Archive for July 5th, 2009
W
ith U.S. unemployment set to climb to 10%, and Canada not far behind, the North American market economies will soon be looking at what used to be derisively termed “European levels” of unemployment. The question is whether these high unemployment rates are merely short-term blips that will be followed by quick recoveries, or whether high jobless numbers will persist, turning Canada and the United States into grim replicas of sclerotic Europe.
Recent economic history suggests both Canada and the United States can quickly rebound from economic slumps. Unemployment in the United States, for example, hit a peak of 10.8% in the midst of the 1982 recession, but it was all over six months later.
Almost all recessions are followed by economic chatter about a looming “jobless recovery.” And all such chatter has, in the past, been proven wrong. Markets quickly adjusted to changing economic circumstances. Investors began investing, capital spending rose, workers and employees moved on to new jobs, consumers began spending again. Markets, left alone, function quickly.
The keys to these quick employment recoveries were the functioning markets for investment, employment and consumption. The current economic crisis, however, looks a little different. In the United States, and to a lesser degree so far in Canada, the open markets that cleared the way to rapid economic recovery have been severely undermined. The ways of capitalism in North America are giving way to the social-planning models and interventionism that have long restrained and paralyzed European economic development.
The Europeanization of American economic policy is well underway. President Barack Obama, backed by an army of anti-capitalist spear-carriers on the left, has moved to install the U.S. government as the overseer of this Europeanization.
One of Mr. Obama’s spear-carriers is Joseph Stiglitz, 2001 Nobel Prize-winning economist at Columbia University, who told the Financial Times earlier this year that “the view of American capitalism has changed. I hear a lot more of a sense of confidence in the European social model — the view that Europeans are very thankful that they have better social protections.”
Edmund Phelps, 2006 Nobel Prize-winning economist at Columbia, disagreed. “The unpleasant truth is that the European social model has been complete failure. They don’t have high employment, they have massive problems of social groups within societies. It’s a social catastrophe in Europe, so there’s no chance that Americans are going to go for a paralyzed, uninnovative economy with stagnant productivity.”
To say that there’s “no chance” Americans will tolerate massive government takeover and regulation of vast chunks of the U.S. economy seems overly optimistic today. The train has already left the station, ready to unload its burden of productivity-killing taxation and programs across the country.
Rapid economic recovery and job creation requires business and consumer confidence about the structure of the economy, free of uncertainty about the future course of governments and politics. Investors and corporations would be hard-pressed today to feel that the U.S. economic environment will soon be a place where market forces will prevail.
The Obama administration has politicized the financial system, taken over auto manufacturing, is seizing control of energy industries, health care, housing and others. Combined, these sectors make up more than 60% of the U.S. economy. New laws expanding minimum wages, union power and deficit spending will impose severe limitations of the functioning of markets for decades to come. The country’s central bank and its currency are covered by a huge overhang of dubious assets. Taxation is about to skyrocket and protectionist measures are already hampering global trade.
By comparison, the U.S. economy circa 1982 looks like an economic utopia. Ronald Reagan was still in his first term, having fired striking air traffic controllers in 1981, sending a message to unions. American capitalism was on the rise and Europe was busy expanding its social model.
Under Reagan capitalism, U.S. unemployment, at 10.8% in December, 1982, was down to 7.7% within a year and a half. And soon, the jobless numbers began a long decline — briefly interrupted in 1992 — to rates as low as 4% in 2000. The chance of a repeat performance under Barack Obama’s Europeanization are…?
Obama’s ‘Europeanization’ of the U.S. – Terence Corcoran, National Post
July 5th, 2009
Just this week, Wal-Mart raised eyebrows across the country when it came out supporting an employer health insurance mandate.
Now, Wal-Mart has got to know that its endorsement is probably not good for its profits. Wal-Mart is the country’s biggest employer, with more workers than the US Army.
