With James M. Stone, Author of 5 Easy Theses, Founder and CEO of Plymouth Rock Assurance Corp., Former Massachusetts Insurance Commissioner
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Since we’re in a Presidential campaign cycle, the problems and challenges of our country are front and center, and we’re continually bombarded by rhetoric from all sides on how to fix what ails us.
James M. Stone, CEO of Plymouth Rock Assurance Corp, former Massachusetts Insurance Commissioner from 1975 to 1979 and then Chairman and Commissioner of the US Commodities Futures Trading Commission, has written a book called Five Easy Theses: Commonsense Solutions to America’s Greatest Economic Challenges, in which he addresses matters of public policy regarding healthcare, education, inequality, and social security—those issues that concern all of us.
Jim states at the outset that there are other matters of equal value, both on a national and international level, and he doesn’t assume to have easy answers across that vast spectrum. The book, instead, focuses on the areas within his level of expertise.
There are two types of federal policies steering the economy, explains Jim: one is the monetary policy resulting from the action of the Federal Reserve’s manipulating interest rates and the money supply; the other is the fiscal policy that is the product of government spending managed by Congress, which is at the core of Jim’s message.
Jim believes that the problems around social security have got to be considered sooner rather than later, and the simple solution, as he sees it, is to begin raising the eligibility age now before we arrive at the critical stage. To use his metaphor, “Now we’re a speeding car heading toward a brick wall.” At the inception of Social Security, life expectancy in the United States was only in the 60s, whereas since then, it’s risen dramatically and is expected to keep on rising. We’re a much younger older population.
Regarding the high cost of our healthcare, Jim’s first line of attack is to lower the cost of pharmaceuticals. He makes the alarming statement that “no other developed nation in the world spends more than about 10% of GNP on healthcare. We spend 18%. That’s more than a trillion a year… and we are not able to show that we get better infant mortality, better life expectancy, better healthy lifespan, better obesity. We don’t get better anything, but we spend over a trillion dollars a year more than we have to.”
Part of his answer to this problem is to shorten the time span on the patents for these drugs but to have the rest of the world who benefit from our research share in the cost. At the moment, the US shoulders most of that burden.
Right now the overall insanely high cost of healthcare is affected by the enormous amount of paperwork required for different insurers and different programs, as well as sales costs for marketing, which could be greatly reduced if the government were to act as administrator, thereby eliminating much of the paperwork. He cites the statistic that 20% of all healthcare dollars is spent on marketing and administration; most other nations spend 2 or 3%.
Other changes Jim proposes are eliminating many of the subsidies as well as interest deductions. “If you add up what the home mortgage deduction and the corporate interest deduction costs, it’s just about equal to the whole deficit.”
When Jim discusses income inequality, he says that “wealth inequality is much more unfairly distributed than income. The wealth numbers are really striking. It appears that in the last 40 years, the United States created more wealth than any other country in the history of the world in that time period and all of it went to the top decile, and wealth is more important than income.” To avoid this, Jim suggests taxing unrealized gains, which he admits is a big leap, but he supports this thesis by saying:
“If you don’t want all the wealth to go to a very small percentage of the population, you either have to tax it as it is being accumulated or at death, and I’m in favor of trying to do both because I really believe that what made America a great country was social mobility, the ability to have a strong middle class and if all the money flows to the top, we won’t have those things”
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Steve Pomeranz: Jim Stone has served as Massachusetts Insurance Commissioner from 1975 to 1979 and then as Chairman and Commissioner of the US Commodities Futures Trading Commission for four years. He’s currently the Founder, Chairman, and CEO of the Plymouth Rock group of companies and Mr. Stone is the author of Five Easy Theses: Common Sense Solutions to America’s Greatest Economic Challenges and he joins me today to discuss his book and the upcoming election. Hey, Jim, welcome to the show.
Jim Stone: Well, thank you very much. It’s good to be with you.
