MountainTops

I’m Not Sold On Long-Term Care Insurance (Yet).

Author: Anvil Smith

Have you purchased long-term care insurance yet? I haven’t. And it’s not because I’m not old enough to consider it (I’m 50) or don’t understand the product (I’ve been in the business for 20+ years). But I still have some questions about the efficacy of the coverage. By way of explanation, here are two recent articles from insurance trade publications in reference to long-term care caught my eye:

The first, from the May 18, 2009 National Underwriter announced that long-term care costs were rising again. The average annual cost of a private nursing home room in the United States rose 4.7 percent, to $74,208.

The second, reported in the August 2009 Insurance Sales Journal, declared the largest open long term insurance claim has now surpassed $1.2 million in paid benefits. The claim, which began 12 years ago, is for a woman who started receiving benefits at age 46.

What’s my take on this information?

Long-term care is expensive, whether administered in a care facility or at home. And those expenses have the potential to greatly exceed current projections. This combination makes long-term economic projections problematic, which makes insurance (of any kind) more difficult to implement.

Long-term care is essentially long-term health insurance. You are paying premiums to offset possible medical expenses, which if they occur, will most likely be incurred well into the future.

There are several factors that skew the marketplace for medical insurance. Government, through entitlement programs and tax breaks, essentially subsidizes health care. Government subsidies have a long history of inflating prices, whether in housing or medical care.

In addition, the majority of medical expenses are paid not by the patient, but insurance companies, which creates a price disconnect between the provider and the consumer. Providers charge more, and insurers pass on the cost to their policyholders, often employers. When providers and consumers do not interact directly, there is a greater chance that market pressures will not compel providers to deliver the best products at the lowest prices.

Third, there is substantial evidence that people with insurance are more likely to use it – the “want to get their money’s worth.” It is easy to see where those with long-term care insurance would have incentives to qualify for a claim, while those without would be more likely to pursue alternatives, including those more cost-effective.

In the past, these three factors result in cost increases for health insurance at a rate consistently greater than either the rate of inflation or the rest of the economy. Since long-term care insurance is a form of health insurance, it seems reasonable to expect similar increases in both costs and premiums.

A critical question for actuaries is “How much will these costs go up in the future?” While the factors mentioned above are persistent factors in cost increases, any long-term assessment of what those costs might be are difficult to assess. Which is why most long-term care policies come with a provision for premium increases at a future date (typically after 10 years).

Consider the implications of a premium increase: First, benefits stay the same, but coverage costs more. Second, because of inflation, any increase in premium without a concurrent increase in benefits means an additional loss of financial value. Third, some people will not be able to afford the increase; losing coverage is compounding by the lost opportunity costs.

One of the ways for insurers to adjust for unexpected cost increases is to deny or limit claims based on the terms of the contract. A long-term care claim is dependent on the definitions contained in the policy, such as whether one can perform activities of daily living (ADLs).

But the nature of long-term care is still developing. Initially, policies primarily covered nursing home expenses, yet recently have expanded to home care services. Considering the demographics of the baby boomers and possible advances in medical technology, who knows what long-term care will look like 10 or 20 years from now?

As an example, recall the life expectancy calculations for those diagnosed with AIDS and HIV two decades ago; most estimates were based on the disease quickly ravaging the body. Since then, new treatment protocols have greatly lengthened both lifespan and quality of life for those who contract AIDS or HIV.

These factors inevitably lead to uncertainties in pricing, no matter what insurers may say about their ability to forecast claims. When the premiums are steep and potentially open-ended, and the possibility exists that all premiums paid will not yield benefits (either because long-term care is never needed, or claims are denied because the future forms of medical care don’t match the definitions of today’s contract), there is substantial economic incentive to resist long-term care insurance.