What’s going on here? Does Wal-Mart, a cut-throat, calculating company when it comes to costs and the competition, know that an employer mandate is even worse for its competition’s profits, and is getting on board to crush its rivals?
An employer health insurance mandate means companies would have to offer health insurance to their workers, no matter what.
The insurance could be paid for with higher taxes, possibly a new form of an 8% payroll tax that companies (translation, workers) would pay. It would mean workers would be enrolled in a low quality HMO type plan that wouldn’t cover the same level of health care costs now incurred.
Before we get to the details of the impact of Wal-Mart’s move, watch this first. Wal-Mart’s support came a day or so before new Congressional Budget office numbers showing the impact on the mushrooming federal deficit of the Senate’s health reform proposal, spearheaded by Democratic Senators Chris Dodd and Ted Kennedy.
The new CBO numbers show the cost of this legislation is now below the $1 tn mark. How does the Senate get there? By not including the costs for expanding Medicaid costs, and because of the employer mandate.
Specifically, according to the CBO, by 2019 the Senate bill will cover 21 mn. That cost comes to about $597 bn. Again, the Senate bill does not include expanding costs for Medicaid. And the new CBO figures doesn’t include the cost of the 15 mn people expected to be enrolled in the employer-mandated coverage.
The CBO’s initial $1 tn plus number that the White House and Democrats in Congress had gulped at, then attacked, had assumed—get this—that employers would dump those 15 mn or so workers onto the US government—meaning, federal taxpayers.
This is a rare admission, a rare bit of candor, a rare acknowledgement of behavioral economics by the CBO. Meaning, a government research body is acknowledging what analysts have been saying all along–that companies would cancel coverage for 15 mn workers employees and shove them off onto the Health Insurance Exchange, where they would then get taxpayer subsidies to buy health insurance.
So, what’s the deal with Wal-Mart and an employer mandate for health insurance? Fox News analyst James Farrell weighs in.
First, Wal-Mart already provides more employee health insurance than its average competitors. Approximately 52% of Wal-Mart’s 1.4 mn U.S. employees are covered by company-provided insurance, while the retail industry average is 45%.
To raise this coverage to 100%, Wal-Mart would have to increase its coverage by 48%, while its average competitor would have to increase their coverage by 55%. Advantage: Wal-Mart.
Second, Wal-Mart has economies of scale that its competitors lack. As a large employer, Wal-Mart already likely pays a lower premium than its competitors with far less employees.
For example, the CBO notes that the share of the health insurance premium that covers administrative costs varies significantly by the size of firms, from about 7% for firms with at least 1,000 employees to a more sizable 26% for firms with 25 or fewer employees.
Requiring employers to provide health insurance to all employees would thus probably cost Wal-Mart less on a per employee basis than its competitors. Advantage: Wal-Mart.
Third, the economies of scale and greater percentage of covered employees would further benefit Wal-Mart if the government mispriced the penalty that it would assess on employers for failing to provide health insurance for its employees.
The government plans to smack companies that don’t participate with a fine, a so called play or pay requirement. The fine could be equal to 8% of pay for each worker not given coverage. Advantage: Wal-Mart.
Follow the math here. If the government prices the penalty lower than Wal-Mart’s average contribution to health insurance per worker, Wal-Mart could just pay the penalty for each employee. Wal-Mart would have to math out its benefits here, taking into account the current cost of insurance coverage and the penalty times the number of employees whose coverage Wal-Mart would be dropping.
Fourth, Wal-Mart has indicated that its endorsement (which will likely be touted by the Administration as evidence of the wisdom of its health insurance reform) is conditioned only upon the ultimate mandate being designed in a way that further advantages Wal-Mart compared to its competitors. Advantage: Wal-Mart.
According to the Congressional Quarterly, Wal-Mart spokesman Greg Rossiter said “that Wal-Mart wanted an employer mandate that would have companies pay in based not on how many employees they have, but based on ‘profit per employee.’”