Steve Pomeranz: Your five easy theses address number one, fiscal responsibility or fiscal balance, the inequality that we’re seeing today, healthcare, education, and financial sector reform and these are, in your view, the most pressing issues facing our country today. Let’s begin with fiscal policy and, just before I ask the first question, let me describe or defined fiscal, the word “fiscal” here. So there are two types of federal policy aimed at steering the economy one way or the other. The first is monetary policy which is the result of the Federal Reserve’s action manipulating interest rates or the money supply and then there’s fiscal policy which is really the product of governmental spending managed by Congress. Jim, you write about fiscal balance as one of those five most pressing issues. Is addressing the deficit part of this fiscal balance you’re speaking of?
Jim Stone: Absolutely. In fact, that’s really the core of what I have to say but if I may interject something.
Steve Pomeranz: Please do.
Jim Stone: I didn’t really want people to come away thinking these are the five most important issues of all because there are foreign policy issues that I’m not expert in that are also really important and there are some domestic issues that are really important, but I don’t have answers to, some environmental issues, in particular. These are five that are, I would say, in the top 10 but they’re five that have answers. That’s why I call the book Five Easy Theses. I could write a book called Five Difficult Theses, but it would have any answers.
Steve Pomeranz: I got you, so this is the stuff that’s in your wheelhouse. This is the stuff you’ve been thinking about, you’ve been researching so let’s talk about the deficit as the first fiscal priority.
Jim Stone: Sure.
Steve Pomeranz: Go ahead.
Jim Stone: There are really two kinds of deficits. There’s a short-term one which is the one that everybody looks at. That’s the one that adds to the national debt and that’s the one that we call the deficit and then there’s kind of a long-term one in the sense that it’s going to be really expensive to meet what we promised seniors and we haven’t provided for it. Social Security really needs mending, so those have different kinds of answers in my opinion. As you said, the deficit is a matter of how much Congress appropriates and how much it taxes and how those two match up.
My argument here is that there’s a lot of attention to spending and spending cuts, a lot of it. Appropriations get scrutinized, but what doesn’t get scrutinized is all the tax breaks we give and we give tax breaks … There were tobacco subsidies until recently. There’s subsidies for life insurances, there’s subsidies for oil drilling, but the ones that I concentrate on because they are, in fact, popular, but I think misplaced in judgment are the interest deductions.
Steve Pomeranz: Why do you say that? How much of the, how much effect will an elimination of getting a deduction on the interest on your mortgage or corporations being able to deduct the interest on their loans, is that really going to make a dent?
Jim Stone: That’s the perfect setup question because if you add up what the home mortgage deduction and the corporate interest deduction costs, it’s just about equal to the whole deficit.
Steve Pomeranz: Wow.
Jim Stone: If we got rid of those two things, we would not be running deficits and they’re not valuable. The home mortgage interest deduction is loathed and people are really happy to have it, but the truth is, it doesn’t help the whole bottom third of the population because they’re renters. It doesn’t help the next third because you have to itemize deductions and the next third doesn’t itemize deductions. So it only helps the top third and it helps them in proportion to how big a house they have. We’re moving money from less prosperous people to more prosperous people. That’s kind of dumb.
Steve Pomeranz: Other countries have eliminated the interest tax deduction too-
Jim Stone: That’s right.
Steve Pomeranz: I don’t think it’s really been much of a problem for that. You talked about these short-term deficits versus the long-term ideal or the long-term IOUs that we’re adopting for ourselves. Well, federal spending, according to your writing, is three-quarters for defense, the elderly, which I guess you’re talking about Medicare and Social Security and debt service. Let’s take a look at that third rail, that’s Social Security’s entitlement and so on.
Jim Stone: Yeah.
Steve Pomeranz: Are the candidates addressing that issue. How are they addressing that issue?
Jim Stone: In general, I would say that the Secretary Clinton has not wanted to address issues where you’re taking away any kind of benefit. She may have to do that as President, but during the campaign, she’s not said anything like that, and Mr. Trump has suggested cutting taxes for the wealthy which I think is probably going in the wrong direction. It would increase the deficit.
Steve Pomeranz: Well, the cutting taxes for the wealthy, he’s come up with three basic tax rates and also some benefits. I think he just wants to cut taxes overall, but, of course, since the wealthy pay most of the taxes, it will have the greatest benefit to them, but what is he saying about Social Security, anything in particular?
Jim Stone: Yeah. I think neither candidate has taken on the Social Security issue and maybe I don’t blame them during a campaign.
