying less than 0.25% on savings, and yet charging 4.0% on their home mortgages. No matter how you look at it, the bank always seems to be winning.

Secondly, current tax law allows many taxpayers to receive an interest deduction on their mortgages, so we feel like we are earning something by having a home mortgage; but, this is really just an illusion. Take for example a $300,000, 30-year mortgage at 3.5% interest.  The monthly payment will be $1,432.25.  At payment #115 (9 years and 7 months into the mortgage), the breakdown is  $631.67 (principal) and $800.58 (interest). If you are in the 25% federal tax bracket, you will save approximately $200 in federal income taxes. All politics aside, it doesn’t make sense to pay the bank $800 in interest to save $200 in taxes.

Finally, we feel safe when we have lots of money sitting in the bank. FDIC insurance gives us a sense of well-being, and the more money in a bank account we have that is guaranteed by the FDIC, the more secure we feel. Unfortunately, after taxes and inflation, the purchasing power of the money we have in our bank savings accounts is being eroded; and as a result, the $100,000 we have sitting in savings will purchase less goods and services next year than they are buying this year. In other words, money sitting in cash will probably be worth less next year than it is worth today.

For many people, making a large lump sum payment against their existing mortgage can be one of the smartest financial decisions they will ever make. Take a look at the following example:

Loan Amount Term of Loan Interest Rate Monthly Payment
$400,000 30 years 3.50% $1,796.18

In this scenario, let’s assume the family has $100,000  in a bank savings account earning 0.25%. If they were to apply the $100,000 towards mortgage payment #36 (3 years into the mortgage), they would save $115,000 in interest over the life of the mortgage, and they would shorten their mortgage to 241 months instead of 360 months. This is because American loans are structured so that most of the interest paid occurs in the 1st 20 years of the loan. That 119 months of not paying $1796.18 20 years from now means the family will have an additional $213,745.42 to spend how they choose at a time when they are 20 years older and possibly not as healthy or willing to work 40-60 hours a week.  If the family had chosen to leave the cash in savings earning 0.25% for the duration of the mortgage, it would have grown to only $106,982.27! In this scenario, saving $115,000 in interest was better than earning $6982.77.

While it is prudent to keep some funds in cash for emergencies, large purchases, periodic bills, or to jump on great investment opportunities when financial crises’ occur, it may not be wise to keep excessive amounts in cash earning close to zero percent when you still have an outstanding mortgage, even if interest rates are historically low. If you are sitting on large cash reserves while also carrying a mortgage or other loans, you would be wise to consider how much your cash reserves are costing you. If you would like to see how making a lump sum payment can save you money, please give us a call. We would be happy to show you how making a lump sum payment on your mortgage might improve your overall financial situation.

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Vouchers are a Free Market Solution for Fixing Public Education

Although we have been conditioned to believe public school is a different animal, free markets work for education too. In America, universities compete for scholarship, grant, and tuition dollars. Consumers, not colleges, determine where those education dollars are ultimately going to be spent. Unlike our centrally planned and taxpayer funded public school system where we contindownloadue to lose  in ranking to other countries , America’s university system is considered the best in the world.  Over the last 150 years we have experimented with government controlled school monopolies, and they have proven to be expensive, overly bureaucratic, and inefficient.  It is time we consider free market solutions to solve the problems that are inherent to our current public education system.

Treating education as an entitlement tends to destroy education’s value in the minds of its recipients.  According to the law of diminishing marginal utility, as a person increases consumption of a product (i.e. education) while keeping consumption of other products constant, there is a decline in the marginal utility (value)  that person derives from consuming each additional unit of that product. What this means is, the more we have of something the less we value the portions we possess above what we really want.

Let’s use the “all-you-can-eat” buffet style restaurant as an example.   These restaurants entice us with “all you can eat,” while knowing each additional plate of food provides less utility to us than the one before. Despite their enticement, most people will eat only until the utility they derive from additional food is slightly lower than the original. For example, say you go to a buffet and the first plate of food you eat is very good. On a scale of ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full plate of food. Since you’re not as hungry, your enjoyment rates a seven at best. Most people would stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops even more to a three. If you kept eating, you would eventually reach a point of total dissatisfaction, or ‘dis-utility.” In education, the first plate of food is learning to read and write, as well as basic math. Beyond the basics, most families don’t value additional education. While this is a bold statement, public school student appreciation for education drops off dramatically with mastery of the basics, and parental disinterest in post- elementary school teacher conferences confirms this reality. Whereas restaurant food bills are normally paid by the people eating the food, such is not the case for public education. Instead, the bill is usually paid by someone else. This lack of “skin in the game” by the consumers of public education further diminishes the value people have for it.

Realizing tax payer funded education is susceptible to the law of diminishing marginal utility, I prefer a policy where citizens are not forced to pay for the education of students who don’t value it.  Instead, I support eliminating public education entirely and allowing the natural order  to inspire families to pursue the education they deem appropriate for their children. It is wasteful to spend money on citizens who don’t value education, but it is wise to let families invest the money they normally pay in taxes towards education opportunities that already exist in the free market. Public education in the 21st century is like bottled water: an unnecessary expense when quality education is readily available in so many other places at much lower costs. Online academies, home-school curriculums, and most private schools are much less expensive, usually more successful in equipping students for the 21st century, and far less controversial than public schools. If education wasn’t a government provided entitlement, the free market would quickly provide the education resources necessary for citizens to function in the 21st century.

Evidence suggests that under a policy where tax payers aren’t forced to pay for the education of their neighbor’s children, poor families would also have access to quality education through patronage. At Whitefish Christian Academy (where I served as board president for many years), many struggling families who value education (and ensure their children work hard in class) have received tuition assistance necessary for their children to attend. Financially successful people in our community continually demonstrate their willingness to partner with hard working families and students who value education, like they do. In spite of the efforts of public school monopoly advocates to paint successful Americans as inherently selfish, I suspect most communities possess citizens as generous as mine, particularly if they are freed of the burden of paying for public education. Community rejections of school bond issues are usually indictments against the inefficiencies of public school bureaucracies rather than denials of education’s societal value.

The inequality created by America’s monopolistic public scho91rupasyk1l-_sl1500_ol system is apt to become our most pressing civil rights issue. Popular documentaries like, “Waiting for Superman,” and “The Cartel,” demonstrate that inner city communities value education as much as any other. They also reveal that public school monopolies are rejected as vehemently in poor minority neighborhoods as they are in affluent, predominantly white ones. Teacher protests in Wisconsin and
New Jersey have exposed government policies that favor teachers and school administrators over tax payers and children, and the appointment of
alternative education advocate Betsy DeVos as America’s newest education secretary signals that parents and students are demanding something better. The only thing blocking them from receiving a decent education in their neighborhoods is a government protected, public school monopoly.

