Moral Hazard Economy

Moral Hazard Economy

On Thursday, the Fed boss, who once worked in private equity, announced another $2.3tn worth of support for capital markets. The US central bank will offer to buy or backstop securities that would have seemed wildly inappropriate a month ago. The package includes so-called “fallen angel” junk bonds, junk bond ETFs, municipal debt and an array of asset-backed securities.

-       Fed’s $2.3 Trillion bailout: fielding falling angels – Financial Times.

Moral hazard is the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity. In addition, moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles. Moral hazards can be present at any time two parties come into agreement with one another. Each party in a contract may have the opportunity to gain from acting contrary to the principles laid out by the agreement.

-       Investopedia

By JM Hamilton (4-20-2020)

How exactly did moral hazard come to be the defining feature of the US economy? 

First, what is moral hazard?  Moral hazard is when a party enters into a contract in bad faith.  A classic example would be when someone enters into a bank loan, fraudulently, w/ zero intent to pay back the loan.  In insurance, the oft-used example is when a house is already on fire, and the owner calls up an insurance carrier looking for coverage or additional coverage, perhaps a second property policy?  A close cousin of moral hazard, if not a synonym, is bad faith or in street vernacular, a scam.

Banks and insurance companies avoid moral hazard like… well, the plague.  And yet, banks and insurance carriers support, directly and indirectly, the very definition of moral hazard on a daily basis, the private equity model (PE).  The private equity model buys up businesses using catastrophic debt/leverage, w/ other people’s money: front loads profit; declares themselves unearned dividends; charges outrageous management fees, often for running companies into the ground; lobbies for and has obtained preferential tax treatment; is known to take out swaps and derivative bets against the very third party debt used to support its efforts; and either flips or liquidates the business at the end of a five year investment period. And that’s just scratching the surface.  

PE LBOs are done under the oft-cited premise that they are here to improve or rescue a business, but, as is often the case, they end up burying the business, along w/ jobs & opportunity.  

The private equity loot & pillage model defines moral hazard.  PE makes money eight ways to Sunday, faster than a person can say, “leveraged buyout.”  At a micro-level, PE makes money on a one-off deal, and it generally, cares less if the bondholders, the business, and the employees survive or not… because there’s always another set of investors who are starved for bond yield thanks to the FED.  At a macro-level, this entire industry has become so pervasive that the PE model has been adopted by both public and private companies, only it goes under the nom de guerre financial engineering.

Companies that are leveraged up (be they private or public), so as to reward management & ownership interests in a rather piggish manner… have done the company, local businesses (suppliers), and labor a serious disservice because these enterprises are ill prepared for crisis.  At a macro level, entire business sectors – concentrated – and leveraged to the hilt – have set themselves up for ruin and are unable to fend off any exogenous & endogenous shock that comes along.  The virus – an entirely foreseeable event - has brought the private equity model into clear view, for what it is: not capitalism but organized crime.

How can this be?  Afterall, if an individual commits insurance fraud or enters into a loan with a bank, via bad faith, surely, they’ll be prosecuted to the Nth degree by said financial institution.  Rightfully so. 

One of the ways that private equity, as an industry, or say, the airlines, is able to accomplish this is through scale.  If an individual steals from a business or a set of investors, it’s a crime.  When an entire industry, or a too big to fail (TBTF) monopoly, engages in what is tantamount to theft from other businesses, bondholders, the US economy, labor, or the American taxpayer…. well, that’s grounds for a congressional and federal reserve bailout. Not only do TBTF companies and industries engage in moral hazard at a macro and micro-level, but they also buyoff and lobby the US congress for preferential treatment.  It’s as if a drug cartel has purchased the executive, judicial and legislative branches of the US government.  Mission accomplished, democracy subverted. And since the neoliberal economy – the anything goes economy – produces so few jobs, these highly leveraged industries are able to hold up the prospect of losing jobs, and investor harm (such as pension funds), as a means to extort bailouts from congress… or at least provide congress - which is in on the scam - w/ a convenient reason to bailout said industry. 

