Why the health care “Public Option” will destroy private health insurance

“An important question about any public provider of health insurance is whether it would have access to taxpayer funds. If not, the public plan would have to stand on its own financially, as private plans do, covering all expenses with premiums from those who signed up for it.

But if such a plan were desirable and feasible, nothing would stop someone from setting it up right now. In essence, a public plan without taxpayer support would be yet another nonprofit company offering health insurance. The fundamental viability of the enterprise does not depend on whether the employees are called “nonprofit administrators” or “civil servants.”

In practice, however, if a public option is available, it will probably enjoy taxpayer subsidies.
...
Such explicit or implicit subsidies would prevent a public plan from providing honest competition for private suppliers of health insurance. Instead, the public plan would likely undercut private firms and get an undue share of the market.
...
A dominant government insurer, however, could potentially keep costs down by squeezing the suppliers of health care. This cost control works not by fostering honest competition but by thwarting it.

Recall a basic lesson of economics: A market participant with a dominant position can influence prices in a way that a small, competitive player cannot. A monopoly — a seller without competitors — can profitably raise the price of its product above the competitive level by reducing the quantity it supplies to the market. Similarly, a monopsony — a buyer without competitors — can reduce the price it pays below the competitive level by reducing the quantity it demands.

This lesson applies directly to the market for health care. If the government has a dominant role in buying the services of doctors and other health care providers, it can force prices down. Once the government is virtually the only game in town, health care providers will have little choice but to take whatever they can get. It is no wonder that the American Medical Association opposes the public option.”

By N. Gregory Mankiw, “The Pitfalls of the Public Option”, The New York Times (27 June 2009).

http://www.nytimes.com/2009/06/28/business/economy/28view.html?_r=1&ref=business

N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush.

As Professor Mankiw points out, there is no purpose in having a public health care insurance option if all it is going to do is provide the same services as a regular provider in the market. Currently there are hundreds of health care insurance providers and adding one more competing under the same terms as the others will do nothing to affect the market in any fundamental way. If the “public option” were to have any influence, it would have to be subsidized and in the end it would undermine current providers.

One can conclude from this that the real intention of the government is to slowly but surely crowd out private health care insurers and move the country toward a “single payer” government monopoly of health care services in the U.S. It can’t introduce a single payer system instantly but over time as the infrastructure for a government monopoly is put in place, the proposed health care insurance cartel now under discussion will morph into a single-payer, universal health care delivery system.

If it is to work, a single payer system must be at once both a monopoly provider of health care and a monopsony purchaser of health care resources. There can be no middle ground for the forces at work necessitate an eventual government monopoly of services supplied and monopsony of resources demand.

In the beginning the reforms now under discussion will encompass only a fraction of the population, but it is the expensive fraction of households and individuals with pre-existing conditions and poorer health status. In order to control costs effectively it will be necessary for the government’s health care cartel to pay fees as low as possible to health care providers such as doctors, nurses and other medical practitioners and limit the provision of services and the quality of care provided. If it does not, it will not be able to compete with other health insurance providers, who serve healthier segments of the population such as those who are employed. But lower fees will only buy inferior resources and cost-cutting will lower the quality of care.

In response, a two-tier system can be expected to develop, with higher income households opting for private health care insurance and private health care delivery. Initially, these households will pay the extra taxes on the private plans and on top of that pay higher fees to obtain the quality of care they desire, much the same way that “free” but lower quality public schools can exist side-by-side with expensive, higher quality private schools. But this situation cannot continue over the longer-term.

One problem for the government’s cartel is that the very existence of a private health care market raises the wages and salaries of health care professionals, both those in the private market and those working for the cartel. There are all sorts of ways this can occur. The best physicians will take advantage of their superior skills by serving high-paying households in a private health care market and earn income far higher than those available to doctors working for the cartel. This will put upward pressure on the cartel salaries. Even physicians in government service or willing to accept the cartel’s reimbursement rates will attempt to “top off” their salaries with (hidden or otherwise) payments for extra or better service. The existence of a private market in health care and accepting more than the standard reimbursement rate not only undermines cost controls but defeats the very idea of equal health care for all. In the long-run, it cannot be tolerated and is the reason why private provision and private health care insurance is forbidden in many countries with universal health care.

Hence, eventually prohibitions against doctors taking private patients becomes necessary to maintain control of the health care market. Only if the government has a monopsony on the hiring of physicians and other health care workers can a lid be kept on the wages and salaries they are paid, which is a key element of health care costs. Similarly, the monopsonistic position of the cartel will allow it to control all resources entering the health care sector, from drugs to ambulances to bandages to hospital beds.

In sum, without all these controls a single payer system becomes a two-tier system of markedly unequal health care, exactly what critics of the present system say they dislike the most about it. On the other hand, with the controls a single payer system sinks into rationed and arbitrary care, abysmal quality and long waits even for simple procedures.

Much better would be a free private health care insurance market, focused on catastrophic coverage, supplemented by efforts of local governments and charities and churches to ensure adequate health care for those not covered by any insurance.

Baseball teams, umpires, and government control of companies

“If you knew that baseball teams with winning records tended to be more profitable for their owners than those with losing records - and if you learned that the Baltimore Orioles had just been purchased by the major league umpire's union, would you expect the Orioles to win more or fewer games?

Almost everyone implicitly understands why the umpires should not be allowed to own teams they referee.

In a free-market economic system, the government is supposed to be the referee and not a player. Its job is to set and enforce the rules, but if it is allowed to also become a player, by owning and managing business enterprises, it is unlikely to treat the competing companies fairly, and there will be little check on its own misbehavior.

Congress is now debating whether the U.S. government will create its own national health provider. The government is now the majority owner of the nation's biggest automobile manufacturer (General Motors Corp.), the biggest bank (Citigroup Inc.), and the biggest insurance company (American International Group Inc.). The record of government ownership and/or control of companies in the United States and elsewhere has been one long disaster.

