Why Insurance Companies Drop Policies

The Obama Administration has been demonizing insurance companies for dropping policies, much as it periodically picks on others in industry.

I was a senior banking and insurance analyst in the past and keep abreast of the industries. I wish top members of the administration were as informed.

A policyholder can have his or her policy dropped for a number of good, valid reasons:

One: Material lying about preexisting conditions. No one should be allowed to buy fire insurance while a fire is in progress.

Two: Fraud. Material misrepresentation, which is so basic that the company would otherwise not have accepted the risk

In one of the insurance companies independently studied, only 0.1% of policies, or 20,000 cancellations were made. It sounds like a lot when politicians talk, but it’s a study from millions of policies over a 5 year period.

On the other hand, our government does not tell you it cancels 6.8% of Medicare claims. Think of that the next time you consider truth in political advertising, especially when you hear about government health care.

Payoffs in the New Financial Legislation

New financial reforms are not really necessary to our way of economic life, but they will increase the power of politicians to make certain of their constituents happy. And I am not talking about just voters.

Politicos love power wherever and however they can get it. Unfortunately, this has become a habit in Washington. Especially when it creates a source of contributions to help finance campaigns to get out votes.

So, in the new financial legislation, investors with losses can now sue credit rating organizations for “knowing or reckless” failure. Make an honest mistake as an analyst and you may be a target of an over-zealous lawyer seeking a massive class action case.

Yet, this type of error can sometimes be as easy to make as it is for a baseball outfielder to occasionally flub a fly ball. And you and your boss can get sued.

Since Democrats get well over 90% of the campaign funds from tort lawyers, guess why this tidbit is in the new law passed by Congress?

Preventing Health Problems Must be Dollar-Sensible

In an Aug.7, 2009 letter to Rep. Nathan Deal, Congressional Budget Office Director Doug Elmendorf’s aide, said: "Researchers who have examined the effects of preventive care, generally find that the added costs of widespread use of preventive services tend to exceed the savings from averted illness."

"It is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway." This costs money that would not have been spent.

We should always attempt to prevent illness. But prevention actually increases costs not reduces them. So, that spending must be cost-effective over the years.

The study, after all, comes directly from the respected Congressional Budget Office. And it refutes the Obama Administration’s claim for savings that will flow from its health care program.

Importance of Business Plans

Business plans never work out exactly as they are conceived. but they are most helpful. Too many small business folks starting out fail to create an adequate plan.

This is true for several reasons. One, they may be too lazy to put in the effort. It takes work and a bit of basic Bookkeeping 101. Yet, all a small business man needs is a small calculator.

Secondly, after a start, many may lose faith in its continued use. That occurs because business plans need to be adjusted as you go along. None of them are ever made in stone.

The necessary adjusted figures are not a sign of error or misuse of the plan. The whole purpose of a plan, adjustments and all, is to guide the management of the business, It is not to exactly predict outcomes. It is to show trends, problem areas to be treated, etc.

Don’t fall for the need to have a fancy business plan. A simple one will do if you follow it religiously.

Post Office and Health Coverage

President Obama, when pushing ObamaCare, once made the point, "Private insurers should be able to compete, They do it all the time. I mean, if you think about it, UPS and FedEx are doing just fine, right? It's the post office that's always having problems."

Obama was making an argument of government ineffectiveness.

The post office, for example, does not operate under restrictions that burden private businesses. It does enjoy a legal monopoly on many types of letter mail. And it is a perfect example of what happens when the government tries to operate as a business.

The new health care law will establish standards of care, to determine what are proper levels of coverage. You can be sure the law will generate an expansion of government in the health system, such as Medicare and Medicaid, much of what we have in the Post Office.

Internet Colleges

For-profit internet schools, also known as career colleges, are doing well. Politicians often complain such schools are making too much money. Politicos love educational mendicants they can support by throwing taxpayer funds at them.

The fact that internet schools are growing is an indication their students are getting value for tuition.

Conventional colleges, which often are mismanaged, tend to lose money. They are thus highly subsidized by government as a result. Conventional schools must also continually solicit needed funds from alumni.

Conventional colleges actually can be run as a for-profit business, and teach students properly. They can, as I have noted before in my comments, rid themselves pf archaic tenure and other management foibles.

Giving Uncle Sam Control of BP's Billions

Do you think it makes sense to put the Executive Branch of the U.S. government in charge of $20 billion or more of BP’s funds, to hand out to victims of its oil drilling accident? Would it not have been far better for effected individuals to have gone directly to BP for compensation through an independent intermediary, supervised by courts?