In short, the taxpayer bails out avaricious management teams, setting the precedent for a continuous loot & pillage cycle; the taxpayer bails out these crime lords, when the money is desperately needed for a Green New Deal, Medicare for All, or student debt forgiveness.  

Capitalism used to mean the risk takers were rewarded for good business practices and suffered losses for egregious business conduct that was detrimental to the company and the public at large… under the moral hazard economy, financial engineering and private equity are rewarded no matter how badly they fail and no matter how adverse their behavior is to the American economy and public.  

Moral hazard as the defining feature of the economy didn’t happen in a vacuum.  Financial engineering, moral hazard, and private equity didn’t just flourish on their own.  No, these businesses and business practices had to be nurtured and created under the right set of circumstances, engineered in a highly controlled environment… not unlike a virus. 

Enter the Federal Reserve (FED) and central banks. 

W/out the FED engaged in highly accommodative monetary policy and suppressing interest rates - and essentially providing free money to a predatory financial elite - the private equity model couldn’t exist or certainly wouldn’t be as profitable.  (Those extraordinary profits, in turn, could not be used to perform an LBO on the US congress.) 

Why does the FED do it… why does it engage in exceptionally easy money polices?  Well, one, we have catastrophic national debt, much of it derived bailing out banks from the 2008 and the current crisis and financing endless war.  Two, the private sector – engaged in moral hazard (see this article) – is in debt up to its eyeballs.  And three, banks and insurance companies sell hundreds of trillions (notional value) in derivates and swaps, much of it insuring & speculating on all this debt.  These swaps and derivative products are essentially the financial gun held to the FED’s head, that ensures the whole rigged process – of enriching the predatory few, at the expense of hundreds of millions of Americans – continues infinitum. 

The final reason ultra-accommodative monetary policy continues, the FED is accountable to no one (certainly not the American people), but rather, to the congress of the United States, which we all know by now has turned abdicating its responsibilities into an art form. And given all the insider stock trading conducted by the American legislative branch, and the fact that the FED lets the house and senate members off the hook from doing its job – by monetizing the national debt - the congress has zero interest in reining the FED in.  

And yet, the FED is the god of the moral hazard economy.

Now, w/ the coronavirus crisis at hand, the FED has ramped up moral hazard to a whole new level.   With money flowing out of the stock & high yield debt markets (because the American consumer, the driver of the economy – in most instances - is now tapped out & unemployed), and those highly leveraged balance sheet increasingly look like a noose for piggish management teams…   The FED has printed up $4.0 trillion to backstop various debt and stock markets.  The FED backstop, or bailout, is for the personal enrichment of a privileged few: bondholders, failed management teams, & shareholders, specifically.  Notice, the FED is not bailing out American labor… there’s no UBI, and there is no infrastructure program.  There is a $1200 check, maybe, and a supplement for unemployment benefits through the end of July.  Gig workers … the majority appear to be on their own.  

The FED, like an arsonist, is essentially throwing $4.0 trillion in jet fuel onto the burning inferno that is the moral hazard economy: doubling down, if you will, on the US caste system, the death of the American Dream, near zero social mobility, and catastrophic wage & wealth inequality.  In doing so, like private equity, the FED has mortgaged – to the hilt – future generations’ and the nation’s future.

The lie that these management teams & ownership did nothing to create the circumstances of their own immolation, must come from some alternative Bizarro Universe.  Private equity and moral hazard are both receiving an exceptional bailout with the FED buying up JUNK DEBT…. hundreds of billions of it.  The FED is also issuing loans to overleveraged industries and corporations.  Moreover, per the Washington Post, it appears that the FED and Treasury may agree not to name which companies are on the public dole.  Once again, backstopping bad faith, moral hazard, and theft; and confirming, once again, all great crimes happen under cover of night, or cover provided by an opaque government.  Thanks to the FED, we see that profits are privatized, while losses are transferred from the private sector and placed upon the FED’s balance sheet… the American people’s balance sheet.  As for the overpaid management – that set these companies and industries ablaze – they face zero hardship: not job loss, not nationalization, not even public shares w/in their companies, and they can return to biz as usual (once their public debts are paid, if not sooner). Who knows?  Thanks to congress… this is the largest, most opaque, bailout this country has ever seen.

