Fairness

The Bright Side of Debt writes about her struggle to pay off a series of medical bills incurred when her husband was sick. I naively asked her whether she had health insurance -- she does, but it's a policy that requires that she pay 20% of all the costs -- in this case about $4,500.

Our policy, which costs us about $4,000 per year (and my employer another $16,000 or so), has $20 office copays, a $250 inpatient admission copay (including day surgery), and a tiered set of copays (up to $50) for prescription drugs. When I was in the hospital for a day last summer (2 ER visits plus outpatient surgery for a rather large kidney stone), my total out of pocket was about $400.

Health care in this country is very expensive, compared to most of the rest of the world, and based on our health data, not any better. It is expensive because of a series of choices that we've made as a society:

• We've decided that doctors should be able to make a lot of money. (Average salary for a urologist: $358,000.)
• We've decided that drug companies should be able to make a lot of money.
• We've decided to allow the food industry to dictate national nutrition polices.

Well somebody's got to pay for all this, and that somebody is us.

The question is, who.

Right now, every American who has enough income to be ineligible for Medicaid has to pay the same for health care. A hedge fund manager pays the same $10,000 or $20,000 per year in health costs as the person answering the phones. As a percentage of income, however, there's a gross imbalance. I see this at my own workplace. I pay the same health insurance premium as higher-paid employees (for whom it's a neglible expense) and lower-paid ones. In the case of lower-paid employees, rising health insurance premiums and copays can quickly eat up the bulk of any salary increases.

One of the potential hidden advantages (at least to my way of thinking) for government mandated/subsidized/funded health insurance plans is that they offer the opportunity to introduce some progressiveness into how this is paid for. Specifically, to the extent that high-income families pay income taxes at a higher rate than low-income families, the portion of government money used to subsidize national health insurance can act to reduce the burden of health care costs on low- and moderate-income Americans.

Coincidentally, in today's Journal there's an article about how hospitals are now demanding up-front payment of copays and deductibles before starting treatment:

LAKE JACKSON, Texas -- When Lisa Kelly learned she had leukemia in late 2006, her doctor advised her to seek urgent care at M.D. Anderson Cancer Center in Houston. But the nonprofit hospital refused to accept Mrs. Kelly's limited insurance. It asked for $105,000 in cash before it would admit her.

Sitting in the hospital's business office, Mrs. Kelly says she told M.D. Anderson's representatives that she had some money to pay for treatment, but couldn't get all the cash they asked for that day. "Are they going to send me home?" she recalls thinking. "Am I going to die?"

Oh yeah. There's another reason that I feel so poor

Household income distribution for the town where I live:


... for the town where I shop:


... for the town where I work:

Boost your retirement savings and save money at the same time

From Mark Hulbert at the Times comes an article suggesting that trying to adjust your asset allocation mix as you age is at best useless and at worst counterproductive.

CONVENTIONAL wisdom recommends that investors start with a high allocation of stock in their portfolios when they are young and reduce it as they approach retirement.

That makes intuitive sense: In your 20s, you may be inclined to take bigger risks; in your 60s, you may feel a greater need to protect the wealth you have been able to amass.

But a recent study of real-world portfolio returns, which fluctuate significantly from month to month and year to year, has found that there is no particular advantage in this approach. You would do just as well, with no greater odds of doing poorly, by simply picking an allocation of stocks and bonds that you can live with for a long while and sticking with it.

That is the implication of “Hitting or Missing the Retirement Target: Comparing Contribution and Asset Allocation Schemes of Simulated Portfolios,” by Harold J. Schleef, an economics professor at Lewis & Clark College, and Robert M. Eisinger, an associate professor of political science at that institution. It was published last year in the Financial Services Review, an academic journal.

Here at Hedonic Adjustment, we only link to articles that support our narrow view of the world, and this is no exception. Spending money to hire a portfolio manager to rebalance your portfolio as you age has always been a dubious use of money (since it's so easy to do yourself).

We subscribe to the widely held view that it is asset type (stock, bond, cash, commodity, real estate) rather than asset selection (a particular stock, bond, or mutual fund) that is the primary determinant of performance.

Why do I feel so poor?

The year before we were married, Ms. Bluebird and I made about $300,000 between us. We each were living lives of frugal singlehood. She drove a Saturn. I had a VW. She lived in a 1-bedroom condo. I lived in a 2-bedroom house.

This was back before the invention of the personal finance blog, of course. But if there had been such a thing, we would have been the poster children for prudence and restraint.

Last year, we made a little more than $100,000. While we now only have one house, we have three cars, and two hungry children. What's worse, the actual purchasing power of our $100,000 in pre-nuptual dollars (to make the comparison with our earlier $300,000 income fair) is only $80,645.

Ouch. In inflation adjusted terms, our income has fallen by 73% while the number of people in our family has doubled.