Even though privatizing education is the most efficient way to improve education, I realize America isn’t ready for the idea of jettisoning taxpayer funded education altogether; therefore, I support a voucher system where each child is entitled to a set dollar amount of education paid for with a voucher. Under such a program, each family is free to choose where their vouchers will be spent. Families may choose to home school, enroll their children in private, parochial or droppingbrpublic school, or use the money to hire private tutors. In order to continue receiving funds, I support the requirement that students demonstrate grade level proficiency in order to continue using funds for anything besides public school.

Free market competition in public education will improve it immediately. For communities that lack the courage to do away with public education entirely, the voucher system is the most viable method for introducing free market competition into public education. Because both poor and wealthy communities have voiced strong desires for school choice and equally loud impatience with public school costs and inefficiencies, vouchers are now politically viable.  Free markets have proven effective in providing the highest quality of goods and services at the lowest prices to the greatest number of people; therefore, I support the idea of a voucher system that promotes education choice.

The Women’s March on Washington and the Incorrect Use of Political Language

As I watched online the Women’s March on Washington take place across the country and around the world, I was confused about its goals. Most of the women I know well were not particularly supportive, and when I queried others on social media about the march’s purpose I received almost as many different answers as the women who responded to my question. Ultimately, I took a look at the movement’s mission statement on its website, and this is what I found:

 

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There is a lot to unpack in this mission statement, but when I revert back to my Marine Corps officer training on how to write a mission statement, it appears the mission of the march is twofold: 1)  send a “bold” message to President Trump that women’s rights are human rights, and 2)  organize grassroots efforts to create change towards getting more women elected into office at all levels. What is amazing is how few people actually understood this mission. It was as if the participants of the march were speaking a language that was undecipherable to the target audience: Donald Trump, and those who elected him. In this essay I will explain why the incorrect use of political language by anti-Trump protesters was misunderstood by most Trump supporters. I will also explain how the proper use of political language can increase one’s persuasive power in the marketplace of political ideas.

A few years ago I read an excellent eBook titled: “The Three Languages of Politics.” In the book the author, Professor Arnold Kling of George Mason University, argues: “Our political debates are frustrating and endless because each group  expresses itself along a preferred axis.” Kling argues there are three different axes we use as heuristics to define our political language. From each axis we explain our understanding of good and evil. These three axes are: 1) the progressive (liberal, left-leaning) axis; 2) the conservative (right-leaning) axis, and 3) the libertarian axis.headerforkling3axis

Progressives view politics along an oppressor vs. oppressed axis. As such, progressives see the world as a collection of people groups who are either oppressing other groups or are being oppressed by other groups. Their heroes are anyone who is looking out for the little guy or the underdog, and the bad guys are anyone who is big, powerful and dominant. More than any other value, progressives crave equality and they despise advantage.

Conservatives on the other hand, view politics along a civilization vs. barbarism axis. Unlike progressives who see people as members of groups, conservatives perceive the world as a collection of various societies and cultures along a spectrum from civilized to barbaric. To the conservative, civilization is a collection of values, behaviors, and beliefs that have stood the test of time, and barbarism are those forces that attempt to destroy those same time-tested values, behaviors and beliefs – at the risk of destroying civilization itself. Conservative heroes defend what our forefathers built that is good, reliable, and secure, and the bad guys are rebels and revolutionaries who want to topple the status quo. Conservatives are turned off by anyone who breaks the rules, engages in shocking and outrageous behavior, or disrespects authority and tradition. Conservatives crave consistency and positive results, and they despise chaos, anarchy, and disorder.

Libertarians view  politics along a freedom vs. coercion axis, and they perceive the world as a collection of individuals who function at their highest level when left alone. Libertarian heroes are defenders of freedom like America’s own revolutionary Sons of Liberty, and the bad guys are any government or social institutions that create burdensome rules and regulations, obstacles, controls, prohibitions or requirements established to limit free choice. Libertarians believe the only legitimate function of government is to protect the natural rights of all individuals, so they may live their lives as they see fit, and any government intrusion into the individual choices of citizens that isn’t directly protecting lives, liberty, or property, is illegitimate. Libertarians crave freedom and they reject all acts of force that limit individual freedom beyond what is necessary to prevent one individual from harming another.

Based on the particular axis from which we each view politics, we tend to use what Kling calls “axis language” whenever we engage in political discourse. With axis language, we view our personal opinions from the good end of the axis, and we place everyone else’s conveniently at the other, evil end. Like any heuristic,  axis language requires very little thinking, and it isn’t particularly useful in solving complex problems or arriving at certainty. Axis language doesn’t explain “why” people arrive at their political conclusions, it merely explains how they express their viewpoints. Using immigration as an example of axis language, we can observe how liberals, conservatives, and libertarians use different language to express themselves politically:

  1. Progressives will use terms like “white privilege,”  and “undocumented worker.”
  2. Conservatives will use terms like “illegal alien,” “go to the end of the line,” or  “they broke the law.”
  3. Libertarians will use terms like “open borders,” and  “the only thing keeping illegal immigration illegal is the government.”problems_with_illegal_immigration

We use axis language for several reasons. First of all, in a society where progressives, conservatives, and libertarians are rivalrous and hostile tribes, we use it to explain to others which team we belong. Secondly, proper use of axis language reassures others of our loyalty to the tribe, and when we use strong axis rhetoric, we can actually raise our status within the tribe. Axis language effectively whips up hostility towards other tribes, but more importantly, it tends to close the minds of people who are already in our camp. Libertarians will say progressives want a nanny state, and conservatives want a police state, but progressives and conservatives seldom describe themselves in similar terms. What is interesting to note is, axis language tends to be ineffective in winning others outside of the tribe over to our own points of view.

Using Kling’s 3-axis model, we can describe what was said by progressive protesters during the presidential inauguration and Women’s March on Washington, and what was heard by their conservative target audience. The protesters were communicating their displeasure of Donald Trump’s election, as he is the icon of everything  progressives perceive as oppressive: he is wealthy, white, Christian, and powerful1485062278-sshow_wom_march_04. Because progressives see the world along an oppressor-oppressed axis, and progressive heroes fight oppressors,  their chosen rhetoric attempted to communicate their commitment to protecting the weak and marginalized (women, minorities, gays, the poor, and immigrants)  from the newly elected oppressor-in-chief. Images of women adorned in costumes of female genitalia, posters proclaiming:  “Not My President!” and black garbed anarchists burning limousines and hurling bricks through bank windows, were a call to arms to progressives around the world to unite for resistance 2017-01-21t004156z1lynxmped0k00qrtroptp4usa-trump-inauguration-protestsagainst a coming  wave of Trump oppression.