Steve Pomeranz: Yeah, I wouldn’t do that either-
Jim Stone: But one of them is going to be president, and I certainly would want them to do it then.
Steve Pomeranz: What are some of the cures for this tremendous entitlement program that everybody values so much?
Jim Stone: Well, it has a simple solution. It’s just a piece of medicine that nobody wants to take and that is that, at the time Social Security was created and they debated what the eligibility retirement age should be, they came up with 65 but the fact is, people only lived into their 60s then. Now the average person lives to be about 80 and if we make progress in solving cancer, people will live routinely to be 90. We just can’t afford to pay for people for that long under the current structure, and so I think that inevitably we’re going to be raising the eligibility age and the sooner we do it, the more gently we can do it, but the fact is 65 isn’t what it used to be and so we’re going to have to do that.
The metaphor I use is, “Now we’re a speeding car headed towards a brick wall,” and my friends in Congress tell me, “Until people panic and realize the wall is right ahead of them, nobody’s going to want to fix it,” and I say, “Yeah. Well, then it’s going to hurt,” but if we fix it now, it’s not going to hurt much.
Steve Pomeranz: Well, the red light always gets put in at the intersection after there’s terrible accidents and some deaths. They never put it in at these terrible intersections beforehand to prevent them, and I think Congress is the exact same way. They’re going to be pushed up against the wall before they make any changes. Now, there have been some changes made. The average, the age where you can collect social security has been rising from years ago. It has risen, I should say, but do you think it should rise more?
Jim Stone: Yes, it was adjusted up once, but not anything like-
Steve Pomeranz: Well, what do you think it should be?
Jim Stone: What the difference is … Oh, I think the Social Security trust fund trustees laid out pretty well about what it ought to be, that it’s got to gradually rise about five years, but gradually rise another five years, but if we make huge progress in extending average life expectancy, then it has to rise more because they didn’t take into account the fact that people may live far longer than the mortality tables show today.
Steve Pomeranz: My guest is Jim Stone. He is the author of Five Easy Theses, I guess a play on Five Easy Pieces, right?
Jim Stone: It is. It is.
Steve Pomeranz: Common sense solutions to America’s greatest economic challenges, we’ve been talking about the budget deficit. Let’s move to healthcare because healthcare is on everybody’s mind. There’s a lot of issues around, especially these days, because I think of the election, pharmaceutical, drugs, and the rising cost of pharmaceuticals, which is real by the way, but let’s talk about what the candidates want. What is Hillary proposing and what is Trump proposing with regards to healthcare?
Jim Stone: Well, both of them have said something that is constructive. I think they mean it, but I don’t know whether Congress will go along. We are probably the only country in the world that seems to have as its policy to make pharmaceutical prices as high as possible instead of as low as possible and both candidates have suggested that they would allow the government to use its purchasing power to push down pharmaceutical costs. That would be a really good thing to do because that’s one of the four or five things that causes us to way overspend on healthcare.
Let me just in one sentence tell you that no other developed nation in the world spends more than about 10% of GNP on healthcare. We spend 18%. That’s more than a trillion a year and we don’t need to spend it because we don’t get any better results. We are not able to show that we get better infant mortality, better life expectancy, better healthy lifespan, better obesity. We don’t get better anything, but we spend over a trillion dollars a year more than we have to.
Steve Pomeranz: I think a piece of it…I think one of the-
Jim Stone: Pharmaceuticals are a big piece of it.
Steve Pomeranz: I think one of the worries is that if you take away the incentive, the profit incentive from drug companies, then you take away a lot of the impetus that has created amazing drugs that are curing people, keeping people alive. You said that there’s a possible cure for many cancers coming our way very soon. These drug companies have the profit motive, they have the capital because of shareholders. If you go into a system where you’re now controlling prices, you’re really in a sense creating them, putting them, making them a utility, and I just wonder if we’re going to lose some of this miraculous stuff.