Look at the past year alone. The nation's largest man-made environmental disaster (according to the New York Times) was the coal-ash spill in Tennessee on Dec. 28, 2008, caused by negligence at the Tennessee Valley Authority (a federal-government-owned enterprise). By volume, this spill was 48 times bigger than the Exxon Valdez spill. This September, the government formally took over mortgage giants Fannie Mae and Freddie Mac, whose financial holes were many times larger than those of Lehman Brothers Holdings Inc., WorldCom, Enron Corp. or GM. Fannie and Freddie were both U.S. government-sponsored and -regulated companies that had the implicit guarantee of the U.S. taxpayer.

Yet the companies not only failed, but between them have also left the U.S. taxpayer liable for more than $1 trillion. …
…
The American Founding Fathers well understood human nature, and that is why they developed the system of checks and balances for the new republic.
…
When government fails to limit its role to being the referee, and also begins to field a team in competition with private parties, the system of checks and balances breaks down. The result - more incompetence, less efficiency, fewer innovations, poorer service and more corruption!”

Richard W. Rahn, “Government grinds the gears”, Washington Times (18 June 2009).

http://www.washingtontimes.com/news/2009/jun/18/government-grinds-the-gears/


Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

Senator Dodd on the Affordable Health Care Choices Act now before Congress

“Today is an historic day. No issue affects more Americans. In fact, there is not a single American who doesn’t have a stake in the success of our work. No issue is more of a moral imperative. In the richest country in the world, you shouldn’t have to be well-off to get well,” said Dodd. “With this bill, the Affordable Health Care Choices Act, we will protect people’s choice of doctors, hospitals, and insurance plans; reduce costs for families and businesses; and assure affordable, high-quality healthcare for every American.”
…
If there’s no other message out of today’s hearing it is this: we will act to cut the skyrocketing costs of our health care system. And we will at long last make quality, affordable health insurance available to every man, woman and child in America.

Our goal is to protect people’s choice of doctors, hospitals, and insurance plans; reduce costs for families, businesses, and government; and assure affordable, high-quality healthcare for every American. Our goal is also to strengthen what works and fix what doesn’t.

If you like the insurance you have today, you can keep it. If you don’t like what you have today, we’ll give you better choices, including a public option for health care. No longer will a pre-existing condition such as a heart attack, cancer, or even being the victim of domestic violence prevent you from obtaining insurance. No longer will cost be a barrier to coverage. Our approach will offer affordable options for Americans struggling under the skyrocketing cost of health care.

We have proposed a bill that would accomplish this great purpose.”

Quote from Senator Dodd’s web site, “Dodd Leads HELP Committee Mark-Up of Health Care Reform Bill” (19 June 2009).

http://dodd.senate.gov/?q=node/5028


Christopher Dodd (1944-) is an American lawyer and Democratic politician currently serving as the senior U.S. Senator from Connecticut. Senator Dodd and his wife sit on the board of many health care companies.

Hyuk hyuk hyuk, what the Senator says is just so funny! Without question, Senator Dodd is one of the best clowns in the circus we call the Senate. To say the government can actually provide people with something in a way that will cut costs! Great joke! And to say it will do it without adversely affecting people who already have what the government wants to provide to others free! And it’s going to expand coverage to the most health care costly segments of the population! And it’s going to do all this while reducing costs for families and businesses! What side-splitters!

Next he's going to say that members of Congress will be covered by and subject to the same requirements with regard to health care insurance they impose on other Americans! Ha! That’ll be the day! And that the government won’t be imprisoning folks who won’t join the proposed government-run health care insurance cartel! And the cartel isn’t going to restrict choice in any way! All this, while it reduces the long-term budget deficit! Oh, what a riot this guy is! I’m rolling on the floor with laughter!

I used to avoid listening to Senator Dodd. Now I realize like many other members of Congress, he is really a comedian out to entertain us with his whoppers about the legislation he supports. Sometimes I think the President also enjoys telling amusing stories that can’t possibly be true. Great fun!

But somehow I still have this nagging feeling that the jokes they tell are not for us, but on us.

Why we should spend more on health care

“Is increased health spending optimal?

President Barack Obama, speaking yesterday, says the answer is no:

“If we do nothing, within a decade we will be spending one out of every $5 we earn on health care. And in 30 years, we'll be spending one out of every $3 we earn on health care. And that's untenable. It's unacceptable. I will not allow it as President of the United States.”

Economists Robert Hall and Chad Jones, writing in the QJE [Quarterly Journal of Economics] a couple years ago, say the answer is yes:

“Over the past half century, Americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: Is the growth of health spending a rational response to changing economic conditions—notably the growth of income per person?

We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences—of the kind used widely in economics to study consumption, asset pricing, and labor supply—imply that health spending is a superior good with an income elasticity well above one. As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.””

Greg Mankiw, “Is increased health spending optimal?”, Greg Mankiw's Blog (12 June 2009).

http://gregmankiw.blogspot.com/


N. Gregory Mankiw is professor of economics at Harvard University and a former
Chairman of President George W. Bush’s Council of Economic Advisors. His textbook is
used in Regent’s survey of economics course. He is a Republican policy advisor.

Robert E. Hall is Robert and Carole McNeil Hoover Senior Fellow and Professor of Economics at Stanford University. He is President-elect of the American Economic Association. Charles Jones was recently promoted to Professor of Economics, Graduate School of Business, Stanford University.

It is of course common sense that as consumers’ incomes rise over time the quantity demanded of different kinds of goods and services changes, a relationship formalized in economics under the term “Engel curves”, named after the 19th century German statistician Ernst Engel. Broadly, three relationships between income and changes in demand are recognized: For normal goods, as income increases, the quantity demanded increases. The share of the product in a typical consumer’s budget remains about the same over time. For inferior goods, as incomes increases, the quantity demanded decreases as consumers stop buying the good because they can now able to purchase better goods than before. Its share in a consumer’s budget tends to fall steadily as spending on more desired goods and services crowds out spending on the inferior good. In the case of superior goods, as income rises spending on these goods and services rises faster than income, and they make up a larger and larger proportion of consumption than in the past. Health care is a superior good, and its share in the national economy of the United States has risen over time because it is a more desirable kind of spending than other kinds of consumption.