While progressives may have succeeded in energizing their base, they failed miserably in being understood by others outside their own political tribe. From conservatives – who view the world along a civilization-barbarism axis – the backlash was immediate. What conservatives saw and heard was not a resistance against oppression, but instead an open rebellion against civilized society. Violent protesters destroying police cars,  women adorned in profane costumes, and crotch grabbing gestures from celebrity speakers all communicated a need for conservatives to rally the troops to protect society from the Huns at the gate.

While it remains to be seen if conservatives won the presidential election, it is crystal clear progressives lost. As a result, progressives will need to speak in a different political language besides their own if they want to be heard, understood, and taken seriously. Angry speeches attacking President Trump and his supporters might feel good, but if their message is perceived by conservatives as anti-social or counter cultural, progressives will lose what little influence they currently possess. Rather than use the rhetoric of revolution and angry defiance, progressives will increase their odds of being persuasive if they speak in languages other political groups will understand. If progressives are sure their views are good for society, they should make that case rather than attempt to dismantle the current status quo. If they want to help the marginalized, they must stop labeling the majority as racist, bigoted, homophobic, misogynistic, and privileged. To be convincing, progressives will need to communicate that their ideas will make society healthier, stronger, and more orderly; because if they don’t, conservatives will not comprehend the progressive message.

Finally, progressives can be more effective in their message if they stop talking in the past and present tense, and begin talking in the future tense. In his book on rhetoric, “Thank You For Arguing,” Jay Heinrichs encourages us to use the future tense if we want positive outcomes. According to Heinrichs, “blame” comments deal with the past, (i.e., “Trump made derogatory comments about women”), and comments about “values” are in the present tense (i.e., “Trump is a cheeto-faced, bigoted, misogynist”),  but “choices”leading to positive change have the best chance of success when communicated in the future tense (i.e., “We hope President Trump ensures the poor don’t lose access to health care”).  If progressives want to influence others to their viewpoints, they would be wise to speak about how we can work together to make things better for the future rather than blame conservatives for things that happened in the past, or label conservatives in the present as hate-filled oppressors.

We all enjoy free speech, but there is no natural or positive right to be influential; that only comes from skill and hard work. At a time when, in addition to the presidency, conservatives control two-thirds’s of  the state legislatures, 31 out of 50 governorships, and majorities in both the U.S. House and U.S. Senate, progressives will have to work harder to wield influence. If progressives continue to speak in a political language only they can comprehend; or, if they continue to blame conservatives for past transgressions and label conservatives with pejoratives in the present tense,  progressives  can expect to endure four long years where the best they can hope for is to be politely ignored.

 

A Low Cost, Mutual Aid Alternative to Obamacare

Make no mistake, The Affordable Care Act (a.k.a. Obamacare) is going away. It will either implode under the weight of its own faulty design, or it will be politically dismantled.  Although extremely popular among those with -existing conditions and those who receive subsidies and tax credits, Obamacare is equally unpopular among those middle class Americans who are required to pay for it. In 2017, federal subsidies to compensate insuranceobamacare-repeal-header companies for the costs associated with covering sick and older people ended, and premiums across the nation rose dramatically. The announcement of significant health insurance cost increases around the time of the 2016 November elections contributed greatly to Republican victories for the White House, Congress, governorships, and state legislatures.  Republicans have been very critical of Obamacare since its inception, and they made campaign promises to repeal it, if elected. Now that Republicans are in power, they must answer to those who supported them in the election. What the Republicans are quickly learning however, is their supporters hate the cost of Obamacare, but they love all the goodies it provides: no lifetime caps, coverage for pre-existing conditions, subsidies and tax credits for low income people, and cost shifting of premiums away from older, less healthy people to younger and healthier folks.  Republicans are now in a quandary over how to get rid of all the unpopular aspects of Obamacare while retaining all the popular ones.

At this point I am not willing to speculate on what is going to transpire, but it is safe to say there are only three options: 1) Obamacare will be repealed without an immediate government replacement; 2) Obamacare will be repealed and replaced slowly over a 2-3 year period to give the markets time to adjust; or 3) Obamacare will be repealed and replaced immediately.

Ambitious politicians have a history of making promises they can’t keep. While they are partly to blame, voters are also responsible when we pressure politicians to accomplish the impossible. An example of an impossible task is providing every American unlimited lifetime health care coverage at a price all of us are willing to pay. E63e728454305e0bd296d183d3181f2abveryone wants the security of knowing that unlimited checks will be written on our medical behalf, but few are willing to pay the requisite 30-50% of our incomes for that security. Politicians can promise us that they will deliver such a plan, but they will fail because it is impossible for a centrally planned program to provide such a level of assurance.

A better way to manage health care cost risk than having the federal government do it is for us to do it ourselves through mutual aid. The mutual aid model has been around for decades in the form of health care sharing ministries (HCSM’s).  As a financial advisor, I have been familiar with HCSM’s for over 20 years, and I wanted to participate when I first heard about them; however, my wife Linda was very skeptical about attempting something so unconventional, so I didn’t press the issue; but, when our health insurance premium and deductible both jumped nearly 20% the year Obamacare was established, Linda softened her resistance and we made the jump to an HCSM.  We are extremely happy that we did.

The most important thing people need to understand about HCSM’s is they are NOT insurance. Whereas the relationship between a policyholder and an insurance company is contractual, the relationship within an HCSM is a covenantal agreement between individual participants.

HCSM’s are not-for-profit religious organizations that act as clearinghouses for people who hold similar strong beliefs and who wish to share their medical expenses with each other.  HCSM’s organize the efforts of their participants by funneling financial support towards those participants who incur medical expenses.

Here’s how it works with our HCSM:  Each month the HCSM publishes a newsletter which it distributes to all participants.  The newsletter lists participants who have incurred legitimate medical expenses, and it directs other participants to send a previously agreed amount of money tmain-health-care-sharing-ministrieso those with medical expenses. The gift givers are also encouraged to pray for those to whom they send money.  Recipients are given a list of participants the HCSM has assigned to send them money, and when they receive it, they cross that gift giver’s name off the list. Assigned gift givers who are late in sending funds are reported to the HCSM who reminds them of their commitment, and if they continue not to send gifts as they agreed, they will be dropped from the program.