150 years ago, the “modern” format of life insurance was a new concept. Read the histories of some of the first insurance companies operating before and after the American Civil War; many insurance companies went broke, or consolidated to stave off insolvency. It took awhile, probably 20-30 years, for actuaries and policy designers to come up with contracts and pricing that worked – i.e., workable products (like term and whole life), affordable premiums, and financial stability to deliver on promises.

The general idea of all insurance is to spread risk among a large group of people in order to manage it. Given this definition, it’s also worth considering whether everything labeled “insurance” really qualifies.

There are alternatives. If someone can afford the premiums for long-term care, using those dollars to buy the maximum amount of permanent life insurance might be a better option. Most life insurance policies include riders that authorize early disbursement of a portion of the life insurance proceeds in the event of terminal and chronic illness, and/or other afflictions that might precipitate the need for long-term care. If the policy is not needed for long-term care, so much the better; the proceeds simply add to one’s estate. And life insurance is very stable insurance product – even people with coverage have limited incentive to use it any sooner than necessary.

In the right circumstances, current long-term care policies may deliver the promised benefits. But in light of the factors mentioned above, long-term care is still a work in progress. The key factors for determining risk are still changing, as are the policy terms, and the pricing. The unsettled terms could translate to uncertain insurance benefits.

September 3rd, 2009  |  Posted in Insurance  |  3 Comments »

You Can’t Legislate Away the Risks of Life, But You Can Buy Insurance

Author: Anvil Smith

The Thursday, July 30, 2009 Wall Street Journal published yet another example of why politicians should not attempt to “improve” the economy. In an opinion essay titled “Can the Fed Identify Bubbles Before They Happen?” writer Donald Luskin, a chief investment officer for Trend Macrolytics reports on a proposal by  New York Federal Reserve president William Dudley that the Federal Reserve should be given the authority to stop investment bubbles before they happen.

Mr. Luskin correctly notes that Mr. Dudley is essentially asking the central bank to be allowed to impose price controls on assets in order to keep them from over-inflating; in other words, Dudley wants the government planners to set prices. Considering this “central planning” approach has no history of success, even in communist economies, the idea has no relevance for anyone that believes capitalism provides a better economic model. And in fact, even most central bankers (who are far from free market advocates) don’t believe they can prevent investment bubbles. Luskin notes that Alan Greenspan and Ben Bernanke, the past and current Chairmen of the Federal Reserve, have stated that monetary policy cannot mitigate against boom-bust cycles in the economy.

This discussion may seem like a lot of shop talk among economic policy wonks, but there’s an underlying issue that has relevance for every ambitious American. The political approach to the natural risks that exist in economic life is to establish laws or governmental agencies to eliminate the risk. But no matter how many laws are enacted and how many agencies are created, risk cannot be eliminated - it’s part of the equation of life.

Suppose the US government declared gravity had been outlawed. Could a law nullify gravity and keep people from falling down once they crossed the United States border? Could a law perhaps be applied to certain groups of people, i.e. those the government determined were “too big to fall” instead of “too big to fail?” No. No matter how idealistic and optimistic you are, gravity is not something that can be changed by decree.

However, capitalism has a practical response to the risks of life: insurance. For every recognizable risk, there are ways to insure against the damage that might result. Insurance doesn’t eliminate the risk, but it deals with it in a constructive way.        

The general public and conventional financial thinkers might consider insurance a necessary evil, but from a Mountaintops perspective, insurance is an ingenious workable solution to the realities of economic life. As Garrett Gunderson says in his book Killing Sacred Cows,

Producers understand that the best way to reduce their insurance expenses is to buy as much of it as possible.

That statement may seem counter-intuitive until you realize you are solely responsible for every economic risk that isn’t insured by a larger group of people. If you don’t have auto insurance, all of the risk (and possible expense) is on you. With auto insurance, your only risk is the opportunity cost of the premium. Most of the time, an insurance premium is a small price to pay for the risk protection you receive. Seen through this perspective, insurance is the logical response for anyone serious about protecting their wealth and economic potential.