It is perfectly sensible that people want to spend more and more of their rising income on health care. They certainly have the added income to do so. A tremendous increase in material wealth and living standards has taken place in the United States in recent decades. The real per capita income of the average American has risen by 70 per cent since 1980, for example, and many Americans have chosen to take much of that increase in purchasing power in the form of increased benefits, such as better health care insurance and services, rather than in other kinds of goods and services. Hence, the share of health care in the U.S. economy has risen greatly. As it did so, it created well-paying jobs for millions of workers and improved the lives of hundreds of millions of Americans.

For reasons beyond my comprehension, President Obama and his allies in Congress see this perfectly natural process of income growth and structural change as a problem that must be somehow “solved” immediately by government interference in the health care industry. They have embarked on a crusade to “reform” one-sixth of the U.S. economy by October of this year in an attempt to suppress people from spending their income on a superior good consumers regard as more desirable than the other things they might buy with their money (or, more to the point, giving their money to the government in taxes to spend on things they don’t want). It boggles the mind why the Administration and Congress want to put a cap on the benefits that come from this kind of spending.

Now, restructuring a large part of any economy is a process that takes decades, not months, and involves tremendous complexities and hidden interrelationships that no one understands or could understand. That is why it must be done slowly and with great care. Even in a tightly planned economy such as the former Soviet Union many years would be spent preparing for a task of this magnitude. What is frightening is that the Administration is not only proceeding blindly and hastily but that it clearly has not the slighted idea of what it is doing. Other than vague words and statements of pious intentions, the Administration has put forward no concrete ideas as to how it proposes to reform this huge sector of the economy. Instead, a small group of Congressional aides (mainly from Senator Kennedy’s office) and a few people from the Office of the White House are at this very moment yelling and screaming at each other as they try and hash out a plan in secret for Congress to vote on. In the end, the same thing will happen that happened with the Stimulus Plan: At the very last moment, a bill hundreds of pages in length and understood by no one, will be pulled out of a hat for a up or down vote in Congress before anyone has had a chance to read and seriously consider it.

The process by which legislation is draw up and passed in Congress has become a farce. It is unworthy of the American people and the American people should object to it.

Allan Meltzer on the independence of the Fed and the coming inflation

“Paul Volcker is … the head of President Obama’s Economic Recovery Advisory Board. Mr. Volcker and the administration’s many economic advisers are all fully aware of the inflationary dangers ahead. So is the current Fed chairman, Ben Bernanake. And yet the interest rate the Fed controls is nearly zero; and the enormous increase in bank reserves — caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain. Still, they all reassure us that they can reduce reserves enough to prevent inflation and they are committed to doing so.

I do not doubt their knowledge or technical ability. What I doubt is the commitment of the administration and the autonomy of the Federal Reserve. Mr. Volcker was a very independent chairman. But under Mr. Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury: bailing out A.I.G., taking on illiquid securities from Bear Stearns and promising to provide as much as $700 billion of reserves to buy mortgages.

Independent central banks don’t do what this Fed has done. They leave such fiscal action to the legislative branch. By that same token, Mr. Volcker’s Fed had to avoid financing the large (for that time) Reagan budget deficits to be able to bring down inflation. The central bank was made independent expressly so that it could refuse to finance deficits. …
…
Some of my fellow economists, including many at the Fed, say that the big monetary goal is to avoid deflation. They point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading: unstable food and energy prices may lower the price index for a few months, but deflation (or inflation) refers to the sustained rate of change of prices, not the price level. We should look instead at a less volatile price index, the gross domestic product deflator. In this year’s first quarter, it rose 2.9 percent — a sure sign of inflation.

Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.

When will it come? Surely not right away. But sooner or later, we will see the Fed, under pressure from Congress, the administration and business, try to prevent interest rates from increasing. …

Milton Friedman often said that “inflation was always and everywhere a monetary phenomenon.” The members of the Federal Reserve seem to dismiss this theory because they concentrate excessively on the near term and almost never discuss the medium- and long-term consequences of their actions. That’s a big error. They need to think past current political pressures and unemployment rates. For the next few years, they cannot neglect rising inflation.”

Allan H. Meltzer , “Inflation Nation”, The New York Times (3 May 2009).

http://www.nytimes.com/2009/05/04/opinion/04meltzer.html


Allan H. Meltzer, a professor of political economy at Carnegie Mellon University, is the author of “A History of the Federal Reserve.” He is considered one of the world's foremost experts on the development and applications of monetary policy.

Because of the great harm inflation can do to the economy and the fear that interest rates could be manipulated for political ends, the nation’s central bank has been placed beyond the direct control of democratic politics to an unusual degree. Its mandate, as stated in the Federal Reserve Act of 1913, as amended in section 2a, is to achieve three objectives:

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”.

In order to carry out this responsibility the Fed has been granted great independence. It has been given both Target independence (that is, it is able to choose its own fundamental objectives) and Operational independence (that is, it is able to pursue its objectives as it sees fit, without interference or pressure from third parties). In this regard, it is recognized that it must have political independence from the government, technical independence in the sense of full control over the policy instruments it uses to attain its objectives, financial independence in the form of a secure capital base, and security of tenure of its key officials.

There is no question but that the Fed is a powerful institution. I tell my students that the Fed’s Open Market Committee, which sets American monetary policy, is the second most powerful committee in the world, trailing only the Joint Chiefs of Staff in its ability to affect developments across the globe. It can on its own and without limit or restraint reduce short-term interest rates by buying government securities, pumping cash into the economy and encouraging economic activity. Or it can raise short-term interest rates by selling government securities, taking cash out of the economy and dampening economic activity. Its demand and supply of Treasuries in the financial markets affects the entire term structure of U.S. interest rates and, given the key currency role of the U.S. dollar, interest rates in all other countries.