There are no financial reserves, no legal protections, and no lawsuits; there are only thousands of participants helping each other with medical expenses, organized by an HCSM.  Eleven months of the year gifts are sent to participants, and one month a gift is sent to the HCSM to cover the costs of running the organization. This demonstrates the overhead cost of the program is only 8.3%, which is significantly less than the 20% of overhead expenses and profit insurance companies are allowed under Obamacare.

Most HCSM’s hold strict lifestyle and moral guidelines for participation: no tobacco, drug use, or sex outside of marriage, and only moderate alcohol use is allowed.  Some require overweight participants to demonstrate good faith efforts and progress towards losing weight.  All participants are ultimately responsible for paying their medical bills, and participants are expected to negotiate lower fees from their health care providers before submitting a medical share need to the HCSM.  HCSM’s don’t pay for preventive care; mammograms, pap smears, and annual physical exams; all these services are paid for by the participants themselves. Most HCSM’s (but not all) require members to be  active church attendees, and several require a pastor’s signature verifying a participant’s commitment to the HCSM’s lifestyle and faith obligations. With that said, there is no reason (other than political) why people of different worldviews and values couldn’t organize their own health care sharing programs around common values and needs.

There are many attractive features of HCSM’s. First of all is the cost. Even though many Americans enjoy tax credits and subsidies for participating in Obamacare, the actual unit cost of health insurance is extremely expensive compared to an HCSM. As a married couple in our 50’s, we pay $440 per month vs.  $1101 per month for an Obamacare insurance plan. Whereas our Obamacare deductible would be $6500 per person, our HCSM out of pocket is only $300 per incident (up to three incidents per year). Many folks – after discovering HCSM’s – have been able to retire before age 65 because their HCSM is significantly less expensive than their previous health insurance plan. Secondly, HCSM’s are much more liberal in what they are willing to cover. If your doctor says you need it, your procedure is covered.

One feature I find particularly satisfying is the cooperative and democratic nature of our HCSM. Instead of dictating monthly premiums, our HCSM membership votes on whether or not to raise our monthly sharing responsibilities. Membership participation in determining what we all will contribute monthly ensures we are allocating resources wisely, and it encourages all members to behave in ways that result in keeping total costs lower.

Although 99% of medical claims are less than $250,000, a major concern of many prospective HCSM participants is the fear of a catastrophic event, such as a million dollar claim. In the plan we use, we have enrolled in the “Save to Share” program. In the Save to Share Program, Linda and I agree to set aside $266 per year to be used in the event one of our members has a health care need in excess of $250,000.  In the 3 years we have participated in the Save to Share program, we have never been asked to contribute the full $266 in a single year. Unlike with conventional insurance, the Save to Share program allows members to keep their money until it is actually needed, which in turn helps keep costs down.  Here is an example of how the Save to Share might work:

An individual has a $1 million medical need, and the HCSM covers up to $250,000. Assuming there are 30,000 families participating in Save to Share, each participating family would be directed to contribute $25.00 to cover the $750,000 difference.

There are only 6 HCSM’s in existence today, and this is because current law doesn’t exempt HCSM participants from the Obamacare penalty for not having health insurance unless the HCSM has been in operation since 1999.  If the Obamacare penalty goes away, there would no longer be disincentives preventing new HCSM’s from forming, and new health care sharing programs, organized within affinity groups such as religious orders, fraternal organizations, or even local credit union memberships, could proliferate.

Although  more liberal than pre-Obamacare insurance companies, most HCSM’s have strict guidelines for enrolling new members with pre-existing conditions. But there is no reason for the government not to provide incentives encouraging HCSM’s to accept people with pre-existing conditions. The most efficient way  is to offer tax credits to those participants whose HCSM’s allow a percentage of new members to have pre-existing conditions (i.e., 5%). The key to success for this idea is to have hundreds of HCSM’s instead of the current six.  By spreading the risks and costs among hundreds of different HCSM’s, the shared risks and  costs would be significantly lower than under our current health insurance model which is currently drowning in both.

Rather than react to Obamacare’s ultimate demise, the prudent citizen should proactively investake-care-of-each-othertigate alternatives. For many middle class families, health care costs can now be as high as 25-40% of a family’s annual income. HCSM’s have proven to offer lower costs, higher quality, and less uncertainty than conventional insurance or single payer systems. HCSM’s have proven to be economically viable, but their future risk is primarily political. Unless HCSM’s can generate more public interest, there is a risk these wonderful programs could be taken away.

 

The Right (and Wrong) Ways to Provide Affordable Housing in Whitefish

 

I get nervous whenever people in authority begin talking about fixing social problems with economic solutions. My latest anxiety is caused by recent discussions about the “affordable housing crisis” in my ski resort hometown of downtown-whitefishWhitefish, Montana.  What causes me so much angst is the number of people who believe it is the proper role of government to ensure housing is affordable. First of all, it isn’t; and secondly, when government attempts to make housing affordable, it usually does the exact opposite, causing housing prices to grow much faster than the rate of inflation, and oftentimes ending up with housing costs much higher than in communities that didn’t implement affordable housing policies at all.

“Affordable” can be difficult to determine because Americans routinely  make spending adjustments to ensure they can buy things that are most important to them. For example, in Whitefish, housing can be nearly 50% more expensive than in other communities in the surrounding area. Some families may decide that saving money for their children’s education is more important than their zip code, so they may forego a Whitefish residency; and with the money they save living in a less expensive community, they will invest in college funds. Other families might decide not to have children at all, because living in a resort town like Whitefish is their ultimate goal, while other families with children might decide to live in less expensive communities  and spend their savings on transportation to Whitefish and ski lessons for their kids. Different families make different decisions, and so a one-size-fits-all definition of “affordable” can be challenging. With that said, we should give Whitefish credit for attempting to define housing affordability as such:

Housing is affordable when the monthly payment (rent or mortgage) is equal to no more than 30% of a household’s gross income.

While this definition sounds workable, what it doesn’t do is take into account people’s financial positions over time. For example, many small business owners have unpredictable incomes. In a particular bad year, a business owner might be paying out more than 100% of his earnings towards a mortgage while having to buy groceries and gasoline on his credit card, but in other years his income might be high enough to render his mortgage payment only 10% of his gross income. If government programs offer people less expensive housing for having low incomes, it shouldn’t be surprising when applicants for government assistance “under earn” in order to qualify for subsidized or low cost housing; but soon after they move into their affordable home, increase their incomes to satisfy their particular tastes.