Of course, you could always hold out for the possibility that some politician will find a way to defy gravity and eliminate financial risk. But you know it’s unlikely that any politician can deliver on that kind of promise.

July 31st, 2009  |  Posted in Economics, Life Insurance  |  No Comments »

Uncle Sam Should Not Be Your Financial Advisor

Author: Anvil Smith

Whenever there is a financial issue on the table, there is usually a broad range of strategies and financial products available to provide a solution. The details can make many money decisions seem quite complex, but here’s a general principle that’s relevant to all financial decisions:

FIND THE FREE-MARKET SOLUTION. IN THE LONG RUN, IT’S THE APPROACH THAT WILL DELIVER THE BEST RESULTS.

Since the Great Depression, the US government has tried to improve the financial lives of Americans by providing government-sponsored alternatives to solve the financial issues of life. While well-intentioned, these programs inevitably have not delivered on their promises.

To understand the dynamics, here’s the general pattern: The free market will always include some adverse outcomes and shady dealers. Not all investments work out, and someone will lie, cheat or steal. As a result, some people will lose money, lose work, lose financial security. At that point, someone will say “there ought to be a law!”

This is music to politicians’ ears. Politicians look for chances to right wrongs, defend the downtrodden (and get reelected). And making laws is one of the things politicians do best.

Alas, even with good intentions, the political, law-driven approach to solving problems (financial or otherwise) usually misses the mark. In fact, the historical record of political problem-solving is that most people end up worse off than before. 

Meanwhile, the free market will grind away, eventually finding an effective (and cost-efficient) method to deter adverse outcomes and bad behavior, because people operating in a free market environment have strong incentives to preserve the integrity of their businesses and their markets. Over the long run, free market dynamics produce better regulation, better behavior - and better results.

Think of the many financial issues where government already plays a strong role, either as a direct provider or regulator:

Banking (Federal Reserve, FDIC)

Retirement (Social Security, the Pension Benefit Guarantee Corporation, qualified retirement plans)

Medical insurance (Medicare)

Mortgage lending (Fannie Mae, Freddie)

Housing (FHA)

College funding (Pell Grants, student loans).   

In any of these areas, you could make a strong argument that a free-market alternative would work better. Unfortunately, once government programs get started, it can be hard to unwind them; constituents who have become dependent on subsidized benefits can’t afford to give them up, and politicians have no incentive to stop delivering benefits and buying votes.

You can see this pattern played out with Social Security. Amid the Great Depression, taking care of the country’s elderly citizens was a legitimate concern. The social and financial structures of life were changing, and many were unprepared to deal with the financial stresses of living longer but not being able to work. Out of this crisis (exacerbated by the Depression) came the cry “someone ought to do something.” And government did.

The short-term results seemed ideal. The payoff to the retiree was huge when matched with the contribution. For the first time in recorded history, an average citizen could retire - they could stop working and live comfortably on a guaranteed monthly income. But the good times didn’t last.

Because of its format (a legalized Ponzi scheme in which current workers fund benefits for current retirees) Social Security has delivered an increasingly poor return to its participants. Even worse, everyone (including the politicians) now knows it the program is unsustainable in its current form, and must either be scrapped or drastically reduced.

In the meantime, the free market has developed several workable private alternatives. Life insurance and annuities have been modified to offer many of the same long-term retirement benefits to a broader section of the American public. Mutual funds have become an avenue for smaller investors to participate in the opportunities in the stock market.

Consider all the taxes a typical 60-year-old American has paid into Social Security over the past 40 years. If you apportioned that same amount into a mix of private life insurance, annuities and investments, the guess here is that 60-year-old is looking at a better retirement package than the one promised by Social Security - more insurance, more income, more options, and better promises. Because unlike Social Security’s formula, insurance companies project their payouts based on specifics and known variables; the amount invested, the age of the annuitant, and real mortality experience. In the long run, which program would work better?  

