Monday, July 16, 2012

America's elites once had a degree of honor and committment to standards

Now "There's no such thing as right and wrong"

Through most of the 19th and 20th centuries, the Protestant Establishment sat atop the American power structure. A relatively small network of white Protestant men dominated the universities, the world of finance, the local country clubs and even high government service.

Over the past half-century, a more diverse and meritocratic elite has replaced the Protestant Establishment. People are more likely to rise on the basis of grades, test scores, effort and performance.

Yet, as this meritocratic elite has taken over institutions, trust in them has plummeted. It's not even clear that the brainy elite is doing a better job of running them than the old boys' network. Would we say that Wall Street is working better now than it did 60 years ago? Or government? The system is more just, but the outcomes are mixed. The meritocracy has not fulfilled its promise.

Christopher Hayes of MSNBC and The Nation believes that the problem is inherent in the nature of meritocracies. In his book, "Twilight of the Elites," he argues that meritocratic elites may rise on the basis of grades, effort and merit, but, to preserve their status, they become corrupt. They create wildly unequal societies, and then they rig things so that few can climb the ladders behind them. Meritocracy leads to oligarchy.

Hayes points to his own elite training ground, Hunter College High School in New York City. You have to ace an entrance exam to get in, but affluent parents send their kids to rigorous test prep centers and now few poor black and Latino students can get in.

Baseball players get to the major leagues through merit, but then some take enhancement drugs to preserve their status. Financiers work hard to get jobs at the big banks, but then some rig the game for their own mutual benefit.

Far from being the fairest of all systems, he concludes, the meritocracy promotes gigantic inequality and is fundamentally dysfunctional. No wonder institutional failure has been the leitmotif of our age.

It's a challenging argument but wrong. I'd say today's meritocratic elites achieve and preserve their status not mainly by being corrupt but mainly by being ambitious and disciplined. They raise their kids in organized families. They spend enormous amounts of money and time on enrichment. They work much longer hours than people down the income scale, driving their kids to piano lessons and then taking part in conference calls from the waiting room.

Phenomena like the test-prep industry are just the icing on the cake, giving some upper-middle-class applicants a slight edge over other upper-middle-class applicants. The real advantages are much deeper and more honest.

The corruption that has now crept into the world of finance and the other professions is not endemic to meritocracy but to the specific culture of our meritocracy. The problem is that today's meritocratic elites cannot admit to themselves that they are elites.

Everybody thinks they are countercultural rebels, insurgents against the true establishment, which is always somewhere else. This attitude prevails in the Ivy League, in the corporate boardrooms and even at television studios where hosts from Harvard, Stanford and Brown rail against the establishment.

As a result, today's elite lacks the self-conscious leadership ethos that the racist, sexist and anti-Semitic old boys' network did possess. If you went to Groton a century ago, you knew you were privileged. You were taught how morally precarious privilege was and how much responsibility it entailed. You were housed in a spartan 6-foot-by-9-foot cubicle to prepare you for the rigors of leadership.

The best of the WASP elites had a stewardship mentality, that they were temporary caretakers of institutions that would span generations. They cruelly ostracized people who did not live up to their codes of gentlemanly conduct and scrupulosity. They were insular and struggled with intimacy, but they did believe in restraint, reticence and service.

Today's elite is more talented and open but lacks a self-conscious leadership code. The language of meritocracy (how to succeed) has eclipsed the language of morality (how to be virtuous). Wall Street firms, for example, now hire on the basis of youth and brains, not experience and character. Most of their problems can be traced to this.

If you read the e-mails from the Libor scandal you get the same sensation you get from reading the e-mails in so many recent scandals: these people are brats; they have no sense that they are guardians for an institution the world depends on; they have no consciousness of their larger social role.

The difference between the Hayes view and mine is a bit like the difference between the French Revolution and the American Revolution. He wants to upend the social order. I want to keep the current social order, but I want to give it a different ethos and institutions that are more consistent with its existing ideals.



Book review of John C. Goodman's Priceless‏

With the Supreme Court’s recent decision on Obamacare, it’s clear that the only solution to repealing the Affordable Care Act lies in the ballot box. But suppose Americans elect Mitt Romney as president and a Republican Congress in November and they follow through on their promise to repeal Obamacare. Then what? Although we will be rid of a legislative and bureaucratic nightmare, we still will be left with the same dysfunctional health care system that preceded it.