Thanks to the FED's machinations and a flat yield curve, investors and pension funds – starved for returns – are conveniently herded into a stock market, w/ astronomical - highly speculative/suspect - valuations.  A stock market that has no basis in reality and a very poor foundation, in terms of business fundamentals.  Don’t like the stock market?  Well there’s always alternative investments, w/ the arsonists over at private equity.  How convenient.  (The analogy that financial engineering & private equity were created, & nurtured, like some rogue bioweapon or virus, in some mad banker’s lab holds.)

Moral hazard affirmed by the US congress and the FED once again. The preeminence of the rigged economy, oligarchy, and the private equity model, supported w/ trillions in debt, courtesy of the FED and a complicit congress: confirmed.  The American people, on the other hand, will be facing: an economy that will struggle for many months, if not years, to recover lost ground; diminished benefit & wage prospects, accompanied by possible deflation; zero bound interest returns on their savings; and almost certainly, endless austerity from the federal government. 

How do we end the cycle of catastrophic theft, welfare for plutocrats, and ceaseless austerity for the American people?  Easy, remove any of the excuses the FED has for ultra-accommodative monetary policy: one, write down the national debt, much of it generated bailing out & enriching so-called expert bondholders, management teams, and shareholders; two, democratize the FED; three, limit campaign contributions to public money, only; four, cap the leverage ratio on all businesses, private equity owned or otherwise; and finally, five, outlaw all speculative derivatives and swaps.

By enacting these measures, the moral hazard economy maybe far less exciting… but excitement in times of ever increasing economic & financial crises is overrated.  So is a highly corrupt government and its ownership, oligarchy, backstopped by an unaccountable/undemocratic Federal Reserve.  

It’s time that the predators who run this country actually learn what capitalism is all about.

Copyright JM Hamilton Publishing 2020

Death Panels

Death Panels

“Our civil rights laws protect the equal dignity of every human life from ruthless utilitarianism,” Roger Severino, the office’s director, said in a news release. “Persons with disabilities, with limited English skills and older persons should not be put at the end of the line for health care during emergencies.”

-       U.S. Civil Rights Office Rejects Rationing Medical Care Based on Disability, Age - NY Times

By JM Hamilton (4-4-2020)

Neoliberalism, or market rule, suffered several more body blows this week.  It now appears, that more deadly than the virus itself, is the laissez faire economy that allow companies and corporate C-suite brass to do anything they please.  The coronavirus, an insidious disease, is both a great leveler and revealer of how badly the US economy has been mismanaged by the political duopoly… in the service of a handful of oligarchs & to the complete detriment of nearly half the American population.

Unemployment has soared w/ 6.6 million more Americans cutoff from badly needed wages, in the matter of just one week (this comes at a time when 40% of American can’t meet a $400 emergency payment), and some economists now expect that unemployment may actually exceed Great Depression levels. Retail, restaurants and hospitality have all taken significant hits, as the entire economy suffers cascading effects from the virus & self-inflicted neoliberal/globalist economic policies.