Jim Stone: You don’t have to go that far. Using the purchasing power is something that every other developed nation does as a practical matter in the area that you’re talking about. We are paying for the research that benefits every other developed country, so we are paying for the research that benefits China. We’re paying for the research that benefits Europe and those costs ought to be shared. We don’t have to have patents run as long as they do. It’s not that we ought to go all the way in the other direction, it’s that we’ve gone much too far in the direction of encouraging high pharma prices.
Steve Pomeranz: Now Jim, you take a pretty radical position when you say that you think that we should be under a single payer system and truly a nationalized health program. I know that a lot of people would applaud that, other people would really decry that. Can you explain your reasoning for that?
Jim Stone: Sure, but it’s probably not as radical as it might sound the way you’ve summarized it because I’m not suggesting that the government supply healthcare. I don’t want the government to take over healthcare. What I want the government to do is to administer it so that there aren’t different kinds of paperwork for every different insurer and every different program. I don’t want there to be sales costs. We spend 20% of all the healthcare dollars on marketing and administration. Other nations spend 2 or 3%. That’s what Medicare costs, 2%. Social Security costs 1%. It’s not medical, but we don’t have to spend this 20% to have different forms and advertisements and all these things that cost money that aren’t providing better health. That’s all I want to centralize, not the provision of healthcare.
Steve Pomeranz: Okay. Well, that’s a pretty big difference in what I was saying initially, so good, I’m glad you explained that. Let’s talk about income inequality because you make some interesting points.
Jim Stone: Sure.
Steve Pomeranz: First of all, the basic discussion today is that the fruits of our recent economic growth have virtually all been taken up by the top .1% of the population, but you say really the inequality isn’t income inequality. It’s asset inequality. Can you explain that?
Jim Stone: Sure. Wealth inequality is much more unfairly distributed than income. The wealth numbers are really striking. It really appears that in the last 40 years, the United States created more wealth than any other country in the history of the world in that time period and all of it went to the top decile and wealth is more important than income. I think that until we do something about that, we are running the danger that we’re doing exactly what the founding fathers would not have wanted us to do. You’ve got to be very wary when anyone tries to channel the founding fathers, but I’m going to do that anyway. I’m going to do it anyway and say I know they didn’t want a hereditary aristocracy and that’s what you get if all the wealth is in a couple of percentile.
Steve Pomeranz: Okay, so what you’re suggesting, and I’m sorry to use this word “radical” again, but this sounds radical to me. You want to tax or you believe it would be proper to tax unrealized gains. Now, just for my listener’s sake, when you buy some, when you buy a stock for $10 and you sell it and you hold it and it goes to 15, you don’t have to pay taxes until you sell it. Selling it would be a realized capital gain. An unrealized gain means that somehow you are going to be taxed from it, even when you haven’t made a transaction. How does that work?
Jim Stone: Yeah. A number countries do it, and it is in some sense a big leap and so the word “radical” fits better there than when we were talking about healthcare, but I would say that the income tax seemed like a big leap at the time and now people are used to the concept. If you don’t want all the wealth to go to a very small percentage of the population, you either have to tax it as it is being accumulated or at death, and I’m in favor of trying to do both because I really believe that what made America a great country was social mobility, the ability to have a strong middle class and if all the money flows to the top, we won’t have those things.
Steve Pomeranz: There is an argument and I think it’s a reasonable argument that states that the inheritance tax itself is a double tax. You pay taxes on your money as you’re earning it, as you’re saving it and even in tax-deferred accounts like IRAs that you’re required to distribute it and pay taxes, so you’ve already paid the tax on that money and then at death, you’re paying the tax once again. What is your argument against that idea?
Jim Stone: Sure. That’s a pretty simple argument. If the tax rate was high enough the first time you pay, you don’t need to tax a second time, but if you have lower tax rates in the beginning and you still see wealth accumulated to the point that we’re going to be rewarding bloodlines instead of merit, well, then you’ve got to tax again. While in a perfect world, you don’t ever want a double tax, it’s better than having a financial aristocracy.
Steve Pomeranz: My guest, Jim Stone, the book is Five Easy These: Comments and Solutions To America’s Greatest Economic Challenges. I definitely recommend this book for all of us to get a very good idea of what the common challenges are that we all face and some pretty reasonable solutions. Jim, thank you so much for joining us.
Jim Stone: I enjoyed being with you. Thanks.