I say it again.

Ouch.

"Crime against humanity"

From this morning's Journal:

"When millions of people are going hungry, it's a crime against humanity that food should be diverted to biofuels," said India's finance minister, Palaniappan Chidambaram, in an interview. Turkey's finance minister, Mehmet Simsek, said the use of food for biofuels is "appalling."

I have to say that I agree. Beyond jacking up world grain prices, biofuel production is extremely energy-intensive and causes additional environmental damage perhaps comparable to the damage caused by fossil fuel extraction.

Although the Journal doesn't say so, I am of the view that we, the United States, have contributed to runaway food prices not just by burning food in our cars. Our fiscal (low tax) and monetary (easy money) policies have encouraged Americans to consume, consume, consume and borrow, borrow, borrow (seen the movie Maxed Out?) Now that we can't pay the money back, all of the countries that export to us, and from whom we borrowed extravagantly to fund our buying, are stuck with (a) dollar-denominated debt and (b) currencies mostly pegged to the Dollar.

So not only is food in short supply and expensive, but the currency that hungry nations must use to buy it is eroding rapidly in value (see Helicopter Ben).

So the next time you see a big GM SUV with a badge on the back that says "FlexFuel Vehicle", Imagine it standing next to a hungry child somewhere.

What's wrong with this picture?

The Journal is running a puff piece today about job insecurity among Wall Street workers.

Derek Thornhill never imagined he would be canceling vacations and cooking dinner at home to save money. In 10 years working at Bank of America Corp., he rose to become one of the company's top equity salesmen.

But in January, Mr. Thornhill was laid off -- the day before he was expecting the annual bonus that typically accounts for 75% of his pay. Instead, he was paid 20 weeks of severance and a bonus that was only 5% of the previous year's. People in his position typically earn roughly $500,000 to more than $750,000, including their bonus.

Maybe it's just me, but I would be deeply reluctant to buy anything from a salesman being paid a half a million dollars a year. I mean an equity is an equity. When you buy stock from an organization that makes huge profits ($21 Billion in 2006) and pays its salespeople huge commissions, you are losing money, compared to what it would cost to buy that equity yourself.

Now it may be that Thornhill sells private placement equities that aren't publicly traded. In which case one would have even more reason to be suspicious.

When it comes to investing, I follow these three rules:

1. I only buy assets that I understand.
2. I buy them as inexpensively as possible.
3. I recognize that asset class, rather than individual asset selection, is the primary determinant of financial performance.

And if I must deal with a salesman to buy something, I choose the guy driving the Hyundai.

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Go to the happy place. Go to the happy place

So those clever bootses over at Lehman have taken a bunch of their toxic debt, shoveled it into a CLO, bought a few expensive lunches for the bond ratings guys to get an A rating for the tranche that won't default until 20% of the underlying debt fails, and then used it as collateral for a loan from the Fed.

That's our Fed. Yours and mine. The custodian of the government's money. Taking a reeking pile of investment grade Lehman garbage wrapped in a Moody's bow and passing out government money.

One person familiar with the matter said the vehicle was named Freedom because it was designed to give Lehman freedom to tap as much cash as possible if needed. The size of the borrowing from the Fed wasn't known, but the person said it wasn't "material" and was meant as a test of what the Fed would accept.

The loans in the pool included debt that was issued to finance last year's leveraged buyouts of First Data Corp. and TXU Corp., a person familiar with the matter said.

A number of Wall Street executives called Lehman's move "brilliant" and said they may follow suit. One senior finance executive at a rival of Lehman's said his main reservation with Lehman's move was that it might lead to criticism that Wall Street is taking its junk to the Fed for cash. Still, he noted that unlike many troubled mortgage securities, there is a discernible market for leveraged loans.

"It's a very creative way for investment banks to get liquidity from assets that they don't want to sell at fire-sale prices," said Todd Kesselman, managing director of Precision Capital, an investment-advisory firm that specializes in structured credit and private equity.

This, I suppose, represents the zenith of the Republican free-market ideology.

Grim News

While the fatuous Alan Greenspan works frantically to burnish his reputation (and preserve the impact of his Randian free-market obsession), the Journal observes that the world is now engulfed by rapidly igniting inflation.

Kimberly-Clark Corp., maker of household goods, began raising prices in February between 4% and 7% for some paper products, including Huggies diapers, Cottonelle bath tissue and Viva paper towels. Hershey Foods Corp. raised the selling price of its chocolate bars 13% in February after boosting prices between 4% and 5% in April 2007. Hanesbrands Inc., which owns the Champion and Hanes apparel lines, has warned that sustained high cotton prices could filter through to retail prices.

It is obvious to everyone, except perhaps Ben Bernanke, that US consumer price inflation is accelerating rapidly while wages are barely budging. Anyone who depends on the value of their savings for income (now or in the future) is being savaged twice: rising prices and falling yields.

