Today we tackle the “Tax Refund Anticipation Loan,” a total rip-off even as compared to the rest of the consumer-lending industry.    These loans work like this:  Tax preparers determine a client’s tax refund, and then offer to “advance” it, less fees and interest.  The problem is that “fees and interest” often amount to about 15% of the refund.   Refunds show up two weeks after filing anyway, which means that people are paying APRs that often approac h four figures for that two-week loan.

Multiply the 8-million of these loans by those fees and interest charges and you are looking at $1.5-billion being siphoned off from the working class.

The “inside the box” solution, as suggested on another blog, is to make these loans illegal http://www.paydayloanfees.info/news/Refund-anticipation-loan.html.   However, there are people who need the money and, in any event, making consumer loans illegal just drives them underground, increasing price and the potential for loan-sharking.

www.whytheheck.com instead proposes that the IRS simply add a line to the Form 1040 after the “This is your refund” line that says:  “Check here if you prefer 99% of this loan immediately deposited in your bank account as payment in full.”   (For people who don’t have bank accounts, 98% could be printed out in a check in the tax preparer’s office, with the other 1% going to the tax preparer for use of his printer.)

Even while giving consumers a big break, the government would actually make money on this transaction because its 1% “haircut” exceeds its cost of capital for those two weeks.  So everybody benefits.

The argument against this idea?   It would encourage fraud.  But the government doesn’t do anything to tax returns between filing and refund other than check math and plausibility – exactly the same level of scrutiny that it could do under this proposal. 

This proposal would raise money for school districts and provide jobs and inexpensive access to fitness, but Joe’s big insight is that part of the arrangement with the health clubs is that the kids be allowed to use the gyms free during these hours and school vacations. 

This arrangement would give kids something to do just when their parents most want them to be doing something (especially during vacations, which are anything but for most parents), and would be a healthy alternative to watching TV or playing video games.  Also, sedentary behaviors lead to obesity, and many schools are in districts that don’t have many fitness options other than at the schools themselves.

Finally, the health clubs that are subcontracting the space are likely to want to upgrade the equipment in the gym too, in order to attract more members, which in turn makes the facilities more attractive to the kids and more of an asset to the school districts.

ThinkOOB normally does not endorse candidates (especially at 5:52 AM on a Sunday morning) but we are going to make an exception here and throw our considerable weight behind Joe Malone’s candidacy.  Great outside-the-box idea, Joe!

You were probably brought up being told that we were the richest country on earth.  Maybe that was true back in the days of Gilligan’s Island, where roughly one in every seven inhabitants was a millionaire (or his wife).     But now fast-forward from Gilligan’s Island to Survivor, where the islands are so poor that the set designers can’t even afford light bulbs.  

You see my point?  That’s okay.  Neither do I.  But one way or the other, our standard of living has fallen to roughly 20^th in the world now.   We are even behind Switzerland.  Switzerland.  What a bunch of wimps.  Whereas the United States makes manly products like beef and guns and forklifts and Jumbotrons and Quentin Tarantino movies, Switzerland’s major industries are tourism, watches, trains, cocoa powder, sheep, milk chocolate, dark chocolate, Nestle’s Quik, Ovaltine, and yodeling.

What’s the solution?  To buy OOBonomics, of course.  You can now buy the prototype draft directly from me, and get it signed and numbered, or you could buy it from Amazon here . 

It is full of ideas to help make the economy more efficient without more government spending.  The book won’t solve the country’s economig problems totally.  But at the very least it will take your mind off them for a while.

You’ll also be helping the environment.   Why? Because the ideas are simple enough that OOBonomics can present an entire program to increase our standard of living — in responsible, equitable, sustainable, ways — in less than 220 pages.  Brevity is paramount because leading environmentalists are now urging authors to shorten their books, in order to conserve valuable resources, such as paper, ink, and semicolons.    So you see, just by buying OOBonomics — even before you read it — you are helping to preserve the environment by reducing the average size of books sold in America.  That means the more copies you buy, the more trees you save.  Do the math if you don’t believe me.

First, why not allow people to obtain a one-time interest-free loan from their own retirement accounts to use to pay off their credit card debt?     The middle class is buried in credit card debt, an average of about $7000 per adult, at very high interest rates.   A loan from their retirement accounts  would allow them to pay off that debt immediately, and then – with about the same monthly payments they make now to their credit card companies – repay their retirement accounts in about six years.   With no change in their monthly debt service, they instantly rid themselves of credit card debt and, six years later, become free and clear of the repayment obligation to their own retirement accounts.     By contrast, without this initiative, people making those same payments to their credit card companies will still be $7000 in the hole six years from now.