Wal-Mart has more workers than the US Army, and low-wage employees as well, so you can see why it wanted an employer mandate based on this metric. If an employer mandate was constructed otherwise, Rossiter said, “it certainly could become a disincentive to support it.”
Wal-Mart’s Health Reform Gambit – Elizabeth MacDonald, Fox Business
July 5th, 2009
Health insurance is supposed to offer protection — both medically and financially. But as it turns out, an estimated three-quarters of people who are pushed into personal bankruptcy by medical problems actually had insurance when they got sick or were injured.
And so, even as Washington tries to cover the tens of millions of Americans without medical insurance, many health policy experts say simply giving everyone an insurance card will not be enough to fix what is wrong with the system.
Too many other people already have coverage so meager that a medical crisis means financial calamity.
One of them is Lawrence Yurdin, a 64-year-old computer security specialist. Although the brochure on his Aetna policy seemed to indicate it covered up to $150,000 a year in hospital care, the fine print excluded nearly all of the treatment he received at an Austin, Tex., hospital.
He and his wife, Claire, filed for bankruptcy last December, as his unpaid medical bills approached $200,000.
In the House and Senate, lawmakers are grappling with the details of legislation that would set minimum standards for insurance coverage and place caps on out-of-pocket expenses. And fear of the high price tag could prompt lawmakers to settle for less than comprehensive coverage for some Americans.
But patient advocates argue it is crucial for the final legislation to guarantee a base level of coverage, if people like Mr. Yurdin are to be protected from financial ruin. They also call for a new layer of federal rules to correct the current state-by-state regulatory patchwork that allows some insurance companies to sell relatively worthless policies.
“Underinsurance is the great hidden risk of the American health care system,” said Elizabeth Warren, a Harvard law professor who has analyzed medical bankruptcies. “People do not realize they are one diagnosis away from financial collapse.”
Last week, a former Cigna executive warned at a Senate hearing on health insurance that lawmakers should be careful about the role they gave private insurers in any new system, saying the companies were too prone to “confuse their customers and dump the sick.”
“The number of uninsured people has increased as more have fallen victim to deceptive marketing practices and bought what essentially is fake insurance,” Wendell Potter, the former Cigna executive, testified.
Mr. Yurdin learned the hard way.
At St. David’s Medical Center in Austin, where he went for two separate heart procedures last year, the hospital’s admitting office looked at Mr. Yurdin’s coverage and talked to Aetna. St. David’s estimated that his share of the payments would be only a few thousand dollars per procedure.
He and the hospital say they were surprised to eventually learn that the $150,000 hospital coverage in the Aetna policy was mainly for room and board. Coverage was capped at $10,000 for “other hospital services,” which turned out to include nearly all routine hospital care — the expenses incurred in the operating room, for example, and the cost of any medication he received.
In other words, Aetna would have paid for Mr. Yurdin to stay in the hospital for more than five months — as long as he did not need an operation or any lab tests or drugs while he was there.
Aetna contends that it repeatedly informed Mr. Yurdin and the hospital of the restrictions in policy, which is known in the industry as a limited-benefit plan.
The company says such policies offer value by covering some hospital expenses, like surgeons’ fees or a stay in the intensive care unit. Aetna also says all of its policyholders receive significant discounts on the overall cost of hospital care. But Aetna also acknowledges that a limited-benefit plan was inappropriate in Mr. Yurdin’s case because his age and condition — an irregular heartbeat — made him likely to require more comprehensive coverage.
“Limited benefits aren’t right for everyone, and it clearly wasn’t right for Mr. Yurdin,” said Cynthia B. Michener, an Aetna spokeswoman.
Charles E. Grassley, the ranking Republican on the Senate Finance Committee, which is taking a lead on health legislation, says Congress needs to make “meaningful” insurance coverage more affordable and accessible. But “until that happens,” he said, “any presentation of limited-benefit plans ought to be completely straightforward, and not misleading in any way.”