In reality, Whitefish doesn’t have an affordable housing problem; it has a poor economic development problem. For the last 30 years, Whitefish has transformed itself from being a relatively high wage railroad and logging town into a world class resort.  Now, 50% of the jobs available are in tourism related service industries (TRSI). Unfortunately, TRSI jobs tend to pay the lowest wages in any economy. In the last few years, Whitefish has seen significant growth in TRSI businesses and a resulting increase in low wage labor demand. Last summer, Whitefish employers reported hundreds of available jobs went unfilled because workers couldn’t afford to live in Whitefish, and those workers who lived out of town often quit their Whitefish jobs when they found employment closer to where they lived.

The second cause for Whitefish’s lack of affordable housing is the desire of current residents to maintain our beautiful wide open spaces and resort town theme.  Many building restrictions prevent land developers from building houses on small lots, and height restrictions make high occupancy apartment complexes impossible.  In 2015, Whitefish voters approved a 1% resort tax increase to help finance the purchase of a conservation easement from F.H. Stoltze Land and Lumber Company that essentially takes 3020 acres of land out of development, thus reducing the supply of available land for future housing projects.  By encouraging low wage TRSI jobs to locate in Whitefish, while simultaneously limiting housing supply, Whitefish has created its own housing crisis via poor planning.

Whitefish is a wonderful community. With its low crime, friendly neighbors, easy access to outdoor recreation, and quality health care, it is an extremely popular location for older, affluent people who wish to purchase second homes. Because of the high demand, retired transplants from other regions are willing to38277_105092776211022_364462_n-2 pay top dollar to live in our utopia. In order to cater to these wealthy new comers, there has been a proliferation of TRSI businesses, such as: restaurants, art galleries, gift shops, outdoor recreation opportunities, hotels and spas. Success breeds success, and when the first wave of TRSI businesses showed profits, subsequent waves of new TRSI businesses opened in town, creating a shortage of entry level housing. Because there are so many TRSI employers in Whitefish, they are able to place tremendous political pressure on our civic leaders to solve their unique labor problems. From this pressure, we have seen a growing number of community leaders organizing to respond to the TRSI’s self-inflicted labor challenges.

Whitefish is not the first attractive community to experience high demand for cheap housing and a self-imposed low supply.  For many decades, popular cities like San Francisco and New York, as well as resort towns in Vermont and Colorado, have all attempted to find housing for the people who work in their communities. From their experiences we can learn what mistakes not to make.

The first mistake to avoid is implementing  rent caps or price controls. Anytime government artificially sets the price of a good or service above or below equilibrium, the results tend to be the exact opposite of what was intended. This is because rents set below market price discourage investors from constructing new units or repairing the ones they already own. In nearly every community that has implemented rent control, rents increased faster than the rate of inflation. Not only do rent control programs cause rents to increase, they are also notoriously unfair because those who are selected to enjoy rent at lower than prevailing prices are often chosen by lottery rather than financial need, so it is quite often that wealthy, well-connected people who hear about an opening in a rent controlled building will often apply and win.

A second mistake would be to implement programs that force developers to donate lots or homes in new developments for the purpose of allowing  low income buyers to purchase a home at below market price.  While these programs are extremely popular (who wouldn’t want to buy a home at below market cost?), they only help the few people who qualify; but, they force the price of every other newly constructed home in the neighborhood to increase. Let’s say the City of Whitefish only allows a developer to build 20 new homes if he promises to donate 2 of those homes to the Whitefish Housing Authority. These 2 homes would be sold to 2 lucky lottery winners to purchase these donated homes below market cost. The developer in turn, raises the cost of the other 18 homes to compensate for the loss he incurred by the city’s affordable housing policy. When the 2 lucky families eventually sell their homes, they are not going to sell them at below market cost, so those homes are no longer affordable, and new affordable homes will have to be made available to replace them.

Finally, it is a bad idea to use tax dollars to subsidize rent in more expensive neighbstonecreek-apartmentsorhoods. In the same way that federal subsidies in both health care and higher education have led to nationwide cost increases many times faster than inflation, providing government dollars to cost shift the high price of housing will lead to the same fate. Let’s say that a typical home in Whitefish will rent for $1300/month. If a tenant can secure $200/month in subsidies, the cost of that home in time will rise to $1500/month. If the government attempts to offset this rise with even more subsidies, the price will go up every time more subsidies are made available.

There are several ways Whitefish can offer less expensive housing options for its low wage workers. First of all, the city can reduce its restrictions on non-luxury homes, such as manufactured homes, micro houses, and multi-story apartment buildings. Additionally, it can encourage entrepreneurs to provide dormitory-style housing for seasonal workers similar to the kinds of quarters the military uses to house its servicemen and women.  Finally, business owners can be encouraged to collectively develop housing cooperatives to provide low cost housing for their own employees. Businesses could purchase whatever number of housing units they would like, with the stipulation that when they rent or sell they must do so at prices the other co-op members decide.

Make no mistake, affordable housing is not a Whitefish community problem, it is a Whitefish business owner problem. Whitefish TRSI employers aren’t any different than other employers, and if they believe they can get someone else to solve their economic problems via government subsidies affordable-housingor community cost shifting, they are going to try. The easiest way for TRSI businesses to ensure their employees can live where they work is to pay them more.

In spite of the concerns we hear from Whitefish TRSI businesses and their advocate, the Whitefish Chamber of Commerce, we should not succumb to their petitions to have the rest of the community – via government policies and programs – to shoulder their responsibility for keeping their own employees happy. Instead, we should think twice before encouraging more low wage TRSI jobs to locate in Whitefish, and we should encourage our civic leaders to ease up on building regulations that discourage the free market from providing  low cost housing options to meet the current demand.

I Love Free Markets

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“The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.”

Leonard Read, “I, Pencil”

I recently ordered a pair of Bluetooth wireless sport headphones with noise cancelling technology that will interrupt the audiobook I am enjoying on my smart phone whenever I receive an incoming call. While hiking up the mountain trails that surround my rural Montana town, I will be able to  carry on a hand’s free conversation through my headphones, and the audiobook will resume where I left off when I end the call. The headphones cost me $19.77, and they will be delivered to my rural Montana doorstep in two days at no extra charge. I love free markets.

In 1958, Libertarian founder of the Foundation for Economic Education Leonard Read wrote an essay titled: “I, Pencil.” In this essay Read highlights the wonders of capitalism. While we take the common pencil for granted – we see them everywhere and they cost practically nothing – the pencil is anything but simple. Although the pencil is only made up of four components: wood, clay, metal, and rubber, none of us has ever made our own pencil, and most of us wouldn’t have a clue how to do so. As the essay describes, free markets have wonderfully brought millions of people together from many nations to produce a product as complex as the pencil in such a way that  is now so inexpensive and ubiquitous that we take it for granted.