Without the politics involved? Without the federal government in the middle of what has become an obviously unconstitutionally dubious form of meddling?

Again I would suggest readers get to understand how a corporate state operates. It would help also to read up on Italy under the rule of Benito Mussolini.

Americans Rely Too Much on Government

In one of his many interesting columns that have appeared over the years, the economist, Walter Williams quoted the philosopher Bertrand Russell, suggesting that "Men are born ignorant, not stupid. They are made stupid by education." Dr.Williams also quoted Albert Einstein: "Insanity:(is) doing the same thing over and over again and expecting different results."

Professor Williams wanted to know whether it was stupidity, ignorance or insanity that explained the behavior of Americans who seek government involvement in their lives.

A good percentage of Americans believe politicians are corrupt. Congress has about a 10% approval rating. This rating has been fairly consistent for some time. Folks know the poor shape of Medicaid and Medicare. And how Social Security is bankrupt. The Post Office is totally inefficient. Public schools fail to teach kids the basics. Why depend on government except for operating our defenses?

Obviously. politicians know that voters have a short memory. The media goes along with the politicians it favors.

Dubious Unemployment Statistics

Job statistics are often misleading because they don’t accurately give current employment figures. It seems their only purpose these days is to provide content for the media and pap on which politicians can contrive their message to confuse an economically illiterate voting public.

Many job seekers give up looking when there is a prolonged recession. So the truly unemployed figure always looks better than it is.

The unemployed tend not to look for employment as energetically while on unemployment insurance, until it’s ready to run out. So extending the periods of insurance during recessions may appear compassionate, but it makes unemployment statistics lower than they would ordinarily be.

In addition to this mess, many jobs may be actually part time or just temporary during recessions. Employers are unable to hire permanent help. or fear hiring because of rising costs and taxes.

So we constantly measure apples and oranges and produce nonsensical numbers that the media loves to repeat over and over as gospel.

Our Misdirected Environmental Policy

The United States has sufficient natural gas and oil reserves, offshore and in Alaska. We have practically unlimited coal supplies, in addition to oil shale. In fact, we would never need to drill for oil in deeper waters. We can build new nuclear plants whenever we decide to make that practical decision.

Developing sources of energy would save us trillions of dollars as a substitute for presently imported fuels, while increasing much-needed jobs at home. It would give the U.S. essential energy independence.

All the while we would develop more solar, wind and renewable energy for the future. Those prospects are bright only in the distant future, not now. Plus, the practical energy policy I outline would help our foreign policy.

But our environmental policy is unhinged by environmentalism. That has to be rectified, FAST.

Let’s Do Away With Robber Baron Terminology

Every once in a while the term “robber baron” turns up conveniently for the media, which helped make it popular many decades ago. It was conjured up for the wrong reasons and continues to stay alive to this day.

The term is used to describe ruthless, dishonest businessmen and bankers or successful entrepreneurs. It was originally used to maliciously represent tycoons who developed our oil, steel, telegraph, railroad and other basic 19^th century industrial revolution enterprises.

It took aggressive business people to succeed in those days. Rules were not the over-regulated variety of today. Were today’s in effect, I may add, much of the development of our oil, steel, communication and other enterprises would be stifled.

How Smart Are Liberals?

We refer readers to a December 2008 study of 4835 respondents by Zeljka Buturovic, of Columbia University, who is a research associate at Zogby International, and Daniel Klein, a professor at George Mason University.

The results: The study found that respondents who tend to be liberal also tend to score lower on basic, or what can be called Economics 101 tests.

Because this is highly controversial for those whose politics lean leftward, I suggest you go to the original source. Go to Econ Journal Watch, at http://econjwatch.org for more details.

As for me, the study confirms what I have found to be true from personal experience.

Frederic Bastiat and Compassionate But Practical Economics

Frederic Bastiat has been associated with the term compassionate economics. His views are important for everyone who wants to fully understand practical economics.

Compassion is considered to be sympathy for those who have had misfortune. There is a desire to eliminate or mediate suffering. Empathy is the wish to share in an other's emotions or feelings.

in an 1850 essay, "What is Seen and What is Not Seen,” Bastiat noted " There the economist and member of the French parliament pointed out that law "produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them."

Bastiat further stated "there is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."