The threat to the independence of the Fed comes from the scale of the Fed’s interventions in credit markets in support of the Administration’s bailout and spending programs and its willingness to publically endorse measures undertaken by the Treasury.

During the past year the Fed has expanded the money supply by more than a trillion dollars and engaged in a wide range of activities which had the effect of lowering credit standards and loading its balance sheet with assets that that will be hard to unwind if it decides to change its policy stance. There is a growing concern that the Fed will refuse to withdraw the staggering quantity of liquidity it injected into the financial system once a revival in activity occurs for fear of prematurely ending any recovery. Any failure to raise interest rates and “take away the punchbowl just as the party gets going,” as a former Chairman of the Fed put it, would mean that rampant inflation could set in and the dollar could collapse on foreign exchange markets. Loss of control over inflation, the Fed’s single most important objective, would call into question its very independence.

Similarly, the Fed should avoid any appearance of supporting or not supporting actions taken by fiscal authorities, except in the most general and gentle way. It should never suggest anything that implies it is picking or choosing among companies or industries or financial concerns. To do so allows questions of favoritism and partiality to arise which are damaging to the central bank’s reputation. But to some degree it has done precisely this, supporting the Treasury’s decisions regarding macroeconomic policy. It has also joined with the Treasury in the financial realm in support of its policies. However, many feel it has overstepped its bounds by pressuring Bank of America and others in ways that reflect favoritism and in limiting the transparency of its operations.

Professor Meltzer is right to have expressed concerns about the Fed and how it has responded to the crisis. Some of us see a frightful storm of virulent inflation gathering on the horizon. While it will not be upon us any time soon, when it comes we believe it will come swiftly and it will be unstoppable except at great cost.

And we will blame the Fed for not only allowing this disaster to happen but for weakening the independence the central bank needs to sustain its reputation and keep political operatives at bay.

A New Classical Economist takes on a New Keynesian

“[Historian Niall] Ferguson and [economist] Paul Krugman ... locked horns at a public symposium in New York on April 30. The historian ... asserted that large fiscal deficits would push up long-term interest rates. This implied they would have a zero stimulatory effect: public spending would simply "crowd out" private spending. An enraged Mr Krugman responded ... that Keynes had proved that such crowding-out could occur only at full employment: if there were unemployed resources, fiscal deficits would not drive up interest rates without also expanding the economy. Prof Ferguson's ignorant remarks only confirmed that "we're living in a Dark Age of macroeconomics, in which hard-won knowledge has simply been forgotten".

However, this is not a debate between economists and historians. It is a battle within the economic profession – between the New Classical Economists and the New Keynesians. What is fascinating is that it is an almost exact rerun of the debate between Keynes and the British Treasury in 1929-30. The Treasury view was that bond-financed public spending was bound to diminish private spending by an equal amount. Keynes replied that if this were true it would apply to any new act of private spending. "In short, the fatalistic belief that there can never be more employment than there is is altogether baseless". ....

Are we doomed to rehearse the same arguments time and again? In this particular debate, I am on Prof Krugman's side, but I do not agree that Prof Ferguson's position represents a retreat to a phlogiston state of economics. This is to take economics to be like a natural science, which Keynes never believed it was ....

Ultimately, the Keynesian revolution was a triumph not of good science over bad science, but of good judgment over bad judgment.”

Robert Skidelsky, "Economists clash on shifting sands", Financial Times (10 June 2009).

www.ft.com/cms/s/0/31e89136-5511-11de-b5d4-00144feabdc0.html

www.skidelskyr.com/site/article/economists-clash-on-shifting-sands/

Historian Robert Skidelsky (1939-) is a member of the British House of Lords and author of a prize-winning biography of the economist John Maynard Keynes. Niall Ferguson (1964-), a British citizen from Scotland, is the Laurence A. Tisch Professor of History at Harvard University and the William Ziegler Professor of Business Administration at Harvard Business School. His specialty is financial and economic history and the history of empire. Paul Krugman (1953-) is a professor of economics and international affairs at Princeton University, a centenary professor at the London School of Economics, and an op-ed columnist for The New York Times.

As background, let me mention that the New Classical Economics emerged as a school of thought during the 1970s. It views macroeconomics from the perspective of neo-classical economic theory, rather than Keynesian theory, and stresses the importance of rooting macroeconomics in the behavior of microeconomic agents that are utility-maximizing and possess rational expectations. In a New Classical Economics framework, the economy is seen as having an equilibrium at full employment and maximum potential output, which can be achieved through market-clearing adjustments to prices and wages. Niall Ferguson is seen as in the classroom of this school of economic thought, which captured much of the intellectual momentum of the past few decades, with its adherents winning several Nobel Prizes in Economics. The tenets of New Classical Economics underlies much “conservative” economic thought today.

New Keynesian Economics was developed in reaction to the New Classical Economics. It strives to provide microfoundations for Keynesian economic analysis. The New Classicals called into question many of the precepts of the Keynesian revolution, especially as they relate to the “stickiness” of prices and wages. New Keynesians, in contrast, maintain that the market clearing approach of the New Classicals cannot explain short-term economic fluctuations, and they say the failure of prices and wages to adjust quickly to new conditions leads to involuntary unemployment and recurrent declines in economic activity. Add to this failures of coordination among economic actors and imperfect labor markets and in the view of New Keynesians you have the possibility of deep and prolonged downturns in economic activity. Paul Krugman can be seen as a member of this school of thought, which is shared by many economists in the Obama Administration.

Now, no one economist actually adheres completely to the tenets of any school of thought and these two competing sets of ideas are not the only ones in circulation today. They can in some sense, however, be seen as a continuation of the old non-Keynesian vs. Keynesian debates of the past. The debate between these two contemporary schools goes way back, and today’s debates are merely the latest incarnation of a long intellectual fight. If you want to think of it in the simplest terms possible, New Classicals think that economies adjust to the constant changes introduced by new technologies, different consumer preferences and investor opportunities, exogenous shocks from abroad and stupid government policies at home mainly by changes in (relative) prices and wages, with some (but not much) change in output and employment levels. New Keynesians, on the other hand, think the opposite, namely, that all the changes occurring in the economy lead mainly to ups and downs in employment and economic activity, and only secondarily to changes in (relative) prices and wages. Exaggerating, but with much truth, the fights about fiscal policy you see in Washington today are between these two groups and their different views on the nature of the economic adjustment process underlying economic change.