A couple of years ago, Linda and I wintered in Arizona. As we traveled throughout the state, I marveled at how much food is grown in what I considered a desert wasteland. We didn’t have to drive far from town to see acres and acres of citrus groves, dairy farms, fields of lettuce, or grape vineyards that supply Arizona’s growing wine industry. It fascinated me to see Americans producing more food than they could personally eat out of ground that seemed incapable of growing anything.

Recently, I have seen a steady stream of  news stories reporting Venezuela’s food
shortages. Photos of empty grocery store shelves and toilet paper riots are shown on social media every day. It seems strange a country with such an agreeable climate for growing food, and adjacent to a ocean teeming with fish, would have so much trouble feeding its people when Americans living in the Arizona desert 14600624444589are able to grow a cornucopia of plenty.

Venezuela is an example of a centrally planned economy where the government controls nearly every aspect of the food market. Recently, the government forced farmers and food manufacturers to sell anywhere from 30-100% of their products to the government at prices lower than the what the private grocers and supermarkets are willing to pay. This has caused the farmers and food manufacturers to stop producing food at a loss. Instead, a black market has developed where toilet paper, rice, flour, cooking oil and other staples are being sold at six times higher than the government’s fixed prices.  In other words, the Venezuelan government’s efforts to force food producers to produce below market prices has essentially caused shortages that have pushed prices up significantly higher. Nowadays, a pound of cheese purchased on the streets of Caracas costs 50% more than my new headphones.

In spite of the fact that we take cheap pencils, toilet paper, and basic food staples – not to mention refrigerators, birth control, contact lenses, cell phones and jet travel – for Venezuela-supermarket-looting-reuters-640x480granted,  there are many people who believe that free markets “don’t work,” and that there is something nefarious about the profit motive. What we are seeing in Venezuela is an excellent example of what happens when bureaucrats rather than customers determine the prices of goods and services sold in the marketplace. In Venezuela’s case, when the government dictated prices lower than producers could profitably meet, they just stopped producing food, and as demand increased, black marketeers began smuggling  in and selling those same products at prices high enough to compensate them for their risk of being arrested and possibly thrown in prison.

The Venezuelan people are capable of producing more than enough food to feed themselves and others; unfortunately, their government’s policies discourage them from doing so.  But in spite of the Venezuelan government’s well documented blunders, there are millions of Americans who believe there is something immoral about the profit motive that inspires Americans to do back breaking work in the Arizona desert harvesting lettuce so that people in New York City can enjoy a nice salad. Markets do work when they are free, and it is ironic to see so many people using smartphones made in China, intellectual property from the United States, and materials mined in Africa, to communicate on social media that they prefer an economy that more closely resembles Venezuela’s food distribution system to that which produced their phones. Free markets aren’t perfect, but I prefer living in a society where UPS deliverymen have incentives to deliver my inexpensive luxury headphones to my doorstep rather than a society where we have to stand in long lines for hours to pick up our weekly government allotment of toilet paper and cooking oil. Sometimes the blessings of free markets are so abundant it is easy to lose our appreciation for them.

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I am a Christian Communist

I love to debate. Recently in the heat of an ongoing Facebook argument, my opponent accused me of being a communist.  I believe the last time I was accused of being a communist was grade school. However, after much introspection, I had to admit that I am a communist.  In 1991, on the border between Saudi Arabia and Kuwait, I became a Christian communist, and I have been a passionate member of my commune ever since.

In my Christian commune, we are taught to behave in ways that bring honorgroup-people-holding-cross-praying-back-lit-41953590 to our leader, and there is a rulebook that hasn’t changed for centuries. In my commune people are expected to follow the leader and the rulebook, and we are guided by a worldview that inspires us to give more to the commune than we take, and what we take from the commune we believe are gifts, not entitlements. There are some in the commune who habitually give less than their ability and take more than they need, but the system seems to overcome its challenges when properly lubricated with grace and forgiveness.

In my commune people often choose to deprive themselves of luxuries so they can afford to help the less fortunate in and outside our cUntitledommune. Although my commune is often ridiculed, insulted, and despised by its beneficiaries, my commune gives more than it takes from the outside community. My commune feeds the poor and heals the sick outside my commune, even when those outside my commune curse our leader’s name.

There was a heavy price I had to pay to fully reap the promised benefits of my commune membership: I was required to voluntarily choose the leader’s ways over my own. While I wasn’t necessarily kicked out of the commune when I was selfish, it appeared the more I gave, the more I received.  Because this contract was built on a supernatural belief, it was difficult to accept until I experienced it.

When I used to live outside the commune, life was more cynical and unhappy. It was confusing and frustrating living outside the commune because the rules were always changing, and they were so complicated everyone was afraid.  Outside the commune, people didn’t talk to their neighbors, and they used lawyers to solve even small disagreements.  Outside the commune, I was taught that inside the  commune life was oppressive and boring, but I discovered the people inside the commune are every bit as fun loving as those living outside the commune. Once inside the commune, I observed that many of the behaviors the outside proclaimed to be liberating were actually enslaving. Until I actually joined the commune, I was a supporter of the anti-commune movement; however, now that I am a communist, I find great comfort in my membership. What I experienced outside the commune routinely failed me, but what I have experienced inside the commune has been consistently positive. For me, life outside the commune was scary and unreliable; however, inside the commune life has been secure and reliable.

Now that I am a communist, I am often insulted and ridiculed  by people outside the commune for being a communist. (I guess it is only fair because I used to attack Christian communists myself). My commune is often attacked for being selfish, even though it has proven to be less selfish than the society outside the commune. My3a0bf7c1d41f7d1323ac327205bd52f9cd0de7fc90ef30b17c7bda7781a15895 commune is routinely called racist, even though my commune’s record on race is superior to that outside the commune. Finally, my commune is accused of propagating untruths, even though little I experienced outside the commune proved reliable. I guess what ultimately led me to exit the society outside and join my Christian commune was the continual disappointments I experienced out there.

I am often encouraged by people living outside to leave my commune and rejoin the society-at-large; however, I already know from experience how frightfully bad life is outside the commune.  I no longer desire to live outside my commune, where people are tricked into creating governments strong enough to force their neighbors into behaving and thinking a certain way, only to have those same strong governments oppress the very people who created them, and in ways the creators never intended.

