My latest post is up on Medium – read about how an extremely low tax on net worth (0.25%) could generate more revenue than capital gains taxes, enabling reform of the tax code.
Archive for Policy
Go to www.irs.gov. Look for the File Now button to file your taxes. You’ll find a list of options for filing, including software companies providing tax filing web sites and software. The IRS makes fillable online tax forms, and the instructions for completing them – so why not cut out the middleman and deliver a free irs.gov tax filing portal? Healthcare.gov is just the latest answer to that question – the government has a poor track record of delivering technology solutions, with IRS, FBI, and DHS systems as just a few examples of failure .
The department (Health & Human Services) managing the Obamacare rollout should take a lesson from the IRS: if you set the rules, and let the private market deliver the software, you can offload the expense and risk of technology development while still receiving the benefits of automation. Turbotax and its competitors receive not one dime from the IRS, and yet have taken a huge share in the multi-billion dollar tax filing preparation market. In addition, these companies have agreed to give their software away for free to low-income individuals, eliminating any criticism on fairness or access grounds.
Healthcare.gov could easily move to the same model, and here’s the crazy part – several companies, including eHealthInsurance.com and GetInsured.com, already have healthcare exchanges certified to sell ACA plans WITH subsidies! While any licensed insurance agent (including websites) can sell ACA-compliant policies, a handful have built out their technology to work with the federal government and provide access to subsidized ACA insurance. Rather than competing with these firms, Healthcare.gov could terminate many of its bloated IT contracts and simply list certified private exchanges on its site. These exchanges would provide a free shopping experience for consumers, and earn a commission on policies sold in a manner similar to the financing system for healthcare.gov itself . Let HHS & CMS employees set and administer the rules of the ACA, and leave the exchanges themselves to the private sector – leading to benefits for taxpayers and health insurance shoppers alike.
 This paper found that 70% of government-run software projects failed to meet stated objectives. Government contract reform has become a hot topic as a result of healthcare.gov’s failure, but these problems have been going on for years.
 The ACA exchanges will charge insurers 3.5% of each policy premium sold on exchanges to finance the marketplace. While this “user fee” is lower than the commissions many private insurance brokers receive, many would likely still jump at the opportunity given the size of the new market on offer (perhaps 7 million individual policies through 2014).
An analysis of every US mass shooting over the past 30 years shows that two small policy changes, restricting high-capacity magazines and introducing stringent background checks, might have saved over 500 injuries and deaths, reducing total casualties in mass shootings by 50%.
Various proposals have been set forth since 2012’s numerous mass shootings, ranging from much stricter gun regulations to arming more individuals in public spaces. Starting from Mother Jones’ list of US mass shootings over the past 30 years, I analyzed the potential impact of two proposals in particular: would a ban on high-capacity gun magazines have reduced casualties, and would stringent background checks of gun purchasers have reduced the number of shootings? I researched the incidents surrounding each shooting to determine whether each proposal would have had any impact. The data are summarized in the table below, with the full research spreadsheet available here.