Second, why is there a tax refund anticipation loan industry?  12 million people a year borrow from their tax preparers against their tax refunds, often taking a haircut of 10% to get money instantly (sometimes, ironically, to pay credit card companies) instead of waiting a couple of weeks for their full refund.  Why not just add a line to the Form 1040 where people can ask for 99% of their refund electronically deposited on the filing date instead of getting the full 100% in two weeks?    Besides being a boon to cash-strapped borrowers, this initiative actually saves the government money because they pay out less in refunds.

Third, speaking of tax refunds, why do people even have to take their tax refunds in cash?   Why doesn’t the Government offer a “ShopAmerica Gift Card”?   People could direct their refund checks (or Social Security checks or any other government check) to a website where retailers and service providers would offer premium-value gift cards.   An example might help:  Suppose the Government owes you $500.  You visit this website and find that Marriott is offering gift cards at a 20% premium.  Your honeymoon is coming up, so you like that idea.  You direct your $500 to the website and get a $600 Marriott gift card in return.  You are $100 better off, at no cost to taxpayers.  Would sellers participate?   Some already do this on their own, but because, absent a central location, marketing is so fragmented and labor-intensive, they offer premiums of only 10% or so.  Creating an eBay-like central market for gift cards will reduce marketing costs enough to make the cards much more valuable.

Finally, why should people pay high energy bills when it’s well-established that conservation is a great, risk-free investment…if only they had the money?  What if there were companies that would do free energy audits and then – if circumstances warrant – make energy-saving improvements and then get paid out of the utility savings?  Including the repayments to the company, homeowners’ total utility budgets wouldn’t change.  Of course, once the companies were paid off, all the savings would accrue to the homeowners.   The Government could jump-start this industry by getting audits on government buildings, many of which are very energy-inefficient. 

While the first three initiatives would have an indirect effect on job creation, this initiative would directly create jobs for skilled craftsmen and electricians.   Maybe not that many, but at no cost to taxpayers.  

While the President’s heart and/or political instincts are in the right place, the answer is not always to throw money at problems.  Sometimes creative solutions can work just as well. 

At the same time, various generous tax credits are available for solar and other energy sources that are not even close to cost-effective in most cases.  (Hence the need for the generous credits.)  On the other hand, if the government were to provide credits for all energy-savings improvements, the impact on the deficit would be substantial and there wouldn’t be any real controls on what investments make sense.

So ThinkOOB is willing to suggest, courtesy of Steve Reichtenstein, a third way:  Let us create a new industry to fix this market inefficiency, an industry that would offer to do energy audits and then finance conservation measures, and get paid for them out of savings in utility bills.     There would be no budget required by the building owner – the whole thing would be paid for out of the existing utility budget.

The company could offer to do the audits at no charge and with no obligation. The building owner receiving the audit would then have a choice of either agreeing to allow this company to make the cost-effective improvements, and then repay them out of savings, or simply buying the audit after the fact and financing the improvements themselves.  Or doing nothing. 

This new company could probably also make preferred-price purchase arrangements with suppliers and with utility companies that may already provide limited free audits. 

Why isn’t this obvious economically viable activity happening today already?  Why aren’t owners already making these investments?  Well, why do people fund their 401ks to get tax-deferred 5%-10% returns while carrying credit card balances with aftertax 20% finance charges?    Simple – neither credit card paydowns nor conservation investments are sexy.   OOBonomics proposes a solution to the former in Chapter 10.  This post suggests a solution to the latter. 

In both cases, I would call it “psychological disintermediation,” creating a sexy business out to address a plebian problem, a problem that is unaddressed today not because of economics but because of lack of interest or understanding.

The hangup, which is where the government comes in, is that it would be difficult to get financing from a bank for this or, these days, almost any other new business.  Financing would be complicated by the fact that the payback to the company (the bank’s client) is based on savings in someone else’s variable costs.  The government could address this problem and jumpstart this industry simply by guaranteeing loans for companies in this business for a few years, until the industry establishes a track record. 

You might say, “Let’s keep the government out of this,” and I would generally agree:  OOBonomics philosophy is to minimize government intrusion, but OOBonomics makes exceptions for short-term marketplace interferences, to noodge an industry to a new equilibrium.  Also, as a practical matter, the government already interferes heavily in energy markets, usually with much more questionable rationales than this one.

Oh, yes, and this would create jobs, reduce pollution, and even improve the balance of trade…all without increasing the deficit or raising taxes.