I am proud of my commune’s record on social issues.  I know throughout history there have been embarrassments identified by those living outside my commune, yet the historical transgressions of my commune weren’t a reflection of the teachings of our leader, nor were they worse than the transgressions of societies living outside my commune. Though far from the perfection required by those living outside of my commune, my commune’s history has been net positive. It is a shame when those outside my commune bring light to our shortcomings and ignore our successes.

There are some in our commune who live their lives like they really believe our leader is the Truth. From the successes I have observed from these hard core communists, I want to be just like them. Others in our commune live like they believe some of what our leader says is true, and this group experiences varying levels of success. Many who join our commune live their lives exactly like they did when they lived outside the commune, and they are just as insecure and frustrated as they were before they joined.  The funny thing about our commune is it only works for the people who live their lives like they believe the leader’s teachings are true.

After living both outside and inside my commune, I prefer living inside. I often get frustrated when those outside my commune want the material benefits  my commune produces without the worldview that makes those material benefits possible. It is sad those who choose to live outside my commune don’t understand that it is our worldview, not its resulting benefits, that holds the real power.

Within my commune good and evil are easily discerned, and they are never changing; but outside my article-new_ehow_images_a07_4k_jp_fundraising-ideas-christian-youth-groups-1-1-800x8001commune, good and evil change every election. In my commune I am free to be good; outside my commune I am forced to be whatever is contemporarily decided by the majority (or a panel of life-appointed judges) to be good.

It would be wrong for me to force anyone to join my commune; however, I will testify it has proven better for me than life outside the commune. While it appears life outside my commune is spiraling towards destruction, I know I am secure within my commune. If my choice to voluntarily join my commune and follow the teachings of my leader makes me a communist, I plead I am guilty as charged.

Refugee Sponsorship and Christian Charity

I recently finished an interesting eBook titled: “The Three Languages of Politics,” by economist Arnold Kling. The premise of the book is that most of us view politics through one of three heuristic lenses in what Kling calls the “three axis model.” Kling opines we both transmit and receive information along one of three completely  Three Axesdifferent axes: an oppressor-oppressed axis, where the oppressor is evil and the oppressed is good; a civilization-barbarism axis, where civilization is good and barbarism is bad; and a freedom-coercion axis, where freedom is good and coercion is bad. While the purpose of this article is not to unpack Kling’s thesis in great detail (I will let readers invest their own $1.99 to do that), I will use the three axis model to suggest we often discuss politics in our own political language and when we do, we  render our positions greatly misunderstood by others who don’t speak the same political language. Case in point is Donald Trump’s recent comments on the presidential campaign trail, where he stated he wants to see a “total and complete sh1006687-trump-1449642179-968-640x480utdown of Muslims entering the United States until our country’s representatives can figure out what is going on.” The social media outlets exploded with outrage from many who saw his comments as racist and bigoted,  while others claimed his common sense approach to national security is sorely needed. One side is arguing against Muslim immigration along a national security axis; another side is supporting Muslim immigration along a religious freedom axis. Unfortunately, neither side is acknowledging the concerns of the other, and as long as we argue in our own political language exclusively, it will be next to impossible to develop a policy that comes close to being acceptable to half our population.

I believe there is a way to solve this dilemma that addresses the concerns of most, and it is through the practice of private refugee sponsorship. Unlike Canada, which has had a policy of private refugee sponsorship for years, there is currently no legal program available in the United States for individuals and/or groups to sponsor refugees. This has not always been the case. Under the Reagan Administration thousands of refugees were resettled in the United States by private sponsorship with very little taxpayer support, and the program was largely successful.

While much of the refugee argument has been framed in terms of Christian charity, I am not so sure there is anything particularly Christian or charitable about a policy of extracting taxes from all Americans to redistribute the funds to government selected voluntary agencies  and using the funds to resettle refugees where they are largely unwanted. The way to demonstrate Christian love for the refugee is to get the government out of the refugee resettlement business (with the possible exceptions of using federal agencies to conduct background security checks and public health examinations). Rather than allow politically motivated bureaucrats decide which immigrants will be net positives as new citizens, let individual private sponsors take the financial and social risks of bringing refugees to our shores. There are thousands of individuals and groups willing to use their own resources to demonstrate Christian love to refugees, and I say we let them.

By removing government from the equation, the sponsor will then be able to demonstrate genuine agape love rather than what I call “Facebook crusader feel good love.” The sponsor rather than the taxpayer can ensure the refugee has food, shelter, healthcare, education, and employment, as well as oversee the refugee’s assimilation into American culture.

The first step in demonstrating America’s Christian charity is to stop doing so by government decree. By allowing private sponsorship, we speak to the concerns of progressives, who will witness oppressed peoples not only being tolerated but embraced by individual sponsors. We speak to the security concerns of conservatives when refugees are supervised by interested private sponsors working towards the ultimate assimilation of the refugees. And finally, we speak to the concerns of  libertarians because citizens will not be forced to fund or participate in a government program against their will.

If the goal is to open America’s opportunity to foreign refugees while being mindful of national security concerns, and Christian charity is the banner under which we rally, then I believe a private sponsorship program for refugees is our best option.

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Anyone of Average Ability Can Pay for College: Here’s How

For all the rhetoric we hear about college being unaffordable, the fact is, ANYONE with normal ability can attain a college degree. For the 2015-16 school year, the University of Montana’s  cost of attendance for an in-state resident is $16,599. While that figure sounds high, it is not overwhelming. The concept of seeking employment to raise funds for one’s own education currently resides outside societal norms, but working and saving are sure-fire ways to graduate debt free. Additionally, working one’s way through college ensures a  graduate will be more competitive against peers who lack any meaningful work experience.

Truth is, if you can get accepted into a state school, you can afford to graduate debt-free. Here’s how:

1) Beginning in your sophomore year of high school, find a part-time job and save $500/month working after school, and $1000/mo during the summers by working full-time. This job can be anything from flipping burgers in a fast food restaurant to stocking shelves in a hardware store. If you do this for 3 years, you will a save $22,500.Student-friendly-Part-Time-Jobs

2) Upon graduation from high school, live at home for the next year, and by working full-time and saving $1500/month, you will be able to save an additional $18,000.

3) Once you enter college, earn $750/month during the school year, and $1500/month during the summers. If you do this for 4 years, you will have earned a total of $45,000

Grand total: $85,500, which is more than enough to earn a 4-year degree at the University of Montana. I am making the assumption that the only jobs available to teenagers pay only $8.00 per hour, but a college kid with 4 years work experience should be able to make a much higher income waiting tables or working construction. For those kids able to earn scholarships or government grants, all the better,  and students willing to live at home and attend a local community college to complete their general requirements will experience even greater cost savings. However, the program above is a sure-fire way to guarantee there will be enough funds for college even if you have no other options but to pay your own way at a 4-year state college.