Let me quickly add that politicians know little or nothing about this debate and could not care less about it. They are not thinkers and are often blind to the forces that shape the present and the future. But whether they realize it or not they are dependent very much upon advisors who are rabid participators in the debate, with strong view that they are right and the other camp is wrong. The success of Barack Obama’s terms in office, whether he realizes it or not, will depend critically on whether the New Keynesians advising his Administration are right or wrong in their assessment as to exactly how the economy adjusts to the problems it confronts.

While the spat between Ferguson and Krugman appears to be about bond yields and the inflationary pressures of large deficits, it is really about the adjustment process and the role of government. If, as Ferguson and conservatives insist, the macroeconomic adjustment process plays out mainly through the price system and the changes that take place to relative prices and wages, as New Classicals insist, the Administration’s policies will aggravate the difficulties before the economy and delay any recovery. Interfering with prices and wages, they will argue, is interfering with adjustment process.

If, as Krugman and liberals insist, the macroeconomic adjustment process works mainly through large changes in incomes and employment because prices and wages refuse to adjust, policy must both mitigate the adverse impact that job losses have on welfare and directly counter the decline in aggregate demand. Hence, the Administration’s stimulus package and Krugman’s argument that public spending cannot crowd out private spending. Sticky prices and wages mean government spending affects quantities (output and employment), not prices (and hence, not the price adjustment process).

To conservatives, prices and wages are not that sticky and government policy cannot help an adjustment process guided by changes taking place simultaneously in millions of different prices and wages, although it might be helpful mitigating the negative effects of any downturn on individuals who are particularly hard hit. To liberals, government policy can control the adjustment process, indeed, the entire economy, because it can set the level of aggregate demand and in doing so determine quantities produced and jobs provided. Prevailing prices, in their view they are sticky, are divorced from cost and demand considerations anyway. One sees the economy best guided by a flexible price system; the other sees the economy as one that can be shaped by mandates and commands to perform better.

Skidelsky sides with Krugman. I side with Ferguson, both on the narrow question of the impact of large deficits causing rising bond yields and, ultimately, inflation and on the broader question of the nature of economic change and the adjustment process. I also fear the power of government as corrupting and threatening to freedom.

A Tdj by Doug Walker with thanks to Larry Willmore for the pointer.

Arnold Kling on the purpose of the public health insurance plan

“The economic issue [of health care] is that some people need subsidies to get health care, especially to get the sort of insulation that we call health insurance. Some people need subsidies because they are poor. Others need subsidies because they are obviously high risk. You can give subsidies in the form of vouchers. You could subsidize poor people with vouchers based on income. You could subsidize high-risk people with vouchers for pre-existing conditions. A public plan is one vehicle for providing a subsidy, but it is by no means the only vehicle.

The purpose of the public health insurance plan is political. The idea is to drive away Republican support by threatening the private health insurance industry. … [T]he real issue is health care costs, driven by over-use of services with high costs and low benefits.

Getting people to reduce their use of medical services is the spinach of health care reform. Expanding insurance coverage is the dessert. The Democrats want to enact dessert now, and worry about spinach later. For the dessert part, they want no Republicans involved. Down the road, when they are ready to tackle the spinach part, they will press for bipartisan cooperation and statesmanship from Republicans.

My suggestion … is that the Republicans not fall on their swords to defend private health insurance. Yes, many people like their insurance. But many of us hate the claims process. In our household, the phrase "going postal" has been replaced by "going health insurance." My guess is that sticking up for private health insurance is a political loser. Moreover, real health care reform would require radical innovation in health insurance, so it is counterproductive to try to entrench for the existing system.

If I were a Republican, I would support a public health insurance plan that provides real health insurance. That is, it would have low premiums, but extremely high deductibles and co-payments--beyond anything we see today. People on the plan would, on average, pay more than 50 percent of their health expenses out of pocket. Only people at the very high end of expenses would get insurance payments. Even their co-payments would not drop to zero.

There are various reasons why such plans do not exist today. Many of these reasons are regulatory. I am not sure how such a plan would fare in a free market. But that is the kind of public plan I could get behind.”

Arnold Kling, “The Purpose of the Public Health Insurance Plan”, Econlog (9 June 2009). Original text corrected.

http://econlog.econlib.org/archives/2009/06/the_purpose_of.html


Arnold Kling is a noted economist who has worked for the Federal government for many years in different capacities and as a professor at several universities. He is a founder and co-editor of EconLog, a popular economics blog that reflects Libertarian thinking.

The basic problem of government financed health care, either as single-payer or any other subsidized arrangement, is controlling costs. Simply stated, if you allow people to have unlimited access to medical care without paying for it, they will use it without limit, and doctors and patients will demand medical procedures with high costs and low benefits. Every procedure the doctor can think of will be ordered to avoid liability in the event of an unforeseen problem. With “free” medical care, if Little Johnny scrapes his knee Mommy will take him to the doc to put a simple band-aid on it, rather than treating him at home or, at most, asking the local pharmacist what antiseptic to apply. Every little medical problem, from a runny nose to an “I just don’t feel well” [which really means, “I just don’t want to go to work and face the boss today”], will be used as an excuse to see a doctor. With free or low-cost access to medical services, demand will expand greatly and costs will skyrocket correspondingly. For this reason, any government-subsidized program, whether it is acknowledged or not, will have to limit access through rationing or supply constraints.