Notably, in response to the economic pandemic created by our neoliberal economy’s inability to suffer a crisis of this magnitude, Congress - and The Federal Reserve (FED) - stepped in to bailout the usual suspects (once again):  Banks, Billionaires, Multinationals, Private Equity businesses that thrive off debt, and of course, US Healthcare.  More specifically, Congress passed a CARES Act worth $2.3 trillion, all of it financed, and the FED will be adding another $4.0 trillion in debt to the $2.3 trillion figure.  The average American can expect to see a onetime payment of $1200, whereas Wall Street can expect the FED to ride to its rescue w/ approximately $4.4 trillion (w/ little or no oversight… it’s 2008 all over again, only worse). Increasingly, we are told, by the Wall Street cognoscenti, w/ the neoliberal economy crashing down all around us, that we are not, repeat “not,” in another financial crisis.  Those assurances are falling on incredulous ears w/ the FED rolling out program after program to salvage Wall St, stock, repo, corporate debt, commercial/residential mortgages, and small business lending markets.

The private equity/financial engineering model is now so pervasive, w/in the American economy, that debt and leverage has left few mid-sized & large companies able to withstand the crisis, w/out welfare from the FED and the federal government. That is to say, management & ownership set many of these companies up for failure – w/ leveraged buyouts, mergers, stock buybacks, & financed dividends.  A fact that often seems omitted from the financial press and the MSM.

But perhaps no industry – and there are many standouts – represents the gross corruption, cronyism, and ineptitude of the neoliberal economy better than the healthcare industry.  The US Healthcare industry is a disaster, and is not only dangerous to their employees -- the brave women and men who serve on the front lines of the pandemic -- but it’s a threat to Americans and the American economy (like a vampire, sucking out approximately double the GDP, as nearly all other Western democracies, or close to 20%).

Some of the middlemen, the healthcare insurers, know they are in trouble, and we can see this firsthand by their sudden willingness to wave copays and deductibles, in the treatment of the coronavirus.  Quite the humanitarians?  Meanwhile, while many blame the federal government for the failure to plan and warn for the raging pandemic (and the congress and executive branch certainly share in that blame)… few w/in government & journalism are asking why the private sector didn’t have appropriate stockpiles available for an entirely foreseeable event?  Can you say, “shareholder litigation?”

And now the failure to plan – or fiduciary irresponsibility, simple negligence, & professional incompetence - is leading to the very real prospect that the US healthcare industry will have to institute death panels.  Death panels are where administrative and professional healthcare staff will make life or death decisions as who, and who will not, receive lifesaving care.  

Such irony, Republicans used to argue that socialized medicine would lead to shortages of care and death panels, but nope, it’s the for-profit – debt & greed soaked – US healthcare system that will, likely, be instituting death panels (if they are not already in place w/in viral hotspots).

At this point, Americans should ask why they are paying double, in GDP, for a healthcare system that is collapsing and failing to provide them care, in the middle of a life & death crisis?  Why does this same industry engage in shock & awe billing, and why is healthcare the leading cause of personal bankruptcy?

Moreover, much of our for-profit - inveterate - healthcare system is addicted to government welfare, at the same time it reports out tens of billions in profits. 

Consider:

Medicare;

Medicaid;

Medicare, Part D (Big Pharma welfare);

The ACA (Corporate welfare defined);

$100 Billion in Hospital subsidies, courtesy of the freshly minted CARES Act.

(The US healthcare model is so irrevocably dangerous - placing profits before the health of the American people and the US economy - that the POTUS had to utilize the Defense Production Act just to get US multinationals off their hind quarters and producing critical lifesaving machinery, such as ventilators.) 

In short, the entire for-profit healthcare industry is backstopped by government (like every other too big to fail multinational w/in the US economy). A federal government that operates w/ both arms tied behind its back, in that it forgoes nearly all powers that would allow it to curtail & mitigate excessive profit taking by the healthcare & Big Pharma industries.  And that's exactly what makes the aforementioned government programs corporate welfare. 

Our elected leaders' campaign coffers, from both parties, grow wealthy from healthcare industry donations and the whole death dealing cycle repeats.

Meanwhile, here again, is an industry, loaded w/ middlemen and overhead, that privatizes profits, while socializing losses (for greed, gross incompetence, and failure).