I am hoping that my salary will rise by something close to the current CPI rate of 4.3% this year, but there are no guarantees. Our household has been cutting expenses as best we can, but the most hard-to-defer purchases (energy and food) have been the most affected by inflation.

It's hard to picture the inflation picture getting better in the short term. I think it will create a lot of resentment among workers toward (a) their employers, who aren't likely to raise wages fast enough to keep pace with inflation and (b) the government, whose nominal job is to protect the integrity of the currency.

Oh sadness

Jon Clements has published his last column with the Journal. He will be missed!

Amongst the clamor and clangor of what passes for personal financial journalism ("10 Secrets to Instant Wealth"), he consistently offered simple, sane, sober advice about how to save and grow money. More importantly, he illuminated the connection, or lack of connection, between money and happiness.

From his column, the three things that money can buy:

1. If you have money, you don't have to worry about it. This isn't guaranteed. There are lots of rich folks who agonize constantly -- and needlessly -- about their finances. Still, if you save diligently, you should reach the point where money worries are relatively rare.

2. Money can give you the freedom to pursue your passions. Ideally, you want to spend your days engaged in activities that you find absorbing and satisfying, that you feel you're good at -- and where you feel you're doing good.

3. Money can buy you time with friends and family. You don't just need a reason to get up in the morning. You also need somebody to come home to at night.

I thought they were exaggerating..

Hedonic Adjustment is an all-Macintosh household. (Well, there's a PC in the basement that used to be a file server, but since we got a Time Capsule, the PC's been on craigslist.) At work, I use an XP system.

But yesterday, my new Vista-equipped PC arrived from Dell.

Wow. I simply couldn't believe how unpleasant it was to use.

I really thought they were kidding.

Frankly, I'd rather learn Linux than deal with Vista.

One or two incomes?

MP Dunleavy, whom I do not read on a regular basis, has a column about the question of choosing between living on one income or two. This is pretty much the same situation that Mrs. Bluebird and I are in, except that I'm working and she's home full-time with the kids.

Like MP (what kind of a name is that, anyway?), I'm keenly aware of the potential quality-of-life effects of having both of us work, as well as the fact that expenses would shoot up due to the need for child care.

We would have to find full-time day care for our son. That not only would mean an extra $1,000 a month — but I wouldn’t see the little guy at lunch or when he visited my home office to see mama “tippin” on her computer. If my husband was gone all day we would probably need a second car. And how would we divide the buying of groceries, doing the laundry, cleaning the bathroom, running to the hardware store and a thousand other chores?

As for what we would do with the extra money, it would be nice to have a fourth bedroom and a second bathroom. Right now, we don't have the cash to do this, and we don't have enough income to service the debt and other associated expenses (more taxes, more heating bills, etc.).

Of course that's just my take on it. I'm not the one actually has to deal with the children 24-7, day after day

Clements on Happiness

The world's best PF Columnist, the Journal's Jonathan Clements, had a nice column yesterday on happiness.

Despite the sharp rise in our standard of living in recent decades, Americans today are little or no happier than earlier generations. Why not?

A new study suggests one possibility: Maybe we need to be smarter about how we spend our time. And, no, that doesn't mean watching more TV.

The conclusion that Clements draws is that the reason happiness isn't going up, despite the fact that we are on average working fewer hours, is that we are replacing our work time with TV and internet time.

I know what makes me the happiest, though. Being outside:

But at 6:30 on a rainy morning, there's nothing like curling up with the internet.

This is not an April Fools Day Post

Apparently Americans' twin habits of overeating and driving everywhere, coupled with the push to reduce fuel prices by mandating the production of biofuels, has finally caught up with world food prices: We are on the brink of taking food from the mouths of the hungry so that we can afford to drive our Ford Explorers to the Burger King drive-through.

Noted bond investor Bill Gross is concerned that increased regulation of investment banks may cut into these banks' profits. I think that's going to be a huge problem too. As if the bubble-blowing, free-market fanatics at the Fed would be more than a paper tiger. Monetize the gains, socialize the costs, as Kris in JP says.

Although Americans' sedentary lives may be starving the rest of the world, they are providing great opportunities for profit for companies making drug treatments for high cholesterol and obesity. Fortunately for investors, the companies no longer need to worry about whether the drugs actually work. Thanks to an aggressive marketing campaign, Merck and Schering-Plough were able to rake in billions of sales for Vytorin and Zetia while at the same time suppressing the scientific evidence that these drugs didn't work.

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If you're looking for less stridency from the PF blogosphere this morning, I would suggest two fine posts from two fine bloggers: A slice of warm, sunny family life from Claire, and a bit of a shocker from Jane over at Boston Gal's Open Wallet.