|Shooting||Deaths||Injuries||Lives Saved||Injuries Prevented||Weapon Legally Acquired?||Notes|
|Totals:||459||481||250||324||Legal in 58 of 63 cases||54% of deaths and 67% of injuries might have been prevented with the policies analyzed.|
|Newtown, CT Sandy Hook Elementary||27||2||17||0||Yes – legal weapons in same household||The shooter’s rampage was stopped by a quick police response. If the shooter had to reload 3 times as often, he would hit many less victims, as he fired on each victim multiple times.|
|Minneapolis, MN Sign Company||6||2||1||0||Yes||The shooter reloaded at least once during the shooting, and initially struggled with victims.|
|Oak Creek, WI Sikh Temple||6||4||3||2||Yes||In a public setting with many adults, it’s possible shooter would have been stopped while attempting to reload, or would have retreated outside more quickly if he had less capacity.|
|Aurora, CO Theater||12||59||12||59||Yes||A lucky form of weapon capacity control prevented a larger disaster, as the shooter’s weapon jammed and he was only able to fire roughly 1/3 of the 100 round magazine. A properly integrated background check system might have stopped the incident entirely.|
|Seattle, WA Cafe||5||1||0||0||Yes||It’s not clear that the gunman ever needed to reload, and though he had a history of mental health problems, he was never treated and never convicted of a felony.|
|Oakland, CA – Oikos University||7||3||7||3||Yes||HCM limit would have no impact here, but the shooter was expelled from school for behavioral issues, which might have been caught if this data were submitted to a comprehensive background check system.|
|Atlanta, GA – Health Spa||4||0||4||0||Yes||HCM limit and background check would have no impact here|
|Seal Beach, CA – Salon||8||1||3||0||Yes||The shooter reloaded during the shooting per police reports, so lowering weapon capacity would likely have lowered casualties.|
|Carson City, NV – IHOP||4||7||2||3||Yes||The shooter fired over 30 rounds per eyewitness accounts – lower capacity would have constrained him.|
|Tucson, AZ – Giffords shooting||6||13||4||9||Yes||Shooter was tackled and stopped while he tried to reload – direct evidence that lower capacity would have decreased the toll.|
|Manchester, CT – Beer Company||8||2||4||1||Yes||Shooter used two weapons and fired multiple rounds at many victims – had he been limited, he would have run out of ammunition earlier|
|Lakewood, WA – police officer shooting||4||0||0||0||No||Capacity limits might not have helped, as the shooter fired on four victims seated at one table, and hit all of them with his initial salvo.|
|Ford Hood, TX – army base||13||29||9||19||Yes||Shooter reloaded many times, and 30 round magazines enabled him to fire roughly 170 rounds before being shot himself by military police. Multiple soldiers attempted to charge the shooter – if he had only a 10 round magazine, it’s entirely possible that he would have been tackled and stopped upon initial reload.|
|Binghamton, NY – civic association||13||4||9||3||Yes||Shooter fired 99 rounds in total – this would likelybeen reduced if his weapon capacity were 1/3 as large|
|Carthage, NC – nursing home||8||3||0||0||Yes||Since shooter used multiple weapons and never reloaded, it’s unlikely capacity limits would have mattered.|
|Henderson, KY – Atlantis Plastics||5||1||0||0||Yes||Shooter did not use a high capacity weapon|
|Dekalb, IL – Northern Illinois University||5||17||5||17||Yes||This incident’s casualty count is quite low because the shooter first fired with a very low capacity weapon, his 6-round shotgun – enabling many students to escape the classroom. Shooter also had a long, documented mental health history.|
|Kirkwood, MO – City Council||6||1||0||0||Yes||Shooter used low-capacity revolver initially, and took a higher capacity weapon from a victim (police officer).|
|Omaha, NE – Westroads Mall||8||4||5||3||No||Shooter appears to have emptied one magazine and then taken his own life.|
|Crandon, WI – sheriff’s rampage||6||1||0||0||Yes||Shooter used a service weapon, so proposed rules/limitations would have had no effect.|
|Blacksburg, VA – Va. Tech||32||23||32||23||Yes||Shooter reloaded many times, and used multiple weapons. Mental health check would have prevented weapons acquisition.|
|Salt Lake City, UT – Trolley Square||5||4||5||4||Yes||Shooter did not use high capacity weapons|
|Nickel Mines, PA – Amish School||5||5||2||2||Yes||Once shooter started firing, sheriffs approached – he killed himself as they arrived, and likely would not have had a chance to reload.|