The Work-Up: Insured, but Driven Bankrupt by Health Crises – NY Times
July 5th, 2009
Entrepreneurship and new small businesses are supposed to lead us out of the recession, just as they have in prior downturns, right?
Sure. Your neighbor’s grand idea will persuade a bank to lend her start-up money; she’ll open for business in six weeks; and money will immediately flow from customers to her to her employees. Taxes will be paid, and the national economic engine will hum effortlessly in no time.
If only.
Today shows a different reality: Commercial bankruptcies are surging. Fewer people are starting small businesses, and firms already open are struggling under changing consumer habits, a lack of funding options and tougher bankruptcy laws. If a nationwide trend seen since January holds true, more than 300 businesses will file for bankruptcy — today alone.
Cafe Boulevard, for 12 years a popular European-style restaurant in Dayton, Ohio, hasn’t been able to endure the downturn.
Rising gas and food prices, increased competition and an ill-timed expansion cut profits. Local unemployment made matters worse, because the regulars no longer showed up. In April, the restaurant’s owner, Eva Christian, was one of 8,149 U.S. business owners who filed for bankruptcy-court protection.
She didn’t close the cafe. Instead, Christian is trying to retain her employees while she works with creditors.
“When I decided to file for Chapter 11 bankruptcy, I felt crushed,” Christian says. “But my attorney said that Donald Trump did it, and GM did it, and Delta did it. It gives people the opportunity to bounce back.”
The first five months of this year have shown a 52% increase in the total number of commercial bankruptcy filings (36,106) compared with the same period last year (23,829), according to the Automated Access to Court Electronic Records. On average thus far in 2009, some 350 commercial enterprises file for bankruptcy daily — an increase of 240% from 2006, the first year after the bankruptcy law was changed.
Small companies hardest hit
Major corporate failures, like GM and Chrysler, flash across front pages and websites. But the vast majority of commercial bankruptcies, which are not separated by size of firm by data keepers, are filed by entrepreneurs and small-business owners, says Robert Lawless, professor of law at University of Illinois.
Troubling for the economy, say Lawless and Todd McCracken, president of the National Small Business Association, is the double-whammy of fewer start-ups and increasing bankruptcies.
“There is always this dynamism in the small-business community: Businesses are always dying, and new businesses are always getting started,” McCracken says. “Usually more start than fail, but my sense is that now it has flip-flopped. And it’s alarming.”
Lawless agrees.
“In the past, small-business formation increased in a recession because people had self-employment thrust upon them,” he says. “One avenue out of economic hard times — self-employment — has become less attractive, because the bankruptcy law is less forgiving” and there are fewer options for those entrepreneurs to get bank loans or to find funding elsewhere.
Trickle-down effect hurts
Small business is considered the backbone of the economy. In the past, new businesses led economic recoveries, McCracken says. Small businesses — those with fewer than 500 employees — make up half of the gross domestic product and account for most job growth.
Problems from the devastated housing market, overall recession and suffering major industries all funnel down to small businesses, especially those that supply the troubled corporations.
“When you have the GMs of the world filing for bankruptcy, they are canceling contracts and discharging debts that they owe to their suppliers,” says B. William Ginsler, a bankruptcy lawyer in Portland, Ore. “And those are small businesses that are less solvent than larger corporations.”
The transportation industry, which includes the auto and airline businesses, has sparked the biggest run-up in small-business bankruptcy filings, according to new data from an Equifax bankruptcy study. After transportation, the construction, manufacturing and retail industries are the major causes, the study says.
While not always the case, the line from one faltering company to another can be direct.
Just before the economic slump, Cafe Boulevard’s Christian opened a second restaurant in Dayton called Cena. Cena’s outlook is bleak, because a nearby General Motors assembly plant is closing, and NCR is moving its headquarters from Dayton to Georgia.
“It was bad timing to expand into a second restaurant,” Christian says.