None of this is directed at the brave healthcare women and men, who are putting their lives, and their families’ lives, on the line, as they selflessly fight a war against an invisible & silent killer. All of this piece is aimed at the billionaires, healthcare multinational executives, and Wall Street financiers & fund managers, who insist upon maintaining a broken healthcare system for their own personal profit. 

A healthcare system that is essentially a death panel for the American people & the US economy.  Unfortunately, the United States is well past sixty-five years of age, and we appear to have many self-inflicted wounds... not the least of which are globalism, imperialism, and neoliberalism.

Copyright JM Hamilton Publishing 2020

On the Corner of Serfdom & Wall Street: We’ve Arrived

On the Corner of Serfdom & Wall Street: We’ve Arrived

Or, as he (Hayek) put it later, in even stronger terms: "the history of government management of money has, except for a few happy periods, been one of incessant fraud and deception." The institutional reform which he espoused to tackle this problem was indeed radical. It involved, as we have seen, the denationalisation of money to be achieved by the complete abolition of the government's monopoly over the issue of fiat money leaving the way open for supply of money to be determined by comprehensive private sector competition.

-      Speech by Professor Otmar Issing, Annual Hayek Memorial Lecture hosted by the Institute of Economics affairs, London, 27 May 1999

By JM Hamilton (3-21-2020)

Before there was Ronald Reagan, there was Friedrich Hayek.  Mr. Hayek, came from the Austrian school of economics, and he was a free market advocate and a libertarian. Hayek was or became, perhaps, the Ayn Rand of his day.  His seminal work – The Road to Serfdom - was published in 1944 and the classic helped shape economics into the present day.  Perhaps the only other economist as influential & profound as Hayek was Keynes. Hayek – like many of us – was emotionally and intellectually influenced by the events of his times, when he saw the rise of totalitarian regimes around the globe, from Nazi Germany to the Soviet Union.

I bring up Hayek because it seems that the United States, indeed much of the “free world,” has arrived at the very serfdom the famous economist worried about (i.e. indentured servitude and slavery).  In The Road to Serfdom, Mr. Hayek felt that socialism, in extremis, was incompatible with both democracy and freedom.  And we know that to be true, by way of Nazi Germany & the USSR, but what Hayek couldn’t or didn’t foresee (or simply failed to acknowledge) was that capitalism - in the extreme - is just as incompatible with democracy and freedom. 

Some of the things Hayek worried about in his book, were:  tyranny comes from a centrally planned economy; tyranny comes from concentrated – economic & political - power placed into the hands of a few; and totalitarian regimes are incompatible with democracy, free expression, and a free press.  Hayek, if my read is correct, seemed to think in binary terms, there was either exceptional freedom and capitalism or there was socialism that rode a slippery slope into hell, a centrally planned economy and slavery.  Mr. Hayek can be forgiven for his polarized thinking, having survived the twin catastrophes of the twentieth century, two World Wars.

To his credit, Hayek celebrated equality through liberty, and he believed the only way to improve the world was to increase the level of wealth. He also had a strong belief that a functioning capitalist system had to have strong competition.  Competition is the checks and balances in the capitalist system, that prevents cartels and monopoly from occurring.

That said, look around us today, and we see in the West – especially, the United States – many of the concerns Hayek worried about have come to life under capitalism’s most reactionary model.  The state has married up with cartels and monopolies, placing economic and political power into the hands of an elite few.  The Western economy – to a very large degree – is planned, in that chosen and favored industries are authorized to merge into monopoly, often w/out question & even less oversight.  Moreover, these same industries receive bailouts and welfare, from a captured government, in times of need--- while profits are privatized.  (See Wall Street and the financial services industry in particular, as well as, the fossil fuels industry.)  Powerful billionaires have taken over the government, own the political duopoly, and the mainstream news organization… ensuring that the neoliberal & globalist narrative are presumed to be the only answer.  Group think w/in the intelligentsia abounds, thanks in large part of billionaire capture & donations to higher education.