|Seattle, WA – Capitol Hill||6||2||6||2||Yes||Shooter had a weapons-related felony charge, which was reduced to a misdemeanor.|
|Goleta, CA – postal shooting||6||0||6||0||Yes||Shooter had a previous history of mental illness|
|Red Lake, MN – high school||9||5||3||2||Yes||Shooter possessed a gun in his bedroom despite being treated with Prozac. Since he was an adolescent, and his parents/guardians chose to give him a gun, background checks would be ineffective. Shooter shot his grandfather who was a police officer, and took his weapons.|
|Brookfield, WI – Church group||7||4||2||1||Yes||Shooter suffered depression, but had no mental health or criminal records.|
|Columbus, OH – concert||4||7||0||0||Yes||No HCM used, and no medical or criminal record. Nearby police stormed the concert and shot suspect|
|Meridian, MS – Lockheed Martin||8||7||4||3||Yes||Shooter used military-style weapon with high-capacity|
|Melrose Park, IL – Navistar||4||4||4||4||Yes||Shooter used military-style weapon with high-capacity, and was also a convicted felon|
|Wakefield, MA||7||0||5||0||Yes||Shooter used high-capacity weapon and also had a history of mental illness, but with the mental illness far in his past and no criminal record, even stringent checks might not have denied him weapons. Shooter stopped firing at an arbitrary point and sat calmly til arrested. If he had lower capacity weapons, stopping to reload multiple times might have caused him to sit and wait for arrest earlier.|
|Tampa, FL – hotel||5||3||5||3||Yes||Shooter was arrested for assault only a few months earlier, and bought weapon at a gun dealer|
|Honululu, HI – Xerox||7||0||3||0||Yes||Shooter acquired a large number of weapons long before mental issues began.|
|Fort Worth, TX – Wedgwood Baptist Church||7||7||2||2||Yes||Shooter committed suicide after emptying three magazines – but he had six more loaded. Has the magazines been 1/3 smaller, that would have lowered the toll proportionally.|
|Atlanta, GA – Day trading||9||13||0||0||Yes||The shootings happened in multiple separate incidents, making it less likely that HCM limits would have had an impact. Barton was suspected but never charged in earlier murders, so background checks would have had no impact.|
|Littleton, CO – Columbine High||13||21||6||10||No||Shooters used a high capacity Tec-9 and standard capacity 9mm, so avg capacity is used here. Details of the shooting indicate that in many cases shooters fired at the same victim multiple times – if limited in capacity, this would have reduced their ability to fire on additional victims.|
|Springfield, OR – Thurston High||2||24||1||19||Yes||Shooter was tackled and stopped when he first tried to reload – a clear indication that lower capacity would have further limited casualties.|
|Jonesboro, AR – Westside Middle School||5||10||2||3||Yes||Shooters ran away after firing 30 rounds – lower capacity might have reduced total rounds fired.|
|Newington, CT – Lottery worker||4||0||0||0||Yes||Shooter chose specific victims and fired relatively few rounds, so capacity limits make no difference here.|
|Orange, CA – Caltrans||4||2||3||1||Yes||Shooter entered shootout with police shortly after initial incident, lower capacity might have shortened his attack|
|Aiken, SC – RE Phelon Co||4||3||0||0||No||Standard capacity weapon (illegally acquired) used|
|Fort Lauderdale, FL – city employee||5||1||0||0||Yes||Standard capacity weapon used|
|Corpus Christi, TX – Walter Rossler Co||5||0||0||0||Yes||Standard capacity weapon used|
|Fairchild AFB, WA – hospital||5||22||5||22||Yes||Shooter possessed only one 75 round drum magazine – so he would never have to reload. Military police arrived quickly and killed perpetrator.|
|Aurora, CO – Chuck E Cheese||5||0||0||0||No||Shooter fired less than 10 times, executing each victim, usually with a single shot|
|Garden City, NY – LIRR||6||19||2||6||Yes||Shooter emptied two 15 round magazines and was tackled while reloading with a third magazine. Total rounds fired would have been decreased by 1/3 were magazine capacity limits in place.|
|Fayetteville, NC – Luigi’s Restaurant||4||6||2||3||Yes||Shooter used a high capacity rifle, shooting was stopped by nearby police|
|San Francisco, CA – 101 California St office building||8||6||4||3||Yes||Shooter used a 32 round Tec-9 in the shooting, and fired hundreds of rounds|
|Watkins Glen, NY – office||4||0||0||0||Yes||Shooter killed four intentional targets with relatively few shots, and then waited for police to arrive – perhaps less than 10 shots total fired.|