A problem that arises when trying to ration health care is there is no such thing as “health care” as we use the term in public policy debates. Rather, there are thousands of different procedures associated with tens of thousands of different conditions and diseases involving hundreds of millions of Americans of different ages, genders, and medical conditions and problems. Given the diversity of the population to be treated, even when the same underlying medical problem is involved, it is not possible to design a single set of rules to be applied to all people. For this reason, the element of discretion and the denial of treatment will remain part of any reformed health care system we adopt. The only thing that will change is who makes that decision and whether a patient has the right to seek and pay for care on this own account. Allowing people to pay for their own health care when the government-mandated system denies it destroys the argument reformers make that everyone should be treated the same.

In this post, Dr. Kling offers a good idea to consider in the reform debate: Provide full health insurance coverage through a plan that has low premiums and high deductibles and shifts much of the costs of medical care to the people who directly benefit from the care. Those that have this kind of policy would be encouraged to “bargain” with providers and resist absurdly high fees and needless procedures. People satisfied with their present plans could continue to have them. Those, like Dr. Kling and me, who would prefer health insurance that focused on catastrophic conditions, could lower our health insurance costs. The poor and those with pre-existing conditions can be covered by vouchers tailored to their circumstances, with varying deductibles and subsidies.

The costs of health care are inordinately high and rising. The argument that universal health care or some variant thereof will lower costs is not supported by our experience with Medicare and Medicaid, which are already single-payer systems, yet they have shown themselves to be unsustainable. If advocates of health care reform want to expand care and excess, they will have to address seriously the question of cost control.

The Administration is attempting to markedly reform the American health care system in a rush. This is a matter of such importance that a full discussion of the alternatives is necessary. Dr. Kling’s proposal is only one of many good ideas that need to be explored. We should take our time and think long and hard about what we want to do in this area.

Positive and negative human rights at the UN

“The UN publicizes such positive rights as “right to water,” “right to housing,” “right to health”, etc. These rights sound wonderful, while not imposing any specific obligation whatsoever on any specific actor to do any specific thing for any specific poor person. It is impossible for the UN or any other body to allocate responsibilities for observing the “right to water,” and also decide who will be first in line among the 884 million people now without clean water. So even if the UN creates international pressure to observe these “rights,” the pressure is diffused across so many potential actors with unclear responsibility that it has no effect, accomplishing nothing for poor people.

What about the UN’s record on the more traditionally defined “negative” human rights, like freedom from state killings and torture? These human rights are a lot easier to specifically address – the UN could denounce human rights violations, identifying the violator and the victim each time. Here international pressure could have more of an effect, because it is applied to very specific wrong-doers to stop very specific actions against specific victims-- some of whom are in the Amnesty International 2009 report.

According to Amnesty, among those who could appeal to the UN Human Rights Council are:

--the families of the 100 Cameroonian demonstrators that dictator Paul Biya’s forces killed in February 2008, shooting some in the head at point blank range

-- the family of Paltsal Kyab, 45, a Tibetan from Sichuan province, who died in Chinese police custody on May 26, 2008, after having been present at a protest march on March 17, 2008. The Chinese government did not allow his family to visit him in detention. When his family members went to claim his body, “they found it bruised and covered with blister burns, discovering later that he had internal injuries.”

---the 49 people the Egyptian government arrested after violent protests on April 6, 2008 in Egypt. The trial began in August 2008 before “the (Emergency) Supreme State Security Court…The defendants said they were blindfolded for nine days and tortured by State Security Investigation (SSI) officials …{including} beatings, electric shocks and threats that their female relatives would be sexually abused…Twenty-two of the defendants were sentenced in December to up to five years in prison.”

So such victims could appeal to the UN Human Rights Council for their rights vis-à-vis the governments of Cameroon, China, and Egypt – except that the governments of Cameroon, China, and Egypt are MEMBERS of the UN Human Rights Council. The UN is perpetrating a sick joke on such victims, by filling the Human Rights Council with human rights violators. This travesty is already well known, but that doesn’t mean anyone who cares should stop talking about it.

So here’s the scorecard on UN human rights. On something like “the right to water,” where it is impossible to identify who is violating such “rights,” the UN talks big. On human rights violations like killings and torture, where the UN knows precisely who is the violator, the UN sometimes shows up on the violator's side.

William Easterly, "UN Human Rights and Wrongs", Aid Watch (8 June 2009).

http://blogs.nyu.edu/fas/dri/aidwatch/2009/06/un_human_rights_and_wrongs.html


William Easterly is Professor of Economics at New York University, joint with Africa House, and Co-Director of NYU’s Development Research Institute. Previously, he was an economist with the World Bank.

Thanks to Larry Willmore for the Tdj.

A Tdj by Doug Walker.

Latvia and its bills and bonds

“I will not vote in today's European election. Instead, I am doing something much more interesting and relevant to the future of Europe and Britain. I am travelling to Riga [for a speaking engagement]. Why is this trip to Latvia more important than voting? Because, believe it or not, the future of Europe could be decided by this tiny Baltic state.
…
What does [Latvia] have to do with the future of Europe? …

Europe is now in the middle of a perfect storm - a confluence of three separate, but interconnected economic crises which threaten far greater devastation than Britain or America have suffered from the credit crunch: the collapse of German industry and employment, the impending bankruptcy of Central European homeowners and businesses; and the threat of government debt defaults from loss of monetary control by the Irish Republic, Greece and Portugal …

Latvia, partly because it has followed an Argentine-style policy of “fixing” its exchange rate and encouraging its citizens to borrow in euros and Swiss francs, is now in the front line of the battle between governments and financial markets - and a humiliating devaluation looks increasingly likely. Last weekend a former Swedish finance ministry official brought in by the Government as an adviser admitted that devaluation was no longer a matter of “if” but of “when and how”. If Latvia does devalue, then the two other Baltic states will almost certainly be forced to follow and the panic will probably move to Romania and Hungary. Beyond that, the contagion is likely to spread to the weakest members of the eurozone - Ireland, Greece, Portugal and probably Austria.

If the crisis expands, other EU governments - and especially Germany's - will face an existential question. Do they commit hundreds of billions of euros to guarantee the debts of fellow EU countries? Or do they allow government defaults and devaluations that may ultimately break up the single currency and further cripple German industry, as well as the country's domestic banks?