The problem of course, is that Social Security is mandatory - almost everyone has to participate, has to pay. This compulsory factor makes it harder for the average American to afford a better choice. In fact, the typical American retiree “needs” his Social Security check because he hasn’t established much in the way of alternative retirement resources. It may have taken 70 years to reach this point, but the average American is now dependent on a government retirement plan that can’t deliver on its promises.

This long-term result is not unique to Social Security. The next time you face a financial decision, think long and hard before signing up for government-sponsored programs. Better yet, look for the free market alternative. Uncle Sam has not proven to be a reliable financial advisor.

July 31st, 2009  |  Posted in Financial Planning, free market  |  No Comments »

The View From the Mountaintops: Why It Makes a Difference – Part I

Author: Anvil Smith

What you see depends in part on where you stand. Whether you are in the valley or on the mountaintop, you may be able to see the sun, the sky, the rivers and the mountains. But how you see these things will be affected by your location. The view from the mountaintops will be different - even if you are looking at the same thing.

This difference in what you see depending on where you stand applies not only to scenic vistas but to the pursuit of Prosperity. And we believe there are good reasons for seeing and understanding the Mountaintops perspective on Prosperity, even if the other perspectives (from in the valleys or the hills) are valid. Here are a few thoughts to encourage you to take a look at the Mountaintops perspective.

Success is rare and Prosperity is not the default option in life. A quick survey of the human condition (from whatever vantage point) should be enough to confirm that success, in any endeavor, is not the norm for humanity. People don’t “naturally succeed;” they don’t automatically learn to read, grasp algebra, build a skyscraper, write computer code, or make fortune. Rather success is developed, through a combination of passion, education and effort. And because success requires passion, education and effort, not everyone succeeds.

But some people do.

This information (that success is not the norm, but that some people do succeed) prompts a simple question:

If you want to be successful, who should you study and perhaps emulate?

The obvious answer is “Those who have been successful,” right?

But quite often, this logical conclusion is rarely pursued or applied. Instead, the focus often changes to “why aren’t the rest of us successful?” Instead of trying to understand the view from the Mountaintops, many people are saying, “why can’t I see the same thing from down here in the valley?”

You may think this is a subtle distinction, but it has a huge impact.

Richard Thaler and Cass Sunstein are the authors of Nudge, a 2008 book with the subtitle “Improving Decisions About Health, Wealth and Happiness.” The book is a behaviorists’ perspective on how to guide, prod - or “nudge” - people toward a beneficial decision or behavior that they might not be able to make own their own.

One of the basic premises of the authors is that most people have little or no chance to make the right choices, even if they want to. They are too busy, too ignorant, too distracted, too lazy, too emotional - just “too human” - to make good decisions about their finances, their health, their relationships.

Since this is the case, most people would benefit from external nudges to make the right decision easier. In what Thaler and Sunstein characterize as “libertarian paternalism,” these external nudges would be provided by governments and social institutions, usually in the form of incentives or default options.

Automatic enrollment of new employees in an employer’s 401(k) is an application of this thinking. Rather than offering participation during an open enrollment period each calendar year, employees are automatically enrolled. Participation is not mandatory, but the employee must initiate the decision to not participate, by filling contacting Human Resources, filling out a form, etc. Studies show that inertia tends to prevail with most people - they do what’s easiest, and tend to keep doing what they’ve been doing - so they once enrolled, they tend not to opt out. Instead, they get used to having the deductions taken from their paycheck, and accept their participation in the retirement plan as a good thing.

According to the behaviorists, if there wasn’t the “nudge” of automatic enrollment, participation in a retirement savings plan wouldn’t happen for many people. And indirectly, the statistics validate this assessment, because 401(k) participation is higher when employers make participation the default option.

This “nudging” might seem relatively benign. Behaviorists would argue that most people are better off because of the nudge. But there’s something missing in the conversation:

What if you’re not “most people?”