|Olivehurst, CA – Lindhurst High School||4||10||0||0||Yes||Shooter used two weapons and fired relatively few shots, so high capacity weapon limits would have no effect here. Shooter also had no prior criminal or mental history.|
|Royal Oak, MI – postal||4||6||4||6||Yes||Shooter had his concealed weapons permit revoked on concern of mental illness. Shooter also used high-capacity magazines with his rifle and fired scores of rounds according to police.|
|Iowa City, IA – Univ of Iowa||5||1||0||0||Yes||Did not use a high-capacity weapon, and did not display sufficient signs of mental illness prior to shooting to warrant attention|
|Killeen, TX – Luby’s Cafeteria||20||24||8||10||Yes||Used high capacity pistols and reloaded multiple times – capacity limits would have enabled more victims to escape, as many escaped by exiting the restaurant.|
|Jacksonville, FL – GMAC plant||9||4||9||4||Yes||Shooter had a history of violence and convictions, and yet legally purchased multiple weapons. Used a high capacity weapon in shooting|
|Louisville, KY – Standard Gravure Co||8||12||8||12||Yes||Shooter used high capacity weapon, emptying its magazine and committing suicide with his second weapon. Shooter also had a lengthy psychiatric history including hospitalization|
|Stockton, CA – schoolyard||5||29||5||29||Yes||Shooter had a lengthy arrest history and had served time in jail as an accomplice to armed robbery, and yet was allowed to buy weapons.|
|Sunnyvale, CA – ESL Co shooting||7||4||7||4||Yes||Shooter was able to purchase guns while under a court restraining order|
|Palm Bay, FL – shopping center||6||14||6||14||Yes||Shooter used a high capacity .223 caliber rifle, and killed two police officers during the shooting – one of them as the officer was trying to reload. Perhaps if the shooter’s capacity were lower, the officer might have himself fared better. Gunman also had prior assault conviction.|
|Edmond, OK – USPS||14||6||0||0||Yes||Shooter was in National Guard and would have had access to weapons. Though he was referred to as “Crazy Pat”, he had no history of crime or treated mental illness|
|San Ysidro, CA – McDonalds||21||19||14||13||Yes||Shooter used a high capacity weapon, Uzi, pinning down a quick-responding officer with 30 rounds of fire before re-entering restaurant|
|Dallas, TX – nightclub||6||1||0||0||Yes||Shooter used an unknown handgun, emptying it into crowd and then rushing out – unclear that capacity limit would have any impact here.|
|Miami, FL – welding shop||8||3||8||3||Yes||Shooter did not use a high capacity weapon, but purchased his weapons one day after failing a psychiatric exam ordered by his employer, the school district, and after incidents in which he appeared to be a threat to students|
|Birchwood, WI – hunting altercation||6||2||3||1||Yes||Shooter fired 20 rounds at other hunters – if he had a lower capacity, it’s likely that another hunter would have been able to respond with fire|
The analysis above attempts to answer the question – what would have happened in these incidents had the proposed laws been in place? Of 459 deaths and 481 injuries in 63 shootings, I estimate that 250 deaths and 324 injuries (54% of deaths and 67% of injuries) might have been prevented with the analyzed proposals. Each proposal, its method of action, and the analysis approach is described further below.
High-Capacity Magazine Ban:
Definition: Sales of high-capacity magazines to and between private citizens would be completely banned, and imports of high-capacity magazines for private use would be banned as well. While many magazines would exist in private hands, a magazine buyback could then be used effectively, as magazines are relatively inexpensive.
Method of Action:
- In some instances, the shooter was disarmed by potential victims while trying to reload – smaller magazine size clearly would have limited total impact in these shootings.
- In some instances, potential victims fled during breaks in the shooting enabled by reloading – if a shooter has to reload 2 or 3 times as often, this effect is multiplied.
- In some instances, law enforcement arrived relatively quickly, and most damage in the shooting was done via the initial magazine – a smaller magazine would have limited impact in the shooting in these instances.
- In a few instances, victims attempted to rush the shooter immediately. If a shooter could only fire 10 shots instead of 20-50, it’s possible that he might be tackled quickly rather than be able to continue shooting.