Getting to the free-market health care system we deserve requires first understanding what’s wrong with the current system. In “Priceless: Curing the Health Care Crisis,” health economist John C. Goodman explains the perverse incentives that plague our health care system. In short, the system penalizes us for doing the right things and rewards us for doing the wrong things. The reason is that we are caught in a system of third-party payment that insulates patients from the cost of their care and discourages health care providers from innovating in ways that lower the costs of care while improving its quality.

Mr. Goodman, who is president of the National Center for Policy Analysis, has written about health care for decades. He probably is known best for popularizing the concept of health savings accounts. “Priceless” arguably is his magnum opus, taking on a variety of subjects, including the quality and access problems of our system; the catastrophe that is Obamacare; and the reform of malpractice insurance, Medicare and Medicaid.

But in the context of the current election, “Priceless”proves most useful in explaining why our private health care markets don’t work properly and how to fix them. Because of federal tax law, health insurance provided by an employer is tax-free. This, Mr. Goodman, notes, has “favored third-party insurance against individual self-insurance.” Because health insurance is tax-free and wages are taxed at the marginal rate, employees have an incentive to put as many dollars of benefits as possible into health insurance. This has led to the notion of “ideal heath insurance,” which Mr. Goodman says is insurance “with no deductible or co-payment, making medical care essentially free at the point of delivery.”

But if health insurance pays for all of a patient’s health expenses, the patient has an incentive “to overuse the system, essentially consuming health care until the last amount obtained has a value that approaches zero.” If patients aren’t paying more of their health expenses with their own money, “they’re not likely to shop around for the best buy.”

When patients don’t shop around, health care “providers will not compete for patients based on price. They will have no economic incentive to keep costs low the way producers do in other markets.” Rather, with an insurance company - i.e., a third-party payer - paying their bills, “the incentive of providers will be to maximize against the payment formulas in order to enhance their incomes.”

That, in turn, incentivizes insurance companies to interfere with the doctor-patient relationship in an effort to restrain the amount of care that is used. Ideally, they are able to eliminate primarily unnecessary care. In practice, they go after low-hanging fruit that may or may be not be necessary care. In the process, insurance companies anger both doctors and patients.

To get out of this mess, Mr. Goodman says no change in public policy is “more important than giving patients more control over health care dollars.” But will Republicans follow this principle? Mitt Romney does not inspire confidence. He wants to give individuals the same tax break for health insurance that employees get for buying it through their employer. That only will encourage individuals to buy more insurance than they need, putting more of their dollars under the control of a third-party insurer. In short, it will only exacerbate the problems with the current system.

If Mr. Romney and the rest of the GOP want to get reform right, they should champion Mr. Goodman’s ideas. For starters, Mr. Goodman recommends getting rid of the employer-based tax exclusion for health insurance and replacing it with an individual $2,000 tax credit for health insurance. This would incentivize people to purchase health insurance that covers largely catastrophic costs. If the person spends less than $2,000, the difference is transferred to a health savings account to help pay for small health care expenses.

Mr. Goodman also advocates changing health savings accounts so that it is easier to save for health expenses. First, let anyone who wants an HSA have one, not just those who have high-deductible insurance, as is the case under current law. Second, the money people put into the HSAs is after-tax money, but withdrawals should be tax-free. This would have three important effects: First, it would encourage people to save more money for health expenses. Second, they would become direct purchasers of health care, comparing cost and value. Third, it would incentivize health care providers to innovate and find ways to lower the cost of care while improving quality.

In short, the market for health care would begin to look like the markets for most other services, with consumers in charge and providers competing to give them what they want and need. It’s not too late for the Romney campaign to read “Priceless.”



The Real-World Middle Class Tax Rate: 75%

For those Americans earning between $34,500 and $106,000, the real-world middle class tax burden in high-tax locales is 15% + 25% + 5% + 15% + 15% = 75%. Yes, 75%.

Before you start listing the innumerable caveats and quibbles raised by any discussion of taxes, please hear me out first. Let's start by defining "taxes" as any fee that is mandated by law or legal necessity. In other words, taxes are what is not optional.

If we include all taxes, the real-world tax rate is much higher than the "official" income tax rate. These "other taxes" vary from nation to nation. France, for example, has a "television tax." It is mandatory, and since virtually every household has a TV this operates as a universal tax. The argument that this is "optional" is specious.

In every other advanced democracy, basic universal healthcare is paid by tax revenues. In the U.S., healthcare insurance is "optional" but this too is specious: in the real world, private healthcare insurance is mandatory because the alternative--having zero insurance--places your entire net worth and income at risk of catastrophic loss.

Having no healthcare insurance only makes sense if you have no real assets and a low income. At that point, your care will be provided by the taxpayer-funded Medicaid program, which is the default universal-care program in the U.S.

For this reason I consider the cost of private healthcare insurance in the U.S. the equivalent of a tax. We pay over $12,000 annually for barebones healthcare insurance, which amounts to about 15% of our gross income. Some countries pay for healthcare with a 15% tax, here we pay the 15% directly. There is no difference except the process of collecting the 15%. (The only real difference is that healthcare costs twice as much per person in the U.S. because the system is operated by cartels whose business model is fraud, opaque pricing and the elimination of competition via Central State regulation.)

Yes, the super-wealthy can absorb a $150,000 hospital bill, but the 99.9% cannot. Thus any claim that healthcare insurance is "optional" is specious.

Property tax is mandatory. Some countries have no property tax, others do. Once again, only counting social-insurance and income taxes as the "official tax rate" is horrendously misleading. For countries without property taxes, the revenues are collected as value-added taxes (VAT) or higher income taxes. One way or another, the services paid by property taxes in the U.S. are paid by other tax schemes in countries without property taxes. So property taxes must be included in any accounting of total taxes paid.

Many of us who reside in states such as Illinois, New York, New Jersey and California pay $12,000 or more annually in property taxes. That is about 15% of our household income.

Renters pay the property taxes indirectly, but to the degree that rents would be lower if property taxes were eliminated and the tax burden shifted to a VAT, then renters "pay" the tax just like property owners.

Employees looking at the paycheck stubs do not see the entire tax paid on their labor. Empoyees may wonder why their net pay has stagnated for decades. One reason is that the total compensation costs of employees has risen substantially.

To give but one example of many, Social Security taxes were once modest, 3% paid by the employee and 3% paid by the employer for a total of 6% of the wage. Now the total for Social Security (12.4%) and Medicare (2.9%) is 15.3%. Self-employed people pay the total 15.3% as "self-employment tax." This is the real-world tax burden of Social Security and Medicare.

The 15.3% Social Security/Medicare tax starts with dollar one of net income. The Social Security tax goes away above around $106,000 in income, the Medicare tax does not.

Most employees do not know how much healthcare insurance "tax" is paid by their employer. To the degree that wages would rise if the healthcare "tax" was not paid by employers, then employees pay for this "tax" indirectly. To act like it isn't a mandatory part of compensation costs is both specious and misleading.

The only transparent way to calculate the total tax burden is to count all taxes (or equivalent) paid by self-employed property owners. Not counting the indirect taxes of healthcare and property taxes is misleading to the point of blatant misrepresentation.
The basic Federal income tax gives each individual earner $9,500 in standard deductions and exemptions. The tax rate for all income above that is:

$1 to $8,500: 10%
$8,501 to $34,500: 15%
$34,501 to $83,600: 25%
$83,601 to $174,400: 28%
$174,401 to $379,150: 33%
Above $379,151: 35%

These rates are scheduled to rise at the end of 2012 unless Congress acts to maintain rates at current levels.

Many households have gigantic interest deductions stemming from gigantic mortgages, but let's set aside outsized debt-based tax deductions as far from universal.

Above a rather modest $34,600 in taxable income and up to around $106,000, the real-world middle class tax burden in high-tax American locales is 75%:

Social Security and Medicare: 15.3%
Federal income tax: 25% (28% above $83,600)
State income tax: 5% (mid-range)
Healthcare insurance: 15%
Property tax: 15%
15% + 25% + 5% + 15% + 15% = 75%

Clearly, the percentage of income devoted to healthcare insurance and property taxes declines as income rises. Someone earning $200,000 has not only dropped the 12.4% Social Security tax for income above $106,000, healthcare insurance and property taxes as a percentage of their income drops from about 30% for those earning around $86,000 to 15%.

We can argue fruitlessly about how many tax angels can dance on the head of a pin, but all the caveats and quibbles don't change the basic fact that real-world tax rate for the "middle class" earning more than $34,500 in taxable income in high-tax locales is a confiscatory 75%.

Please don't tell me the U.S. is a "low-tax" nation; I might suffer a breakdown that I couldn't afford due to exclusions in my "voluntary" healthcare coverage.



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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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