In short, the tyranny of communism, Hayek’s fear, has been replaced by the tyranny of markets.  That's right, markets and the profit motive -- which are unable to plan beyond the next quarterly statement and are often paralyzed & unresponsive in times of crisis -- dictate our daily lives.  Meanwhile, labor has been crushed under the boot heals of the financial elite, leading to catastrophic wage & wealth inequality.  The level of wealth produced – in both the real and financial economies – has grown stratospherically (non-productive debt has fueled much of this heist, in yet another transfer of wealth from the government to C-Suites and shareholders), but it has led to less freedom, greater oppression, and oligarchy.  Half the US population lives hand to mouth and between 20 to 25% of American children live in poverty. 

We’ve arrived at serfdom all right, but by means of a slippery slope from crony capitalism right into hell on this earth, plutocratic rule & tyranny. 

The cornerstone of the company store, the sharecropper model, indentured servitude, and serfdom is debt.  And debt often leads to slavery, especially when used against the powerless, as our founding fathers were so keenly aware.  In the United States, catastrophic national debt has grown from less than ten trillion dollars, as recently 2008 (on the eve of financial crisis) to approximately $23 trillion today (on the eve of a pandemic that is likely to create yet another financial crisis).  And the starting point for the latest round of bailouts appears to be two trillion dollars (w/ countless more trillions gifted by the Federal Reserve).  This means that if the pandemic goes on, as long as the 1918 Spanish flu, the debt will begin to increase at a considerably more rapid pace.  To the present American government’s credit, this time the bailout package will include aid for the working poor and greater social spending.

But it’s very important to take precise note of exactly what catastrophic debt has done, as a prelude to crisis: its turned entire industries into rent seeking utilities; the financial engineering/private equity model is now so prevalent that it won’t be just financial services requiring bailouts but entire swaths of the US economy (see C-Suite executives in the airline industry); the highly unique, and often indebted, for-profit, US healthcare model is, predictably, under tremendous strain and may collapse.  That is to say, with the advent of an entirely foreseeable pandemic, the American medical model is about to ration care and deliberate as to who will live and who will die (that’s if there are any doctors left to make these decisions).  Professionals plan for the worst and hope for the best; but the for-profit healthcare model appears to insist upon the rosiest of scenarios, sometimes w/ highly deleterious & deadly outcomes.

By way of quick digression, it’s worth noting that the NY Times had an outstanding piece on the trials Italy faces, as the beating heart of the plague w/in Europe.  What this same piece did not mention, however, is that a major reason Italy remained open for business for so long, when all forbearance and prudence required closing the country down… Italy is the most heavily indebted country in the EU (aside from Greece).  In short, Italian politicians chose the economy and markets over the health of its citizens, mainly because the country is so heavily indebted.  The country can ill afford to shut down.  And Italy’s healthcare system, in large part due to catastrophic debt, is about to fall. 

Debt is a hell of a drug… it makes nation states do things that they wouldn’t normally do.  Here again, in the US, the Senate played down the pandemic for weeks, apparently, so that stock trades could be executed before the crash.  The executive branch bears responsibility, in this regard, too.  The POTUS did himself no favors by linking the success of his administration to a stock market that has taken some serious hits, in viral pandemic's wake.  (Maybe, going forward, the president should tie his success to labor's living standards?)  And, as mentioned above, the US airline industry is already attempting to stampede congress into a multibillion-dollar bailout, after years of looting cashflow and balance sheets for billions in dividends and stock buybacks.

All this and the full force of the pandemic has yet to be felt, and what Warren Buffett once called, financial weapons of mass destruction – derivatives & swaps, have yet to be triggered (at least to the public's knowledge). 

Its time ask ourselves exactly why America is no longer the land of the free, but rather, the land of the disenfranchised and the home of the indentured and enslaved.  It’s time to ask ourselves the role the Federal Reserve plays in enabling the debt driven economy, massive equity bubbles, and why their solution to every crisis is to print more and more debt…instead of writing down debt that, clearly, will never be repaid.  The writing down of debt, gradually & methodically, preferably coordinated w/ other central banks, would defuse an increasingly probable financial apocalypse on a global scale.