- In most instances, the shooter committed suicide after doing a certain amount of shooting, but always before exhausting ammunition. Since each reloading represents a break in the act, some shooters would commit suicide after having fired fewer total rounds if they were capacity constrained.
- In a few instances, the shooter appeared to choose a specific weapon because of its high capacity. If high capacity magazines were not available, would the shooter still go forward with the attack?
- In 18 of 63 shootings, shooters fired relatively few rounds, chose a small number of specific victims, or used standard capacity weapons. In these instances the high-capacity magazine ban has no impact. 29% of actual mass shootings fell into this category.
Analysis Method: If the shooting fell into the last category above, then zero impact is noted in the analysis. Otherwise, the casualty count is reduced by the ratio of the shooter’s magazine size to standard magazine size – if the shooter used a 30 round magazine, then the casualty count is estimated at 2/3ds lower (rounded up) with a standard capacity magazine. This approach will tend to underestimate the effect of a ban in instances like 1,4, and 6 above, while providing an accurate estimate or an overestimate in instances like 2, 3, and 5 above. In aggregate, I think this approach is unbiased.
Stringent Background Checks:
Definition: Create a mandatory national database of all felons, mentally ill, and others posing threats (anti-terror lists, those who have made threats against schools or other institutions). Mandate that all firearms transactions for new and used weapons, in public and private transactions, be checked against this database, with instant results. This stands in contrast to the current background check system, which is done on paper and via telephone call, not electronically.
Method of Action:
- Out of 63 mass shootings over the past 30 years, only 5 have involved illegally purchased weapons. Some of the shooters had a history of mental illness or a criminal record – preventing a sale of firearms to these individuals would reduce the frequency of shootings.
- Many of the shooters with a history of mental illness had no criminal record – it’s unlikely that they would know how to obtain an illegal firearm.
- Some of the shooters purchased weapons in the days after making threats against a school or other institution – in these cases, a properly implemented stringent background check system would have prevented the weapon sales.
Analysis Method: Shootings were identified in which a shooter had a documented history of mental illness, a criminal record, or had made threats against an institution prior to buying a weapon. In these cases (17 instances total) it’s assumed that the casualty count is reduced to 0, as the shooter would have been unable to obtain a weapon. In reality a certain number of shooters would then try to acquire weapons illegally, and some might succeed. But a certain number of mentally-ill or former felons might never try to obtain a weapon if they knew they had no easy or legal means to do so, providing an offset.
Analysis of Assault Weapons Ban and Armed Civilian Presence
Two other proposals have been mentioned in the last several months – a ban on assault weapons and the placement of more armed guards or civilians in public places. On the question of assault weapons, the data from mass shootings shows that shooters preferred a range of semi-automatic weapons with high-capacity magazines. Weapon capacity makes a difference, but the type of weapon (handgun vs rifle) does not.
With regard to armed bystanders, in 9 of 63 shootings armed individuals (often police officers) were present. In several cases armed individuals became victims in the shooting, and the presence of armed individuals did not prevent the shooting from taking place. However, this analysis is by definition incomplete – this is an analysis of shootings that actually did take place, and doesn’t include data on shootings that were stopped by armed individuals. The evidence here suggests that the element of surprise may render concealed weapons somewhat ineffective, but this is not a conclusive finding.
In the wake of yet another mass shooting tragedy today, let’s examine the costs and benefits of high capacity gun magazines. I previously examined the cost-benefit of private gun ownership in the US, and noted at that time that the extraordinarily negative cost-benefit ratio might eventually become an issue for the pro-gun lobby (the industry generates economy-wide economic losses of over $15B/year) .
High capacity magazines  seem to have become a feature of virtually every recent mass-shooting in the US . How many lives might have been saved by eliminating high-capacity magazines? Let us conservatively assume 10 deaths per year might be reduced through this policy (a rounding error compared to the roughly 10,000 annual gun homicides in the US). The economic value of 10 lives can be estimated at $80 million, while the annual sales revenue of high-capacity magazines might be less than $20 million (since gun magazine sales are a tiny fraction of gun sales, and magazines can be had for as little as $15) .