While some will argue that the work described above will rob kids of the joys of youth, I have seen how college debt and no previous work experience rob college graduates of the joys of young adulthood. Trying to manage the cost of an apartment, transportation, food, utilities, and a social life while simultaneously servicing a monthly student loan payment of several hundred dollars a month can be a real challenge; but, as I have demonstrated, student loan6194417_f520 debt is completely unnecessary for the student willing to think and act outside the box.

If someone convinces themselves that work is drudgery, it will be; however, if they choose to see work as a valuable way to please others, gain valuable work experience, and save the necessary funds to attend college, it is quite possible that work during high school and college will be a social and emotional -as well as financial – net positive.

Failing Health Insurance Cooperatives and the Future of Obamacare

Utah’s nonprofit health insurance cooperative, Arches Health Plan, recently announced it is shutting down.  This is the 10th health insurance cooperative (10 out of 23) to close their doors, citing lower than expected enrollment as the culprit. Billions in federal loans were made to these health insurance cooperatives for the purpose of providing a non-profit, credit union-like alternative to profit centered health insurance companies, under the theory that by removing the profit motive, health insurance cooperatives would be able to pass on their savings to policyholders. Unfortunately, those funds loaned to the now  shuttered co-ops are gone forever. (These failed co-ops should not be confused with the very successful health care sharing ministries (HCSM’s)). These closures were highly predictable. When the Affordable Care Act (ACA) was signed into law on March 23, 2010, it was a political victory but an economic disaster. Now that we are entering Obamacare’s third year, the full weight of what happens when policymakers ignore the tenets of basic economics are unfortunately starting to appear.

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Because we understand the law of gravity, we know if we drop an object from a height it will fall towards the Earth. Similarly, because we understand the principle of adverse selection and the laws of supply and demand, we know that if not repealed or drastically adjusted, the ACA will ultimately end in failure.  Here is the sequence of events I wrote about in another blog back in July of 2012 before the implementation of the ACA that predicted some of the outcomes we are observing today:

(1) The ACA will increase the per unit cost of healthcare for everyone.
(2)  Some fortunate Americans will see their increased premiums subsidized by their neighbors, giving those subsidized the illusion of a cost reduction.
(3) Some unfortunate Americans will see astronomical increases in their health insurance premiums and income taxes.
(4) Healthy middle class Americans will eventually drop their expensive coverage and opt to pay the less expensive “tax.”
(5)  Insurance companies will incrementally leave the health insurance market until the whole scheme fails.

While governments can pass laws to suspend gravity or change the speed of light, they will fail because physical laws are unaffected by human desire. Health Insurance operates by certain economic laws in the same way matter follows physical laws in the natural world. According to the economic laws of supply and demand, if you increase the demand for a good or service and the supply remains constant (or decreases), the unit cost for that good or service will increase.  Good intentions can’t change this economic reality. Predictably, the ACA is increasing  demand for health care by entitling unhealthy, expensive patients to unlimited access. With state insurance commissioners  recently announcing premium increases of 5-35% across the nation, we will begin seeing rational, healthy, and inexpensive patients dropping their expensive health insurance policies by opting to exercise one of the several insurance mandate exemptions  allowed by law, or by paying the cheaper “tax” instead. The ACA magnifies the insurance problem known as “adverse selection,” where only people needing immediate health insurance buy it. Adverse selection is pushing  the cost of health insurance to astronomical levels. Using price controls and federal subsidies, the ACA attempts to prevent insurance companies from raising their premiums, making the sale of health insurance a losing proposition (too few healthy people paying in, and too many sick people making claims). As we are seeing with health insurance cooperatives, for profit health insurance companies are also exiting the market due to their inability to run profitable businesses under the ACA. Losing health insurance providers will eventually lead to reductions of quality as well as access to health care.
When governments violate economic laws by artificially holding down the price of a good or service, they inadvertently reduce the supply of that good or service. In the early 1970’s the government set the price of gasoline below market equilibrium, and the supply dropped overnight because gas station owners refused to sell gas at a loss. The same thing has happened historically with rent control. Whenever government uses its coercive powers to hold down rent prices below market equilibrium you get a predictable reduction in the number of landlords willing to rent property at a loss. We are now observing the identical experience with health care; governmental price controls are reducing the number of health care providers resulting in rationing and an erosion of health care quality and access.

Under the ACA, the unit cost of health care is rising for everyone; but, the cost increase of insurance premiums for lower income citizens is paid by someone else, giving the voting poor the illusion that the ACA has driven down costs.  If Citizen A is currently paying $400/month for health insurance that costs $400/month, but on 1/1/2016 he is charged $200/month for insurance that costs $500/month, Citizen A will think the ACA reduced the cost of health insurance when in reality someone else will be saddled with the increase. Unfortunately for Citizen B, he will experience a health insurance cost of $800/month; $500 for his own insurance and a $300  tax increase to subsidize his neighbor.
pull quote 2Whereas government subsidies and price controls almost always lead to increases in the unit costs of regulated goods and services, free markets allow unit costs to drop for all Americans. The unregulated costs of Lasik surgery, laptops, digital watches, and flat screen TV’s have dropped in unit price for EVERYONE. There has been no cost shifting for the aforementioned items, but instead universally experienced cost reductions in real terms for all Americans.  Poor people and rich people can buy a flat screen TV for prices much lower today than they could 10 years ago. The same can’t be said for the over-regulated health care market. The free market brings unit costs down and drives quality up for ALL consumers. Because the ACA has removed most of the free market forces that drive costs down and quality up, nearly everyone is experiencing higher costs per unit of health care and a simultaneous reduction in access and quality.

Many of the ACA’s supporters are claiming the law is a resounding success. They state that millions of people who once were denied health insurance because of pre-existing conditions or expensive premiums now have access to it. What the ACA’s supporters don’t admit is that millions of different Americans are rapidly finding health insurance so unaffordable they and/or their employers are dropping coverages due to unaffordability. Insurance programs don’t survive when unhealthy, expensive people sign up to buy at the same time healthy, inexpensive people are leaving.

While it is true the American health care system is in need of a complete overhaul, the Affordable Care Act is not the answer. Due to the immutable economic laws of adverse selection and supply and demand, the ACA, is failing, When the ACA does fail, I hope we learn from our mistakes and consider using free market solutions that have reduced prices and increased quality and access wherever free markets have been allowed to operate.