Thaler and Sunstein note that numerous behavioral studies show it is human nature to follow the herd - if the group believes something, the individual will often follow, even if it conflicts with his own assessment. Hence, the desirability of having “choice architects” arrange things so that the group will choose the “right” choice.

But even these tests note that while the majority may be swayed, some are not. Most people may follow the herd, most people may make poor decisions, but some do not. And they don’t need nudges.

Mountaintops attempts to offer the wisdom, experiences and perspectives of those people who, for whatever reason, have already grasped that they want to be different, want to be better, want to reach their full potential.

If you don’t want to be most people, Mountaintops is a place where you can explore how to be different. While the perspectives “most people” have may be valid, we seek to be a vital source of “alternative” information, because we believe that when you see things differently, you may like the view a lot better.

July 27th, 2009  |  Posted in Prosperity  |  No Comments »

What Happens When People Ignore The Mixed Economy (An Example From Our Archives)

Author: Anvil Smith

Note: Here’s something that we first wrote about in 2001. Read the article, then our follow-up commentary.

One of the mysteries of human behavior is why people don’t do things universally recognized as beneficial.

For example, everyone knows regular exercise is a healthy habit, but every new study seems to indicate Americans are exercising less and weighing more. And even the tobacco industry has finally admitted that cigarettes are a health hazard. Yet people still smoke.

In both of the above examples, some might argue that addictive nature of high-calorie foods and nicotine must be considered as part of the equation. That may be the case, but there are other areas where people just don’t do the things that would be good for them.

Read this excerpt from a letter to the editor in the February 26, 2001 issue of the Wall Street Journal:

“On April 23, 2001, my wife and I will write a check for $461,000 to the U.S. Treasury for estate taxes for her father. One would think this is a painless act since she is now considered by many to be rich.

“How will this amount be met by that date? We are in the process of mortgaging the $220,000 Florida house that has been on the market since October. We have sold all of the liquid assets. Yet we are still going to have to borrow another $100,000 by April and avoid the 25% late penalty.”

A sad story, right? It’s the type of anecdote that makes you angry with the government for taking one last swipe at the hard-earned assets from a lifetime of work.

Wait a minute…

We don’t know all of the details, but this appears to be a sad story that didn’t have to happen.

It’s just a guess, but $461,000 of taxes due means an estate with a ballpark value of $3 million, give or take a few hundred thousand. And if the assets aren’t liquid, there’s possibly property or a business involved. More than likely, then, this was an estate that grew gradually over time. It wasn’t the result of some 20-year-old computer geek cashing in on a dot-com idea.

Which means there was time to plan.

Which means there could have been trusts, and life insurance policies, and gifting plans, and other strategies in place to protect those hard-earned assets. Which means a lot of the estate taxes probably could have been avoided.

Don’t misunderstand. It’s legitimate to decry the tax policy that results in the situation mentioned above. But it doesn’t explain why so many wealthy people don’t take the time to do what they can to minimize the damages. As far as we know, there isn’t an addiction or disease that keeps people from planning. Like we said at the beginning, it’s a mystery.

Why don’t people plan?

Comment: The situation described above is a classic example of the risk of ignoring the certain aspects of the mixed economy. This family apparently did a commendable job of accumulating wealth, probably through diligent work in free-market activity. Now they find the “control” of government taxation removing a sizable chunk of their wealth, and it seems so unfair.

You know what? For most people, the estate tax is unfair. But it’s also characteristic of how the mixed economy works. You can complain, even advocate for changes. But you should prepare for the financial realities.

If you have any knowledge of current economic control issues being discussed by politicians, you know changes to the estate tax rules are again under consideration - and the idea is to increase estate taxes, not reduce them. To remain ignorant of these changes means a lifetime of wealth could be transferred to government entities instead of designated heirs.

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend is about the end of any nation. You cannot multiply wealth by dividing it.”