Measuring tragedy on an economic basis might seem crass, but it helps establish a key point: not only are high capacity magazines empowering individuals in mass shootings – but they are also provably hurting America as a whole, as they subtract value from our nation! An outright ban on possession of high capacity magazines is thus a reasonable step to limit further damage to America’s citizens and economy.
Let me address a number of potential criticisms here:
- Would-be mass shooters will acquire weapons and high-capacity magazines illegally, so you are only affecting law abiding citizens. Actually, 75% of weapons used in mass shootings were acquired legally, and recent shooters acquired their weapons legally. Most of these shooters had no previous criminal record, so in the event high-capacity magazines were illegal, it’s unlikely that they would even know how to find them illegally.
- Banning high-capacity magazines would have no effect on death rates, as shooters would simply reload. In the Gabrielle Giffords shooting, the gunman was stopped in his rampage once he stopped to reload. Reducing magazine capacity to 10 rounds reduces total firing capacity – this is simple arithmetic. In both of these shootings and many other incidents, lives would have been saved. For that matter, lives might be saved in incidents like drive-by shootings where the rapid fire of multiple rounds makes victims of innocent bystanders.
- High capacity magazines are needed for self-defense. Even the police rarely find need to fire large numbers of rounds. Is there even one documented case of self defense where the potential victim needed more than 10 rounds to deter his attackers? There are outliers in everything, but I’d be surprised to hear of such a case.
- I have a 2nd-Amendment right to whatever capacity magazine I like. The recent Supreme Court case upholding an individual right to a firearm also upheld the right to ban American citizens’ access to fully automatic weapons, grenades, tanks, and all other manner of military weapons. Even Justice Scalia admits that there are restrictions on the 2nd Amendment. Your right to purchase whatever weapon you like has long since been curtailed, and the government retains the right to enact reasonable restrictions on access to arms.
 Using more recent numbers on the economic value of human life at $8M per life, the gun industry may actually cause annual economic losses in the US of $200B per year (8M * 30k lives lost – economic value of gun trade). I republished the more conservative estimate above to remain consistent with the original analysis that I referenced.
 I am defining high-capacity magazines as those holding more than 10 rounds, as defined in the original assault weapons ban.
 Limiting gun capacity would have reduced casualties in a number of recent tragedies:
- Today’s CT school shooting – the shooter used both Glock and Sig Sauer handguns. Glock handguns typically hold 17+ rounds, and so are always capable of discharging a high number of rounds before reloading.
- Gabrielle Giffords shooting – Jared Loughner used a 33-round magazine with his Glock handgun.
- Virginia Tech – Multiple Glock handguns were used in this and many other mass shootings.
- Columbine, CO – The perpetrators were armed with a TEC-9 with multiple high-capacity magazines, among other weapons.
- Aurora, CO – James Holmes used multiple weapons, one of which had a 100 round magazine, and produced a steady stream of fire rendering it difficult for victims to escape.
- If you’re still reading this list, and can’t comprehend the simple arithmetic involved – that greater firing capacity leads to greater damage in mass shootings – then you are willfully ignorant.
 Gun sales are estimated to have reached an annual rate around 12 million this year. If separate high-capacity magazine sales are in the neighborhood of 10% of all gun sales, and magazines cost around $15, then total annual revenue from this business might be 1.2M * 15 = $18M. This is an imprecise estimate, since gun sales are not tracked, but conveys the order of magnitude, and illustrates the tiny economic benefit supplied by this particular product relative to its cost in human life.
May 28, 2013 Update: California’s just-released prices for ACA coverage are close to my 2012 estimates, with an unsubsidized bronze plan (for a 25 year-old) available for $142/month in Los Angeles.
Health insurance premiums for minimum coverage will likely be around $150/month for 27 year-olds under the ACA, since the ACA includes relatively high-deductible plans under the Bronze plan option.
Now that the dust has settled on the Supreme Court ruling, let’s attempt to answer a simpler question – how much will health insurance cost under the ACA (Obamacare)? Individuals purchasing health insurance via the new health insurance exchanges will be able to select from four plan levels: bronze, silver, gold, and platinum. The law dictates that plans falling into these categories must have 60%, 70%, 80%, and 90% “actuarial value”, respectively. The concept of “actuarial value” dictates that the plan must cover the specified percentage of health care costs for enrolled individuals. Individuals enrolled in a bronze plan can expect their insurance to cover 60% of their health costs, for instance .