Household spending cutbacks reach far, too. Dual-income families who are now single-income may no longer need or be able to afford child care, so many of those services are going out of business, says Lester Thompson, a bankruptcy lawyer in Dayton. Sporting goods stores and lawn-mowing services also have struggled.
Small-business bankruptcy filings jumped the most in the Los Angeles and Chicago metro areas, according to Equifax. But even smaller areas of the country are experiencing a big increase.
David Hicks, a bankruptcy lawyer in Omaha, says he has seen an increase in business struggles related to the auto industry and the mortgage crisis. Among them are owners of used car lots and housing contractors.
In South Carolina, bankruptcy attorney Jane Downey has worked with dry cleaners and gourmet sandwich shops.
Robert Chernicoff, a bankruptcy lawyer in Harrisburg, Pa., says one client who recently filed for Chapter 11 bankruptcy is the owner of a new small strip mall, Shoppes at Silver Spring. Mall owners counted on about eight tenants. It’s in a good location, Chernicoff says, but the economic downturn caused some tenants to back out, and it has taken longer to find new ones.
Chapter 7 vs. 11 vs. 13
Many small businesses owe so much money to creditors that there is no future. Such owners often file for Chapter 7 bankruptcy and shut their businesses for good. Chapter 7 allows sole proprietors to discharge their debt and for corporations to have an orderly liquidation.
Those who want to reorganize a business or sell it as a going concern may file for Chapter 11. Chapter 13 is a similar but less costly and time-consuming option that is limited to individuals who have a certain amount of debt.
Last month, Randy Wicker filed for Chapter 11 bankruptcy because his 15-year-old business, Earth Structures, had hit a significant rough spot after previously earning up to $8 million annually. His corporation, based in Spartanburg, S.C., primarily builds retaining walls for highway projects.
Earth Structures has worked on Department of Transportation projects, but those have nearly disappeared. Wicker and other contractors are now competing in the commercial market.
“More contractors are vying for less jobs,” Wicker says.
“Maybe President Obama’s effort to restore the highways with a stimulus plan will lead to more work for him,” says Downey, his lawyer.
Lack of loans worsens problem
The credit crunch is a major contributor to the rise in filings.
Loan dollar volume from the U.S. Small Business Administration has increased 35% since the American Recovery and Reinvestment Act was passed on Feb. 17, according to the SBA. Even so, a National Federation of Independent Business trend report states that in May the percentage of business owners reporting that loans are harder to get rose to 16%, the highest reading since the 1980-82 recession.
Businesses can’t easily rely on credit cards these days, either.
“What’s happening now is that a lot of banks are retrenching and cutting back on lines of credit and credit card limits,” McCracken says.
With that reality, and loath to dip into their retirement savings, struggling small-business owners have few options other than bankruptcy. When the bankruptcy law changed in 2005 it was mostly aimed at curbing abuse of personal bankruptcy filing. But it also singled out small businesses for harsher treatment, and those changes did not apply to larger corporations, Lawless says.
Small businesses that file for bankruptcy have a shorter time frame to reorganize, Hicks says. “And before, a judge could pull the plug on a small-business owner that was playing the system, or he could give a break to somebody who was legitimately trying to reorganize,” he says. “Most of the discretion is now gone.”
But the data show the change hasn’t deterred small businesses from filing for bankruptcy.
“You can change the bankruptcy law all you want, but if we have a recession, lots of business are going to file,” says John Pottow, professor of law at the University of Michigan Law School. “The increase is yet another sobering economic milestone.”
Bankruptcy is still the only option for many small-business owners who are hanging by a thread.
“The failure of a small business doesn’t have to be a lifetime sentence for the owner,” says U.S. Bankruptcy Court Judge Lewis Killian, in Tallahassee. “Bankruptcy gives them the ability to go forward, to start up again and be successful.”
Small Businesses Vital to Economic Recovery Go Bankrupt – LA Times
July 5th, 2009