Dr. Adrian Rogers, 1931 to 2005

June 29th, 2009  |  Posted in Economics, Financial Planning  |  No Comments »

Why Do the Philosophies of the Mixed Economy Matter to You? Part 3

Author: Anvil Smith

Building a Team for the Mixed Economy

When you understand the general nature of the mixed economy, it should help you with your financial decisions, including the kind of advisors and financial representatives you choose. In structuring your financial strategies, you want to work with people who understand both aspects of the mixed economy. You want entrepreneurial mentors who understand the dynamics of wealth creation in the competitive free market. And you want advisors who have the technical expertise to navigate the oceans or rules and regulations as well.

This is true even for those who perhaps don’t see themselves as capitalists, but simply wage-earners who are trying to save for retirement. The people who said they “didn’t worry about the daily ups and downs, because the market always goes up,” were not paying attention to the free-market forces that overwhelmed the supposed “controls.” A little free-market perspective might have changed some decisions and minimized some losses. And for the people now forced to borrow or take early withdrawals from retirement accounts because of these financial losses, it might have helped if someone had offered some alternative accumulation programs with freer access to funds and lesser tax consequences.

• DO YOU UNDERSTAND THE MIXED ECONOMY?
• DO YOUR FINANCIAL DECISIONS INCLUDE THE ABILITY TO PURSUE PROFITABLE FREE-MARKET OPPORTUNITIES?
• AS YOU ACCUMULATE WEALTH, ARE YOU TAKING THE APPROPRIATE “LEGAL” STEPS TO PRESERVE IT?

June 26th, 2009  |  Posted in Economics, mixed economy  |  No Comments »

Why Do the Philosophies of the Mixed Economy Matter to You? Part 2

Author: Anvil Smith

A Realistic Response to the Mixed Economy: Be Productive, Know the Rules

Ardent supporters of the free-market might have good arguments for abolishing most government regulations because they believe the same effects (fair business practices, safety, etc.) can be accomplished through competitive incentives. On the flip side, there are many economic thinkers who believe that better regulation and centralized control over the economy can yield the same levels of prosperity that the free-market generates - without the risks. It’s a great topic for discussion, but the reality is we operate in a mixed economy. And that reality requires a mixed response.

If you are truly interested in accumulating significant wealth, you must consider free-market opportunities - and you must structure your financial decisions accordingly. For example, most free-market endeavors will require capital at various stages - there will be start-up costs, down payments etc. This knowledge should affect your decisions on where and how you will save, and what assets you will choose to protect. In this context, you might find that a highly-regulated, tax-favored retirement account like a 401(k) is not well-suited for your financial objectives.

On the other hand, you cannot simply plan to make a lot of money and ignore the possible impacts of the “controlled” parts of the mixed economy. Investors, lenders and builders who over-committed their resources to government-sponsored home ownership incentives have been whip-sawed by the declining property values and mortgage defaults. And most people know of someone who lost much of their wealth because of legal or tax issues - in the real world, higher productivity doesn’t resolve all financial problems.

June 23rd, 2009  |  Posted in Economics, free market, mixed economy  |  No Comments »

Why Do the Philosophies of the Mixed Economy Matter to You? Part 1

Author: Anvil Smith

Wealth Creation through free-market opportunity, Wealth Preservation through regulation

This is perhaps an oversimplification, but free-market competition favors both the creation and destruction of wealth, while regulation often tends to stifle new wealth creation in order to preserve existing prosperity. For both individuals and businesses, there is a tendency to change philosophical horses depending on where one is the race.

When you’re just starting out, you want as much economic freedom and opportunity as possible. Taxes and regulations are a drag on your efforts to get going. But when you’ve reached an acceptable level of financial prosperity, you want as much financial security as possible, even if that means more regulation.