Beyond this, Hayek was right… extreme communism is bad news.  And we now know extreme capitalism is also bad news, along w/ catastrophic debt. Somewhere in the middle falls the mixed economy (see the Scandinavian model, by way of example), with countless combinations and variations between capitalism and socialism, that provides the equality, freedom, liberty and social harmony that the majority of rational adults would gladly trade in for the place we are in today.  

The world is not binary.  Thank the Goddess above for that.  

America will survive this crisis.  The key question is what kind of world do we want to live in and bequeath future generations?  If we don’t learn from past mistakes, and act upon those lessons, then maybe we all deserve to be at the corner of Serfdom and Wall Street.

Copyright JM Hamilton Publishing 2020

Note:  There is a great deal of debate as to whether or not the economy of Nazi Germany was in fact socialist.  There is little doubt that Hitler made alliance with German industrialists, during his rise to power and while in power. But Nazi Germany had key elements of a command economy – often associated w/ 20^th Century Communist regimes – as Hitler realigned & focused the German economy on war time production.  There was also little doubt that Hitler fostered and encouraged a cult of personality, again often associated w/ authoritarian and totalitarian regimes in the 20^th Century.  Finally, Hitler encouraged monopoly and cartel within German industry, what the JMH blog has frequently called, “socialism by private proxy.” Hayek did feel that Nazi Germany was socialist.  Germany had extreme nationalism, often associated with authoritarian and fascist regimes. 

Nazi Germany socialist or capitalist, totalitarian or authoritarian, you make the call.  We can all agree Hitler twisted the darkest aspects of dictatorship, socialism, and capitalism to its very worst end.  Hitler was evil incarnate.

Another Black Hole in the US Healthcare Model: Workers' Compensation Insurance

Another Black Hole in the US Healthcare Model: Workers' Compensation Insurance  

By JM Hamilton (3-8-2019)

As part of JMH’s ongoing series on the failed US Healthcare system, this week we tackle an often overlooked, little discussed, corner of the US Healthcare system, Workers’ Compensation insurance (or WC, a fifty-five billion dollar market).

First a little background:  WC insurance schemes are designed to protect labor from workplace disease and injury, but in the event of either occurrence, WC provides medical care for injured employees, and compensation for lost wages & even untimely demise.  Generally, WC coverage is designed to be no fault, that is to say, provide exclusive remedy (to protect employers from litigation). 

WC coverage – both private and public – began with labor movements from the late 19^thand early 20^th centuries, due to chronic labor abuse by ownership.  Reform started in Europe and spread to North America. Two systems, initially, were derived:  A German model characterized by considerable centralized control; nonprofit associations administering benefits and claims, which employers contributed to; and a no-fault compulsory system broadly applied to all classes of labor. The British model, initially, was characterized by WC being elective; insurance provided by private carriers; and the administration of benefits was adversarial and litigated in the courts.

Today, in the US, federal workers are covered under a system resembling the German model w/ monopolistic coverage provided by the government… whereas, American non-federal government employees (i.e. private sector employees) fall under the auspices of fifty different state insurance bureaus & regulatory bodies (w/ widely varying benefits and laws). There is no federal control over WC coverage presently, beyond US federal workers and certain classes of employees (i.e. mine workers, maritime workers, et al.).

As the US system today all too often fails in its ability to cover injured workers’ medical expense and indemnification of lost wages (especially for serious disability & injury), the federal government often must step in to provide backstop and support, via Social Security benefits (see SSI and SSDI) and Medicare/Medicaid.  Similarly, in Europe, today, many countries have a monopolistic system (sometimes with private insurer involvement, but generally run by the state) that folds WC benefits directly, and indirectly, into relatively generous social programs. 

So here again, as mentioned in my recent piece, Storm Clouds Over US Healthcare, we have the American public – more specifically, labor – facing off against a large number of powerful special interests that have little or no desire to see true reform for WC coverage & injured worker care.   