Similarly, you can have compassion for workers who have lost their jobs. They can be seen. You cannot have compassion for unknown potential workers in other industries who don’t get job offers because a compassionate government subsidizes an unprofitable company. The potential employees are never hired and are therefore unseen.

You may say that unfortunate, known homeowners who lose their homes through foreclosure, make it possible for unknown potential individuals, who may not have been able to afford a home in the past, to now buy one cheaply.

Or, for that matter, many more workers profit from exports due to free trade agreements, for every worker who loses out to corresponding imports.

The Post Office Problem As a Lesson

The U.S. Postal Service is in trouble. it loses about $7 billion a year, about $240 billion estimated over the next 10 years. A report from the Government Accountability Office says the post office's business model is not viable.

Demand for conventional mail has been falling. First-class mail volume has declined about 20 percent since its peak in 2001. Even though the post office has cut staff, it isn’t enough. While the post office is supposed to pay for itself, it has been covering its losses by borrowing from the Treasury. But the post office is nearing its $15 billion borrowing limit with the U.S. Treasury, plus unfunded pension and retiree health obligations and liabilities top $90 billion.

Wages and benefits, which account for 80 percent of Post Office expenses, exceed those of other highly paid federal workers. To compound problems, about 85 percent of its postal employees are covered by union contracts. These agreements force the use of more full-time employees than are necessary; and restrict flexibility, outsourcing and layoffs. The post office pays more for employees health and life-insurance than most other government agencies.

This is a lesson of what to eventually expect from all government-sponsored programs, including Obama Health Care.

Regulatory Capture is Government Failure

Regulatory capture has to do with influence an industry may have on an agency that regulates it. Obviously, vested interests in an industry with the greatest financial stake in the regulatory activity of that agency, are more likely to attempt to influence that body than would individual consumers.

Members of the consuming public would have little incentive to try to influence the regulators. We would therefore expect that when regulators assign experts to help review and decide policy, this will lead to opinions of former industry members in contact with that industry.

I feel there are some agencies where industry input is essential. High tech and medical are examples. But it is important that independence be truly and consciously maintained

This regulatory capture syndrome extends beyond political agencies and organizations into business, media, and popular culture.

The concept of regulatory capture is one of government failure. Yet, the media and the Left constantly attack the problem as one of a free market shortcoming.

Bank Mark-to-Market Accounting and Our Deep Recession

Taxpayers and bailed-out banks would be better off if the government were to have bought bank assets at "net realizable value." This would have been based on an evaluation of an asset’s current cash flow, discounted by expected credit losses over time.

Accounting rules relating to assets, including mortgage-backed securities, required that they be marked-to-market if held for trading, or held "available for sale." Most banks hold such assets in one of these two accounts. Mark-to-market rules unfortunately applied.

What happens when there is no real genuine market for assets? The banks first find the net realizable value for the portfolio. That is, what the value of the cash flow would bring in a fully functioning market. That would include discounts for factors such as anticipated future losses. Many of the banks' most troubled assets were flowing cash near expected rates, and therefore their net realizable values were higher than the values which had been written down.

Because there were few buyers, market values were heavily reduced. Potential buyers had no assurance they will be able to resell the assets. Therefore, mark-to-market rules made banks discount their assets' values. and produced write-downs that impaired capital.

If the government bought assets at their net realizable values, and not marked-down values, the capital positions of the major banks would improve.

The taxpayer could not be hurt. Because cash flows would determine value, the government would be able to sell such assets in the future at about what it paid.

In short: Much of the banking problems we have had could have been avoided with clearer thinking by the “experts.”

REMEMBER: The financial meltdown that brought on this deep recession could have been self-corrected by simple market-place principles and no mark-to market accounting.

Should Franchisers Offer Financing?

While I am not an advocate of most franchising, this is a suggestion, both for a franchiser, and a franchisee who may be seeking assistance for a franchise he is thinking of buying.

I find it exceedingly dangerous for a franchise to offer financing to a franchisee unless there is firm collateral. Despite the rosy marketing and promotional material, a franchise is, after all, small business, and that entails risk.

The only type of financing that makes sense is account receivables financing. It actually ties the franchisee more closely to the franchiser. Construction, real estate and general financing does nothing of similar sort that applies equally to both parties.

The franchisee usually finds it difficult to get financing these days, so any help from a franchiser is welcome.

Attending Trade Schools

Misleading data about the financial advantage of attending formal college skews career choices of too many kids. Numbers thrown out by what I call college administration snake oil salesmen, are usually off-the-mark.