How? By replacing that $8,000 automatic credit with a $2,000 incentive credit, the difference being that this credit goes only to homebuyers whose purchase prices include a total commission of 3 percent or less (or no commission at all).  Because prevailing commissions average 6 percent today, the selling brokers will naturally complain:  “We can’t afford to split a 3 percent commission with the buyer’s broker.  That’s how much we need to make ourselves.  So buyers will have to make their own arrangements.” 

And that is exactly the point:  Today’s 6 percent commissions include two payouts—3 per cent each to the seller’s broker and the buyer’s broker.   Instead of requiring  this fixed buyer’s broker commission requirement in the sales price, this tax incentive encourages  homebuyers to pay openly for whatever level of assistance they want, if any, from whomever they want. Given those other options and the chance to collect $2,000, few buyers would opt to pay a 3 percent out-of-pocket commission (about $6,000 on a median-priced house). 

But buyers don’t have multiple options today – that is why the hidden, fixed buyer’s brokerage commission survives.  Writing the check themselves to keep the total commission low enough to earn the credit, most buyers would want advice only, perhaps by the hour, and/or perhaps only a few times during the homebuying process.   

Financially, a buyer paying a small sum for advice with no built-in buyer’s brokerage commission will be about as well off as a buyer collecting today’s much larger homebuyer tax credit while also paying much larger hidden commissions.  The big difference:  far lower taxpayer expense ($2,000 per house instead of $8,000).   Anyone could still opt to pay the traditional commission at closing — but paying a full-service buy-side broker by commission would become a choice instead of a requirement.

This hidden buyer’s brokerage fee requirement survives only because real estate brokerage is a cartel, as a few market observations clearly demonstrate.    While middleman costs on everything else from stocks to cars to travel to insurance have plummeted, real estate commissions have remained close to 1970 levels in percentage terms and have climbed dramatically since then in dollar terms…and are often curiously identical within a market. 

Forty years ago you needed one broker to buy a stock or a house, while today you need none to buy a stock, but two to buy most houses.    In law and medicine fee-splitting is illegal.  In real estate, it is required.  Finally, while a few discount brokers charge less than the “standard” fee in a market, no broker anywhere charges more by claiming that their service is better.

Even a temporary $2,000 credit could permanently alter the structure of real estate brokerage, because there will be no going back once the credit expires — there has never been an industry where high commissions have replaced low commissions.  And just as happened when stock commissions were allowed to decline, much lower transaction costs will create more transactions and hence more liquidity.  Liquid markets will allow people to sell houses more easily before they go “underwater,” thus reducing foreclosures.  

Of course the real estate brokerage industry, which has strongly endorsed homebuyer tax credits, will oppose this particular tax credit.  .  Fortunately, an equally powerful coalition of builders, bankers, mortgage brokers and consumer advocates will be lined up against them.   

Much lower transaction costs would not just reduce foreclosures by facilitating transactions, but would also increase people’s net equity in their existing homes, thus making all homeowners better off – a perfect example of not wasting an economic crisis.

Dear OOBonomics nation,

There is a lot of debate about the implications of health care policy.  It’s a pleasure to join you today and hopefully to provide you with a brief overview of certain aspects of healthcare spending – this is not intended to be an in-depth analysis but it should  cover some of the major topics.

This is an economic analysis of some of the issues – it is presented because it could provide useful information that will help you develop your ideas regarding Healthcare and give you a better understanding of how health care funds are being used..

What is money being spent on in Healthcare?  And what might that mean?

Healthcare

Healthcare expenditures have significantly increased over the past decade and  these increases are expected to continue.  Expenditures on health care have increased from $699.5 billion in 1990 to $1,035.1 billion in 1996 and are projected to reach $5,329 billion by 2015.  Concurrent with the increasing expenditures on medical care is the continuing growth in biomedical research.  Total expenditures on research and development (“R&D”) in real dollars, has increased from $164.9 billion in 1991 to $192.6 billion in 1998.  Research in biomedical areas has increased its share of these funds.  The number of biotechnical firms has increased from approximately 200 in 1975 to almost 1,200 in 1997.[1]

Spending has grown at a much faster rate than population.

It’s is almost like a Malthusian growth pattern - expenditures are growing geometrically while the population is growing arithmetically.  The average annual growth rate for healthcare expenditures has been between 7.0% and 11.8% while the average annual growth rate of the population has been between .9% and 1.0%.  On a per capita basis, the annual growth rate averaged between 5.9% and 10.7%.

The costs cover a very broad area..