Publicly, German politicians have insisted that any bailouts or guarantees are out of the question. Germany has vociferously blocked proposals from Italy, Spain and the European Commission for the EU … to issue bonds … to support the governments with weaker credit. …

Last October [, however,] a previously unused regulation was discovered, allowing the creation of a €25 billion “balance of payments facility” and authorising the EU to borrow substantial sums … This facility was doubled again to €50 billion in March. If Latvia's financial problems turn into a full-scale crisis, these guarantees and cross-subsidies between EU governments will increase to hundreds of billions in the months ahead … .

This policy of “fiscal federalism”, long advocated by France and high-debt countries such as Italy, Spain and Greece, has been fiercely opposed by Germany and Britain. …

How could German politicians accept such a policy, having repeatedly sworn to oppose it …? And how can they pervert democracy by telling their electorates that they are doing one thing, while advocating the exact opposite within the EU?

… Germans focus on the letter of the law when they cannot bear to think about the spirit of the rules they are applying … . The new EU borrowing, for example, is legally an “off-budget” and “back-to-back” arrangement, which allows Germany to maintain the legal fiction that it is not guaranteeing the debts of Latvia et al. The EU's bond prospectus to investors, however, makes quite clear where the financial burden truly lies: “From an investor's point of view the bond is fully guaranteed by the EU budget and, ultimately, by the EU Member States.”

And so the juggernaut of euro-federalism rolls on; but viewed from an increasingly liberal central Europe, there is a great consolation: the history of euro-federalism keeps being repeated but, as Marx once said, what began as tragedy tends to end in farce.”

Anatole Kaletsky, “The great bailout - Europe's best-kept secret”, The Times of London (4 June 2009).

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6426565.ece


Anatole Kaletsky (1952-) is Principal Economic Commentator of The Times of London.

In a recent government auction Latvia failed to sell a single bill in its attempts to find $100 million in financing support for its crumbling currency and economy. Its currency is probably overvalued by a factor of one-third and its GDP is expected to shrink 15 per cent this year. House prices have fallen 50 per cent, and in response to bailout terms imposed by the European Commission and the IMF a third of its teachers are being laid off and public sector salaries are being cut by 35 per cent. One reason why it can’t sell its paper at auction is foreign creditors don’t believe it will really follow through and implement these draconian cuts in spending.

Latvia is not the only East European country in deep financial trouble. It is estimated that Western banks have loaned $1 ¾ trillion to this region. In the midst of a severe recession, these countries need to roll over $400 billion in foreign debts this year. With output and employment dropping sharply in many of these countries, their budget deficits rising rapidly, and their currencies under extreme pressure, it is difficult to see why private lenders (or even international agencies) would want to bail out these countries. As Kaletsky points out, however, failure to bail them out could bring down the private banking system of many West European countries. Hence, the dilemma before Germany.

Like it or not, the well of global capital from which these debts -- and the growing debts of the U.S. and many other countries – is running dry. In the U.S., President Obama’s stimulus package alone, if allowed to run its course in the years ahead, would add $6 trillion to the U.S. debt load. Note that this tremendous increase in debt owed by the U.S. government does not include all the bailout costs of the banks, Fannie and Freddie, the auto industry, the states and localities now set to default on their debt, or the rising costs associated with an ageing population. Other countries are also in trouble, and will be running to the IMF and the international development banks for help. The realization that all these bailouts are not possible is no doubt why long-term interest rates are on the rise despite the Fed’s effort to hold them down.

It is not only that the policy course we are on is not sustainable that gives one pause. It is that those in charge of setting the course do not seem to realize that it is unsustainable, and rather than changing their policies continue down a dead-end path to economic decline.

A Tdj by Doug Walker.

Obama and the mountaintop

“With the election of President Obama, environmentalists had expected to see the end of the "Appalachian apocalypse," their name for exposing coal deposits by blowing the tops off whole mountains.

But in recent weeks, the administration has quietly made a decision to open the way for at least two dozen more mountaintop removals. ... The list included some controversial mountaintop mines. ...

The administration's decision ... sheds on relations between the mining industry and the Obama White House,... environmentalists ... say they feel betrayed...

The issue is politically sensitive because environmentalists were an active force behind Obama's election, and the president's standing is tenuous among Democratic voters in coal states. ... Moreover,... halting mountaintop mining could eliminate jobs and put upward pressure on energy prices in a time of economic hardship.

Coal advocates have solicited help from officials as high up as White House Chief of Staff Rahm Emanuel. And the issue has sparked contentious debates within the administration, including one shouting match...

Although environmentalists had expected the new administration to put the brakes on mountaintop removal, Rahall and other mining advocates have pointed out that Obama did not promise to end the practice and was more open to it than his Republican opponent, Arizona Sen. John McCain.

A review of Obama's campaign statements show that he had expressed concern about the practice without promising to end it. ... And his EPA administrator, Lisa Jackson, has said that the agency ... would "use the best science and follow the letter of the law in ensuring we are protecting our environment." Soon afterward, the agency in effect blocked six major pending mountaintop removal projects...

But this month, after a series of White House meetings with coal companies and advocates..., the EPA released the little-noticed letter giving the green light to at least two dozen projects. ...

Ed Hopkins, a top Sierra Club official, said some of the projects that have now obtained the EPA's blessing "are ... large and potentially destructive..." "It makes us wonder what standards -- if any -- the administration is using," Hopkins said. ...

Environmentalists were stunned to learn from Rahall's office May 15 that the EPA had given its blessing to 42 out of the 48 mine projects it had reviewed so far -- including two dozen mountaintop removals.”

By Tom Hamburger and Peter Wallsten, “Obama walks a fine line over mining”, Los Angeles Times (May 31, 2009).

http://www.latimes.com/news/nationworld/nation/la-na-mountaintop-mining31-2009may31,0,7589633.story


Tom Hamburger and Peter Wallsten are writers for the Los Angeles Times.