In most instances, education marketers compare apples and oranges.Their earnings comparisons often include janitor jobs, in comparison with high tech. But their figures are prejudiced with regard to higher-paying, non-college trades, such as electricians, plumbers, or computer techies.

You are successful because of your skills and enterprise. not a framed piece of paper from a college. Get a marketable ability. Whether it comes from a college or a technical school.

Many technical school graduates earn far more than college grads.

Pareto Efficiency

Pareto efficiency, or Pareto optimality, is a concept in economics.

Named after Vilfredo Pareto, the term is applied in engineering, game theory, and social sciences.

Pareto used the concept in studies of economic efficiency and income distribution. He claimed that a change from one allocation to another could make one individual better off, without making another worse off. This is referred to as a Pareto improvement. The allocation is called Pareto efficient or Pareto optimal.

The 80/20 Efficiency concept. so often used in management, is his reasoning. For example, 20% of your sales force may contribute 80% of your sales.

Why Hire When Government Threatens Your Business?

The Obama administration genuinely would love to improve the job picture. But those heading the administration are missing the boat by not recognizing how job creation works.

It does not work by handing out one-time tax credits or benefits. It does help by improving the psychology for hiring. That means providing a clear understanding of the ground rules for business. And those ground rules must be pro-business.

Enterprise requires less cost of doing business. With no future prospects of a choking increase in taxes. And that means no higher minimum wages for unskilled labor and ever-increasing burdens such as government-mandated health care.

Inasmuch as government bureaucrats and most politicians have never even operated a pushcart, how are they to know the psychology of creating private enterprise jobs?

Teaching Quality of Colleges

Over 4,000 colleges and universities now enroll over 17 million students. College has become a huge growth industry.

Unfortunately the industry has also changed and mutated negatively, with far too little oversight of quality.

As an example: Colleges appear to be primarily in the business of acquiring students, differing to a degree, only in their approach to marketing.

Some do so as research centers. They may boast professors with science awards and Nobel Prizes. These are very appealing marketing devices. Such esteemed faculty also attract grants and endowments, as well as students.

The truth is, few undergraduate students have celebrity professors. They often are taught, instead, by graduate students.

Parents and taxpayers pay billions of dollars to colleges and universities. Schools make money whether students learn or not, whether students graduate or not, and whether they get good jobs after leaving school, or not.

Colleges and universities engage in "bait and switch;" confer what are actually deficient degrees; and engage in other practices that would bring legal sanctions if done in any other business.

Failing College Students

A Pew Charitable Trusts investigation in 2006 showed that 50% of college seniors failed a practical test. It had asked them to understand a table about exercise and blood pressure, or understand newspaper editorials, or to compare credit card offers.

Employers say many college graduates lack basic skills of thinking and writing. This is not surprising.

About 20% of college seniors did not have the ability to estimate whether their car had enough fuel to get to a gas station. According to the National Assessment of Adult Literacy, the percentage of college graduates’ ability in literacy had declined from 40% to 31% in the past decade.

Furthermore, the ignorance-trend continues as college attendance grows.

I have often said, colleges do more for their teachers and staff, than for a large portion of their students.

U.S. Economic Self-Sufficiency?

Americans in the past created farmland out of forests, swamp and deserts. They built dams and canals when required. They produced the world's most widespread and inexpensive agriculture.

Today the population is growing by natural and immigration means. Yet many hundreds of thousands of acres of productive land is going out of use. At the same time we have chronic water shortages, particularly west of the Mississippi River.

This has not stopped organized, professional environmentalists. They stop irrigation wherever they can, to save threatened species of fish and other organisms they view on the same level with human needs.

We are thus taking too much productive farmland away from food supplies. As well as making food we do have more expensive.

Moreover, the trend continues despite economic hardship.

Inflated College Marks: Part 2

I would like to a add to my previous comments on college mark inflation:

At the College of the City of New York during World War II, students were admitted only if they had the highest grades in local schools.

If they were getting deferments because they were science and engineering majors, they had many of their classes marked on a “curve.” This was comparable to having to make the cut in PGA professional golf. The lowest 10% to 15% of each class flunked, no matter what mark they got. Classmates competed against each other.

In the toughest college in the city, perhaps the U. S., open only to the top high school graduates, a student with one class failure immediately lost that army deferment.

Compare that to the Ivy League standards of today!

If truth be told, students go to Ivy League schools because of the aura about them, and the contacts they afford. The vaunted Ivies are not tough once you are admitted.

If anything, they are overrated.

Inflated College Marks

A college education isn’t what it used to be. In fact, a high school education isn’t what it once was. You can call it educational inflation.

When it becomes too easy to enter college, you are bound to get a diminution of educational principles. Educators actually dumb down courses, to appeal to a student’s lowest ability.

Also, affirmative action is practiced, and not just for conventional minorities. It is there for any group that is not equally represented on attendance roles.

What is more, schools market themselves by appealing to the baser instincts of students. The idea is to fill the rosters by making it easier to attend.

Students, therefore, tend to wind up in the easiest courses, That’s why so many graduates are unable to find real, practical jobs. Or why we have so many with easy-to-get law degrees and so few who are doctors and scientists.

Suspect Global Warming

The sun has been its least active in decades. It’s actually in its dimmest phase in a hundred years.

This is causing some scientists to recall the Little Ice Age, an unusual cold spell in Europe and North America, that lasted from about 1300 to 1850. The coldest period of the Little Ice Age was between 1645 and 1715. It was linked to a deep dip in solar storms, known as the Maunder Minimum.

Access to Greenland, at that time, was largely cut off by ice. Canals in Holland routinely froze solidly. Glaciers in the Alps covered whole villages, and sea ice increased so that no open water flowed around Iceland in 1695.

For hundreds of years scientists used the number of sunspots to trace the sun's roughly 11-year cycles of activity. Sunspots indicate intense magnetic activity on the sun's surface. Solar storms send bursts of charged particles hurtling toward Earth.

Changes in the sun's activity affect earth in other ways. Research has developed a theory that the sun has a bigger influence on earth's climate than others have predicted.

That throws the sky-is-falling-down climate-position pessimists, who are anti-autos, anti-industry, and anti-industrial development. into a dither.

Picking Execs by Good Looks

Picking execs primarily by good looks is a fact that is well-known, and worth repeating. It is also an unfortunate fact of business life.

Top business executives too often get where they are on the basis of their good looks. This is particularly so, it appears, when it comes to women.

For men, the taller and handsome they are, the better. When it comes to women being attractive, there is also a disclaimer. Being too pretty translates as dumb, especially among blonds.

This is unfortunate but my experience in the business world has taught me that too many execs look for shortcuts when evaluating talent among groups of prospects.

All forms of prejudices, including, good looks, fuel and simplify those shortcuts.

The Cost of Bailouts

The liberal media and left-leaning members of Congress are making a lot out of the fact that much of the bailout is being paid back.

But that is not the important aspect of what happened with the so-called attempt to get the economy moving. It is not how much money was put up and how much has been repaid. It is the effect of the bailout and what it signifies,

First, the bailout did not work. Doing nothing would have not been the disaster we were lead to believe.

Most importantly: Government interference in all its forms is what caused the damage. The meddling, the setting of business policies, and the hiring and firing at bureaucrat whim, to go with salary caps. That is state capitalism or socialism.

Plus, of course, the open use of these “slush” funds to bail out the pension funds of favored, unionized, state government workers.

Tax Factors Behind the 1930’s Depression

Tax increases were an integral part of Roosevelt’s New Deal, along with an expansion of political controls started by President Herbert Hoover. The actions devastated the American economy in the 1930’s.

All this central planning around open and hidden taxes is where we are headed under the Obama administration. Yet, with financial history for us to learn from, we are not acquiring any practical lesson the 1930’s Great Depression.

The Obama administration is attempting to tax the U.S. out of a recession, right into a deeper one of stagflation. One, where we suffer from a lack of decent, private-industry jobs, amidst much higher prices

The Gap Between the Rich and Poor

There is a difference between the rich and poor as a group in the U. S. when you look at statistics. However, folks within the numbers are not the same each time the statistics are noted.

Individuals move from one category to another within groups. In other words, the poor people measured at one time, may not be the same that are being counted in the following survey. They may no longer be poor.

Millions keep constantly moving from one income category to another. So you may have been in the poor bracket in the first measurement, but have now moved into to a higher level.

This throws much of liberal policy into a loop, whenever they talk about handouts for the poor, or the need for a livable wage for the poverty-stricken, or for those earning a minimum wage.

The Left conveniently goes on the assumption that earnings of those they measure are static. That it’s the same folks entrenched in constant financial mire.

The truth is, in the U.S. most are moving outward and upward.