Among these special interests:

WC Insurance companies;

Doctors;

Big Pharma; 

Pharmacies; 

Hospital chains;

Lawyers (who make considerable income off WC and employers’ liability litigation);

And US federal & state government politicians (who enjoy campaign, lobbying, and PAC largesse from the aforementioned interests).

No wonder then that there is little in the way of federal level reform of a WC system that has failed American labor and the US economy. The fallout from the lack of sustained and substantive WC reform – by the Federal government - has led to micro and macro repercussions for Americans and the US economy. (None of this should surprise anyone at a time that the US government has consistently sided w/ billionaires & multinationals in labor and labor rights evisceration.)

We’ve seen an opioid epidemic and the US WC system played no small role in the administration of pain killers, like Purdue Pharma’s now infamous & deadly OxyContin.  We’ve seen a rise in “deaths of despair” among blue collar workers, left behind by AI, automation, globalization and uncertainty surrounding a Silicon Valley creation, The Gig Economy.  

Spiraling US medical costs and the resulting increase in WC costs & premiums (WC insurance is often one of the largest expenses American employers face, outside of labor cost) have played a role in US manufacturing, and employers in general, seeking out labor in emerging market countries.  Rising WC premiums - and the lack of reform – have also helped drive the move to the outsourcing of labor, domestically, to the aforementioned Gig Economy and to third parties, Temp Agencies and Professional Employer Organizations (PEO).  All of which are designed, in the majority of instances, to sidestep (or significantly mitigate) Workers’ Compensation premium and expense, as well as, the requirement to maintain a safe work environment.  Safety can be expensive.

As for the nation – at a macro level - a defective, dysfunctional, and very expensive Healthcare and WC system means US goods and services can be uncompetitive in the global economy, which contributes to escalating trade deficits. (This in turn leads to more automation, globalization, outsourcing of labor… along w/ the attendant hollowing out of the middle class.) Remember, US healthcare now eats away at nearly 20% of US GDP.  Of course, not all of this can be laid at Workers’ Compensation insurance’s doorstep … some of the aforementioned economic trends (like outsourcing and globalization) can be directly attributed to greed.  

Apple is the classic example of a US multinational exploiting Chinese labor, often supplied by a third-party company, Foxconn.  However, Apple could still make an extravagant profit markup on the iPhone, utilizing American labor.  

Either way, once again, we see multivariate layers of administrative costs and expense, due to redundant medical care, various insurance schemes, and two healthcare programs: one for Health insurance and a second for Workers’ Compensation medical coverage. In addition, there exists today, in America, private and public versions of each, Healthcare and WC coverage.  Tack on WC litigation and it’s a very expensive mess, and a barrier to entry to creating a business. 

We can also see a lack of interest or will from the political duopoly, owned by the aforementioned powerful special interests – including Wall St., to do anything about our broken Healthcare and WC systems.  

The solution is simple: a consolidated Healthcare plan under the US government, for Healthcare and WC medical coverage, combined.  The economies of scale of a Medicare For All model – particularly if the government is finally allowed to negotiate on the behalf of the American people against the aforementioned special interests – should save the economy, employers, investors, and American labor & taxpayer considerable sums (vis a vis the current system). Additionally, American labor would likely become more competitive, versus global competition.

Not to place too fine a point on it, in order for a consolidated Medicare for All program to succeed, inclusive of WC medical coverage, the government must be allowed to negotiate against special interests.  And where the private sector refuses to respond, the government must step in to provide competition. Given the arrogance & greed surrounding Big Pharma, at some point the US government may have to get into the medicine manufacturing business, so as to achieve its mandate.

A failed ACA program has clearly demonstrated that costs only escalate higher, if the government allows healthcare monopolies and special interests to run roughshod over the American consumer, labor, and taxpayer.

Copyright JM Hamilton Publishing 2020