To quote one of the President’s strongest supporters (Ted Rall, writing recently in the State Journal Register of Illinois), who now has a very different view of the President:

“We expected broken promises. But the gap between the soaring expectations that accompanied Barack Obama’s inauguration and his wretched performance is the broadest such chasm in recent historical memory. This guy makes Bill Clinton look like a paragon of integrity and follow-through.

From health care to torture to the economy to war, Obama has reneged on pledges real and implied. So timid and so owned is he that he trembles in fear of offending, of all things, the government of Turkey. Obama has officially reneged on his campaign promise to acknowledge the Armenian genocide. When a president doesn’t have the nerve to annoy the Turks, why does he bother to show up for work in the morning?

Obama is useless. Worse than that, he’s dangerous. Which is why, if he has any patriotism left after the thousands of meetings he has sat through with corporate contributors, blood-sucking lobbyists and corrupt politicians, he ought to step down now — before he drags us further into the abyss”.

It is a truism in life that the act of governance is very different from the act of running for office. When running for office, politicians and their supporters believe in “free lunches” and that it is possible to have something for nothing, and there are only benefits associated with anything they might propose. They advocate all sorts of policies and programs that sound nice before the election but discover they have high costs once they face the prospect of actually implementing them after the election.

Supporters are shocked – SHOCKED!!! – at the dishonesty of politicians even though this “dishonesty”, if it is that, is obvious and never ending. Bad as politicians are, they are not the only problem. A worse problem than the dishonesty of politicians is the naivety of their supporters. More. What is telling, is that supporters always blame the politician rather than the failure of their own judgment to foresee that the policy they advocated had costs to be considered, and that the people who would ultimately bear those costs would be persistent in their opposition to what the candidate proposed to do.

Like all politicians, President Obama has broken some promises. It means little. Because I did not vote for him and object to much of what he wants to do, I hope he breaks many more promises. If he does, I realize it will not be because he wants to break them. It will be because the political system – that is, the costs, both political and economic – won’t let him keep his promises.

The country is broke, the economy is floundering, the deficit is widening, interest rates are rising, the dollar is falling, entitlement costs and state and local bailout expenses are skyrocketing, and now the head of the Fed has told Congress it is time to start reducing the deficit or we will have neither financial stability nor economic growth. We are reaching the end of the road on not only on Obama’s policy approach to the immediate crisis but his ambitious goals for expanding government-financed social services over the long-run. The only question is whether the Administration will recognize the dead end before them or they will lead the country into a far deeper crisis.

The constraints on the President’s aspirations for health care, energy independence, educational expansion and so much else have always been there and are not going away. I expect when all is said and done he will be a very disappointed President, and for reasons far more important than the removal of a mountaintop. His unthinking supporters, who never consider the difficulties involved in governance, will of course blame him. That is too bad, but it comes with the job.

I, on the other hand, will be very relieved and will praise the system for having constrained all the ill-thought out ideas this Administration has proposed, and I will celebrate that it prevented the worst of them from being implemented.

A Tdj by Doug Walker.

Monetary and fiscal policy today and in 1936

“From its bottom in 1933 to 1936, the G.D.P. climbed spectacularly (albeit from a very low base), averaging gains of almost 11 percent a year. But then, both the Fed and the administration of Franklin D. Roosevelt reversed course.

In the summer of 1936, the Fed looked at the large volume of excess reserves piled up in the banking system, concluded that this mountain of liquidity could be fodder for future inflation, and began to withdraw it. This tightening of monetary policy continued into 1937, in a weak economy that was ill-prepared for it.

About the same time, President Roosevelt looked at what seemed to be enormous federal budget deficits, concluded that it was time to put the nation's fiscal house in order and started raising taxes and reducing spending. ....

Real G.D.P. contracted 3.4 percent from 1937 to 1938; the total G.D.P. decline during the recession, which lasted from mid-1937 to mid-1938, was even larger.

The moral of the story should be clear: Prematurely changing fiscal and monetary policies — from stepping hard on the accelerator to slamming on the brake — can be hazardous to the economy's health. ....

I hope and believe that President Obama will not transform himself from the spendthrift Roosevelt of 1933 to the deficit-hawk Roosevelt of 1936 — at least not until the economy is back on solid ground. That said, a growing flock of budget hawks are already showing their talons. They will have their day — but please, not yet.”

Alan S. Blinder, "Economic View: It's No Time to Stop This Train", New York Times (17 May 2009).

www.nytimes.com/2009/05/17/business/economy/17view.html


Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.

Like the stimulus plan of 2008, the stimulus plan of 2009 has done little to improve the economic situation and certainly has not stemmed the downturn and restored the foundations for growth. I would also note that all the money pumped out by the Fed and all the huge volume of sour assets moved to its books has done little to improve the condition of the banking system over what it would have been under more modest policies.

Some say the bottom of the recession may be in sight, although I for one have my doubts. In any event, the economy certainly hasn’t recorded a period of strong growth, such as the one from 1933 to 1936. More clear is the fact that the government has been running a tremendous deficit but its accelerating spending seems to have had little positive effect on the state of the economy. On the contrary, the Administration’s current policy stance seems only to be setting the stage for a run up in inflation, continued stagnation, and a huge increase in the national debt. Similarly, the Fed keeps the banking system overbloated with reserves in hopes it will do some good but little good can be seen.

The failure of these policies to actually improve the state of the economy does not stop some economists, such as Professors Blinder and Krugman, from recommending that the government’s wild spending spree go on and the Fed’s unrestrained expansion of the money supply continue in hope of an eventual economic turnaround. Contrary to their expectations, I suspect a continuation of this policy approach is going to cause an extended period of stagflation, with the price level increasing rapidly and the economy experiencing little or no growth for years.

As mentioned in my recent Op Ed, far better would be a policy approach that would address the longer-term problems of the economy by restructuring its productive base, matching incomes and outlays in government and trade accounts, and reducing entitlements. This will take many years and involve much sacrifice but it would quickly arrest the current decline and establish a foundation for long-term prosperity for our children.

A Tdj by Doug Walker.