The Kaiser Family Foundation commissioned a study to determine the structure of plans that might meet the 60% actuarial value standard for the Bronze plan. The study found that the following individual health care plans might qualify (all plans have a cap of around $6350):
- A plan with a $6350 deductible and 0% coinsurance
- A $4350 deductible with 20% coinsurance
- A $2750 deductible with 30% coinsurance
How much would plans like these cost in 2014? We will focus on adults aged 27 in this example, since young adults more frequently go without insurance, and since young adults can now stay on their parents’ plans until 26. We can shop online for similar plans and get some results for comparison :
- $67.26 for a $2750 deductible / 30% coinsurance plan in Atlanta for a 27 year-old male
- $98.21 for a $2750 deductible / 30% coinsurance plan in Atlanta for a 27 year-old female 
- $129 for a $2750 deductible / 30% coinsurance plan in Silicon Valley for 27 year-old men and women
- $73.22 and $95.07 for a $2500 deductible / 20% coinsurance plan in Chicagoland for a 27 year-old man and woman, respectively
- $95 for a $2750 deductible / 20% coinsurance plan in Houston, TX for a 27 year-old man
- $132 for a $2500 deductible / 10% coinsurance plan in Houston, TX for a 27 year-old woman
- $70.75 and $90.46 for $2500 deductible / 20% coinsurance plan in Hartford, CT for a 27 year-old man and woman, respectively
Here are two market quotes for 63-year old females in relatively expensive markets:
- $302 for $1200 deductible / 10% coinsurance HMO plan in New York, NY for a 63-year old woman
- $516 for $3500 deductible / 10% coinsurance PPO plan in Santa Clara, CA for a 63-year old woman
The ACA stipulates that the most expensive policies for older individuals can be no more than 3 times the price of policies for younger adults. The data above show that a 27-year old can get a plan similar to the exchange bronze plan for around $100 per month today, but this is less than 1/3 the cost for older Americans. Using 1/3 of the cost of the plans for older women as a price floor, we get an estimate of $150 per month as the lower limit for plan prices .
This estimate is lower than the commonly-cited CBO estimate of $4500 per individual for bronze plans via the ACA exchanges. The CBO estimate is for 2016, and so it builds in two additional years of premium inflation (roughly 15%). The CBO number is also an average across all age groups – since young adults’ plans can cost 1/3 as much as the oldest (non Medicare-age) Americans, 27 year-olds’ plans will be much cheaper than the average. While the ACA should have allowed for more high deductible plans, it’s good to know that the bronze plans do provide for some affordable coverage options within the new health insurance exchanges.
 The 60% bronze plan threshold and other thresholds are applied to each plan considering the average expenditures for plan members. Given the deductible and copay structure of a particular plan, it’s possible that the plan spends a higher (or lower) percentage on a particular individual’s care. For instance, if you don’t use your plan at all in a given year, then your plan spent 0% on your care. At the other extreme, if you are diagnosed with cancer, and incur $100k in costs in a year, even a bronze plan would cover perhaps 90% of that amount.
 All plans were found on ehealthinsurance.com on 8/2/2012.
 The wide discrepancy between plan prices for men and women will be eliminated by the ACA. For these purposes, averaging men and women’s prices enables us to get closer to a representative price under the ACA.
 Since health insurance is more expensive for women, and more expensive for older Americans, we used a 63 year-old woman as the prototype for an expensive risk in the existing private health insurance market. At age 65 virtually all Americans gain entry into Medicare (or Medicaid for seniors), and so 63 is the oldest age for which insurance quotes can reliably be obtained (some insurers won’t write short-dated policies, and no insurer writes non-Medicare policies for 65+ Americans). The average price from the two expensive quotes thus obtained was $409. After adding in 10% in premium inflation between now and January 2014, we get a premium estimate right around $450 per month. By law, one-third of this is the minimum that the exchanges can charge for any adult – and this equals $150 per month.