Expenditures on physician services increased from $5.1 billion in 1960 to $148.3 billion in 1990 and reached approximately  $483.6 billion in 2005.   Expenditures continue to grow at an average annual rate of 10.6%.  Concurrent with the increased spending on physicians’ services  expenditures on prescription drugs increased from $63.8 billion in 1995 to $81.2 billion in 1997 while the number of dispensed prescriptions increased from 2.l billion to 2.3 billion. 

This means that the cost of prescriptions increased by about 7.8% during each of those years!  This rapid rate of growth in spending has created an attractive area for major pharmaceutical companies.. 

Private pharmaceutical corporations have increased spending on R&D from $74.8 billion in 1984 to $144.7 billion in 1996.  Expenditures on R&D for drugs and medicine increased from 4% of this total in 1984 to 7% in 1996.[2]    The large pharmaceutical companies have increased their role in R&D related to the development of drugs.  Domestic expenditures on R&D by drug companies has increased from $6.8 billion in 1990 to an estimated $20.1 billion in 1999.  As a percent of total domestic sales plus exports this represents an increase from 16.2% in 1990 to an estimated 20.8% in 1999.  Thus as sales increased, expenditures on R&D increased by a faster rate. 

There are many areas of potential research, profit, and better public health.  A key issue is to remember that companies conduct research with an eye for future profit yet take on a significant current risk.

R&D in general is filled with uncertainties; projects can take years before anything is discovered.  The typical research project will go through many steps before clinical trials start.  Frequently the process is analogous to following a tree diagram with numerous branches.  Many of the branches are dead ends and the researcher must go back and pursue a different branch.

Concurrent with increasing expenditures on healthcare, the level of expenditures for R&D in biomedical and related areas have also been increasing in real terms and this growth is expected to continue.

That was a lot.  To wrap things see the following  chart that tells you where spending is going:

Dr. Jerrold Katz, a highly respected economist, was a founding professor of Simmons Business School and has published many papers.  His firm, *JP Katz | Economic Expert Witness* [link: www.jpkatz.com, provides a variety of economic and financial services, especially those related to valuations, like *divorce business valuations* [link: http://www.jpkatz.com/services/divorce-business-valuation.php].

Whether you are pro-choice and disagree with the above headline, or pro-life and disagree with Roe v. Wade, please hold off on the hate-mail, okay?  Direct that towards people with bombs in their underwear instead.   (While you can’t send me hate-mail, you can still send me disagree-mail or even dislike-mail. )  What you are about to read are OBJECTIVE OBSERVATIONS, not a political diatribe.

Choice advocates have focused on the required separate check that does indeed have to be written for the abortion rider (and you read that separate-check proposal here first, Nation – where do you think Newsweek and then Senator Nelson got the idea?), but they have failed to make four other observations:

(1)    Never before have these 30-million people had abortion coverage.  Since most of them are working-class or below, they faced financial hardship when needing one.  This will no longer be the case because…

(2)    …The rider will cost only around $3/month.  Once again, no one else has noticed this price but I’ve even worked it out on a spreadsheet, not because I need a life, but because in my field of population health management, there is a complete idiot of an actuary who’s been telling people this rider will cost $145/month.  I worked this out to prove how stupid actuaries are (that didn’t take long).

(3)    The “separate checks” requirement is far less burdensome than anyone thinks it is because payment will probably just be collected via a standing credit card and/or paid once a year.

(4)    The win for both sides – and the major and as yet unappreciated coup for pro-life forces (though not at the expense of choice advocates!) – is that many second-trimester abortions will no longer be performed later than they need to be, because it now takes a while to raise the money for them.  You will see a decline in second-trimester abortions following implementation of near-universal coverage.

I know sometimes people don’t like these “guest posts” and I am going to tighten the rules a bit for guest posts, but if I am offering a prize for the best posts, I need to actually post them, right?  So I will post everything that comes in that is not obviously a dumb idea.  (You’d be suprised how many that threshold rules out.)    Also, this particular one is far from the worst idea I have ever heard, if one removes a decimal point or two.

********************

Let’s simply tax non-US student tuition at a rate of 400-500% and use the money to fund loan and grant programs for US citizens.

In return, let’s provide green cards for the foreign students so that they are not forced to return to their country of origin to use our education in a way that creates stronger competition for the USA.

Why?

- The non-US students come from wealthy families; they can afford it

- The middle class in America need relief for tuition costs, so why not fund 4 or 5 students fully for every non-US student?

- Today, other countries make it extremely difficult to enter their educational systems; this is only fair

Today, the internet is the new pencil, the new instrument of education.

So, what if we put the internet into the hands of people who are, right now, being taught to be terrorists?

Let’s defeat terrorists by literally dropping a million satellite-linked internet devices directly into the hands of people around the world.