The American automobile industry provides great illustrations of these shifting perspectives. In the early part of the 20th century, scores of entrepreneurs made and lost fortunes building automobiles. In the middle of the century, unionization and government regulation (safety devices, pollution standards) injected a high level of regulatory control. By the end of the period, when some companies faltered in competitive market because of foreign competition, automakers sought controlled-economy assistance; they asked for tariff protection on imports, and finally, direct financial assistance.

June 18th, 2009  |  Posted in Economics, free market, mixed economy  |  No Comments »

Two Modes of Prosperity in Mixed Economies

Author: Anvil Smith

The paths to success in the mixed economy can be distilled to two categories. While most people don’t follow one mode exclusively, their actions reflect one of two perspectives.

Mode #1. Become an expert in the controlled-economy game

One of the ways to make financial progress is to recognize the controlled economy format and embrace it. Be diligent to know the rules and regulations of the controlled economy in which you operate. Make sure to stay within the rules, but remember that the rules will often be contradictory, and change constantly. Hire an attorney, as well as a tax pro, to help you navigate the regulatory mazes. This will allow you to find loopholes, receive government subsidies, and qualify for tax credits.

Because so much of controlled economy revolves around rules (such as taxes and industry regulations), you must always be aware of the financial opportunities and risks from litigation. Expect to be sued and/or audited at least once.

If you can achieve a financial advantage through legal recourse, do it. The general public may attach a stigma to some of these behaviors, but those who are playing the game can’t worry about the perception of the masses. For example, the general public might see bankruptcy or other legally permissible methods of financial maneuvering as an “easy out” for people of questionable character who make bad financial decisions. But in controlled economy environment, you almost never win by following the social rules of “good behavior.” You win by knowing the legal rules and using them to your advantage.

Mode #2. Become a capitalist and focus on productivity

The ambitious capitalist figures the best way to overcome any financial challenge is to out-produce it - just make more money, build a bigger company, create more value. As long as you keep producing at a high level, all the other issues will take care of themselves.

Because the goal is increasing productivity, a capitalist seeks to operate in areas that afford the greatest economic freedom. The more regulated your activity, either to earn money or put it to use, the less control you have over profit, and the more “control” issues you must deal with. This is why capitalists often gravitate to new technologies or new products because the government hasn’t yet figured out how to regulate or tax them.

In a free-market format, liquidity, flexibility and financial control are priorities. Be wary of financial transactions that seem heavily reliant on government subsidies for their profitability (like the solar and alternative energy industry in the 1980s), or where tax laws are prone to change (qualified retirement plans, 529s college savings plans and the like). You not only want to be in charge, you want to be able to change, to pursue the next free-market alternative.

Both modes work - and affect each other

As you read the above options, you might be inclined to make some value judgments about the means to achieving financial prosperity. (Pick up two newspapers and flip to the editorial pages. One blames politicians and government control for the current economic mess, the other faults the greedy capitalists.) But setting aside what you may see as moral issues, understand

both approaches are absolutely legal - and successful - even in countries where the economy is most free or most controlled.

In America, we know many stories of entrepreneurs who build their wealth through business, but some very wealthy Americans have made a career out of working the system to their benefit as well. Maybe they used government programs to buy distressed properties, started a business with grant money, or invested in tax-favored financial programs. Whether they worked in the competitive market or the worked the system, the common denominator for financial success is work - focused, consistent effort.

Besides the common denominator of work, both parts of the mixed economy have similar goals: trying to prevail without destroying the other side.

People who understand the power of regulation and control also know that if there’s no productivity there’s nothing to control - if nobody’s making money, there’s nothing to tax, if no one’s working, there’s nothing to regulate. Regulators need successful capitalists.

Likewise, most free-market producers will acknowledge that some government-enforced controls (like prosecution of theft and enforcement of contracts) make free-market competition easier because everyone plays by the same rules. And an astute producer can often find new free-market opportunities as a result of some government regulations - even in an America where “we are all Socialists now.”

June 15th, 2009  |  Posted in Economics, free market, mixed economy  |  No Comments »