The US can sustain a budget deficit of 5%, not 3% as commonly assumed, because 2.5% inflation and 2.5% real growth combine to keep the total debt/gdp ratio stable.
With both the financial crisis and European debt crisis having a root in excess borrowing, the American political debate has turned toward deficit reduction as well. If current budget deficits (averaging 10% of GDP since the financial crisis) are recognized as unsustainable over the long term, then what level of budget deficit is sustainable? At one extreme, politicians call for a balanced budget, and at the other extreme the budget deficit is considered a distant issue. Meanwhile, many economists set the sustainable deficit threshold at 3% of GDP, and EU rules formally set the budget deficit threshold at 3% as well. What is the basis for the idea of a “sustainable” budget deficit, and is the 3% figure too high or too low?
What is a sustainable budget?
Unlike individuals or families, a nation has an indefinite lifespan, and can therefore continually roll over its debt as long as markets deem it a worthy creditor. As long as a nation’s economy is growing, its capacity for borrowing grows as well. But if the debt grows at a rate faster than the economy, then it will eventually exceed the nation’s ability to repay it. The idea of a sustainable budget deficit is summarized by the chief economist of the Concord Seo Company Coalition, “President Obama’s fiscal commission set a goal of getting deficits down to about 3 percent of GDP within five years – 3 percent being the average annual growth rate of the US economy since World War II.”
The Real Sustainable Deficit Target
There’s just one problem with the 3% target for a sustainable budget deficit – it’s too low! While GDP growth is measured in real terms, inflation also eats away at the value of the US debt over time. For instance, assume that the US has no future economic growth, but continues to have 2% inflation. Assume that we also manage to (magically?) balance the US budget. With no economic growth, does this mean that debt/gdp stays constant? Actually, inflation would cause the numerical value of GDP to continue rising, while the debt stays constant. This would cause the debt/gdp ratio to fall by around 2% per year.
In practical terms, this means that we have to look at the rate of nominal GDP growth to determine a sustainable budget deficit level . To be conservative, let’s assume 2.5% real GDP growth (less than the 3% post-war average) and 2.5% inflation (within Americans’ comfort zone, and less than the 90’s and 2000’s average). Taken together, this means that if nominal GDP grows at 5% per year, a budget deficit of 5% can be sustained long term. The difference between 3% and 5% of GDP is big, over $300 Billion in 2012. As the federal budget and spending again enter serious debate after the November elections, it’s important that politicians understand the government’s true borrowing capacity – and neither the populist “balanced budget” nor the typical economist’s 3% magic number stand up to examination.
Using this data, we see that nominal GDP has grown at a compound annual rate of 6.6% over the post-war period (since 1947, when the data series begins). Over the past 30 years, nominal GDP has grown at a compound annual rate of 5.4% – and this period excludes most of the late 70’s and early 80’s inflation spike. Even over the past 20 years, which are skewed downward due to the financial crisis, the nominal GDP growth rate is 4.7%.
Over the past several years, I’ve steadily come around to the MMT (Modern Monetary Theory) view of macroeconomics. Some of my past posts make me out to be a deficit hawk; while still true, I now believe that the ROI of government spending is more important than simply looking at the deficit and gross debt alone. This brings me to the headline – why is it that the US cannot default default on its debt, except by choice?
The answer lies in Modern Monetary Theory. In brief:
1. If all of a nation’s debt is denominated in its sovereign fiat currency, it cannot default. The fundamental point here is that the US can always print its way out of default, and so insolvency is never an issue.
2. This is totally different from Europe, in which individual nations do not have sovereign control over their currencies.
3. The only risk of printing money is inflation. This threat must be respected, but it is fundamentally different from a debt default.
While MMT is not yet in the academic mainstream (taught only at University of Missouri-Kansas City), it is the only theory that explains why Japan has yet to default on its debt, why the US can never default on its debt (except by choice), and why the Euro Zone is so screwed.
In future posts I’ll likely dive deeper into MMT, but let me first reference some great resources from around the web on the topic: