A Fatuous Defense of the Affordable Care Act

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“There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli

The L.A. Times provides a nice set of cherry picked data to justify the Affordable Care Act. The author is also fond of the word fatuous to describe Republican plans to repeal and replace Obamacare, so I feel compelled to maintain usage of the word my thoughts on the matter.Ignoring the long descent that healthcare has been on for decades now, and then claiming that slowing the growth rate of healthcare spend, while it still moves above the general rate of inflation and much of the decrease in observed to expected growth is related to the recession, is analogous to giving a kid a blindfold and a bat and told to hit the piñata in the tree in your backyard, meantime you have tied the piñata to a forest in the park two miles away. When the kid swings and misses, you take the blindfold off and tell him to try again, and declare success when he at least swings level at the air. The point being, even if Obamacare impacted these selective statistics, it is still miles from being where it needs to be.

To wit, there is many citations of costs decreasing, but the author conveniently ignores that those costs are going back up and projected to once again hit their stride of 6% a year, double the rate of inflation, for the foreseeable future. The recession was a temporary halt in healthcare spend, so it is really convenient to leave that fact out. Consider that in 1946 the average inflation adjusted hospital stay was $30 per day whereas today it is an astounding $2,200, a 70-fold increase. Trumpeting a modest decrease in this awful record is quite a bit like missing the forest for the trees.

Plus, while there is a lot of current debate about the tactics of repeal and replace given the slim Senate majority and how to use arcane Senate rules on budget reconciliation, Paul Ryan and others have come up with plans on replacing Obamacare, all under the banner of the Better Way moniker, which I detail in further detail elsewhere. Apparently this journalist is too lazy to look that up. But yes, I do hope that Republicans don’t take the risk of getting repeal without replace and do both at once. I honestly am not holding my breath given Republican ineptitude in the past.

It’s nice that the uninsured rate is going down, but of course a federal mandate to buy health insurance upon pain of hefty tax penalties is going to increase insurance rates. Would you praise a parent who upon their child spilling a drink or dropping food forced them to do 40 push-ups before eating again and then declaring to Facebook, “my child can do 40 pushups!”? No, I think not. At any rate, the real question is whether this metric on its own is the most important one and decoupled from the irrefutable evidence that healthcare costs and insurance premiums continue to skyrocket at a double-digit pace. Plus, recent research from economist Mark Warshawsky indicates that skyrocketing health insurance premiums have held down take home wages, as health insurance coverage has gone up for the lower and middle classes as a percentage of their total compensation from 4% to 12% in just a couple of decades – meaning they are not getting raises in take home pay because it is getting swallowed up in health insurance. Since inequality is a focus these days, look at the failures in our government run healthcare system as a main culprit.

If we are concerned with people not seeing the doctor, providing a stipend for catastrophic insurance and flexible Health savings accounts would have done the same thing without the enormous bureaucratic bloat that has led to skyrocketing premiums. And uncompensated care is an important gap to close, but this is all a bunch of cost shifting. What used to be covered through disproportionate share payments at the county and state levels, where great board oversight could be applied with local knowledge, is now being soaked up by cross-subsidies through the federal tax code – out of sight, out of mind, no accountability, and requiring hospitals to create a new administrative burden to work through the ACA and all its complexity.

This also ignores the many blatant failures of Obamacare, which I helpfully capture here. https://wordpress.com/post/gymnasiumsite.wordpress.com/117

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The World is Full of Good News too

Turning on the nightly news, whether it be local or global, is bound to be an exercise in depressing futility. Whether it is a twelve car pileup, the local restaurant who failed its health exam, a case of road rage, a corrupt politician caught with his hands in the proverbial pot, despair and protest over Trumps’ latest tweet, acts of terrorism, or perhaps even the more provincial annual outrage over the grinch who stole Christmas by taking the yard inflatable Santa and his reindeer out of someone’s yard. For sure, the element of the depravity of mankind is ever with us, but that should not stop us from celebrating and recognizing that the times we live in are better than ever on a tremendous amount of fronts.

Take for instance the “Notable and Quotable” section out of today’s Wall Street Journal, in which Johan Norberg points out that since 1990, actual poverty, defined as living on $1.9 per day or less and adjusted for inflation and local purchasing power parity, has fallen from 37 percent of the world population to less than 10 percent today. That’s a rate of 138,000 people escaping poverty every day.

In a more fulsome article on the subject within The Spectator back in August of 2016, Norberg elaborates on the points of the golden age we live in and the reasons for people’s doom and gloom pessimism.

If you think that there has never been a better time to be alive — that humanity has never been safer, healthier, more prosperous or less unequal — then you’re in the minority. But that is what the evidence incontrovertibly shows. Poverty, malnutrition, illiteracy, child labour and infant mortality are falling faster than at any other time in human history. The risk of being caught up in a war, subjected to a dictatorship or of dying in a natural disaster is smaller than ever. The golden age is now…

…Look at 1828, when The Spectator was first published. Most people in Britain then lived in what is now regarded as extreme poverty. Life was nasty (people still threw their waste out of the window), brutish (corpses were still displayed on gibbets) and short (30 years on average). But even then things had been improving. The first iteration of The Spectator, in 1711, was published in a Britain whose people subsisted on average on fewer calories than the average child gets today in sub-Saharan Africa.

Karl Marx thought that capitalism inevitably made the rich richer and the poor poorer. By the time Marx died, however, the average Englishman was three times richer than at the time of his birth 65 years earlier — never before had the population experienced anything like it.

Fast forward to 1981. Then, almost nine in ten Chinese lived in extreme poverty; now just one in ten do. Then, just half of the world’s population had access to safe water. Now, 91 per cent do. On average, that means that 285,000 more people have gained access to safe water every day for the past 25 years.

But what about the plights facing the world of today? Norberg’s advice is sound:

Times have been rough since the financial crisis, yet for all the talk of Americans ‘left behind by globalisation’, median income for low- and middle-income US households has increased by more than 30 per cent since 1970. And this excludes all the things you can’t put a price on, such as advances in medicine, an extra ten years of life expectancy, the internet, mass entertainment, and cleaner air and water…

…Parts of the world are falling to pieces but fewer parts than before. Conflicts always make the headlines, so we assume that our age is plagued by violence. We obsess over new or ongoing fights, such as the horrifying civil war in Syria — but we forget the conflicts that have ended in countries such as Colombia, Sri Lanka, Angola and Chad. We remember recent wars in Afghanistan and Iraq, which have killed around 650,000. But we struggle to recall that two million died in conflicts in those countries in the 1980s. The jihadi terrorist threat is new and frightening — but Islamists kill comparatively few. Europeans run a 30 times bigger risk of being killed by a ‘normal’ murderer — and the European murder rate has halved in just two decades.

But inequality is growing faster than ever, you might retort. I am going to refute much of notions of how many studies focus on inequality and why they are flawed in a post later on this week, but for now I will point back to an earlier post as to why this is the wrong focus. Also, just as a gentle reminder – the politics of envy and the urge to give government power to address it is beset with problems. Namely, envy of a neighbor who has a mansion is just that, a base and unvirtuous feeling. He can do nothing further to me than invoke feelings and emotions. In contrast, the government leveler with the monopoly of violence can do far more harm.

Reducing Poverty and Saving the Poor

My favorite person and big thinker discovered over the last couple of years has to be Deirdre McCloskey. The clear and convincing manner in which she writes as well as the almost inhuman way in which she has command of economics, literature, history, philosophy, religion, sociology, to name but a mere few, makes her defense of free markets, open societies, equality of the law and opportunity (as opposed to equality of outcomes) palpable and a tremendous delight to read. I have posted elsewhere detailing some of the key ideas in her latest book, Bourgeois Equality, but for those who want a Cliff’s Notes version, fortunately McCloskey has provided it in the form of a New York Times op-ed in what Economist Dan Mitchell has called “the most compelling article of 2016” in his International Liberty blog.

McCloskey provides a helpful reminder that growth and lifting people out of poverty, not inequality per se, is what our focus should be on:

….will we really help the poor by focusing on inequality?

Anthony Trollope, the great English novelist, gave an answer in “Phineas Finn” in 1867. His liberal heroine suggests that “making men and women all equal” was “the gist of our political theory.” No, replies her radical and more farseeing friend, “equality is an ugly word, and frightens.” A good person, he declares, should rather “assist in lifting up those below him.” Eliminate poverty, and let the distribution of wealth work.

Economic growth has been accomplishing exactly that since 1800. Equality in the most important matters has increased steadily, through lifting up the wretched of the earth. The enrichment in fundamentals for the poor matters far more in the scheme of things than the acquisition of more Rolexes by the rich.

What matters ethically is that the poor have a roof over their heads and enough to eat, and the opportunity to read and vote and get equal treatment by the police and courts. Enforcing the Voting Rights Act matters. Restraining police violence matters. Equalizing possession of Rolexes does not.

Going further, McCloskey explains the futility of the focus on equality of outcomes:

A practical objection to focusing on economic equality is that we cannot actually achieve it, not in a big society, not in a just and sensible way. Dividing up a pizza among friends can be done equitably, to be sure. But equality beyond the basics in consumption and in political rights isn’t possible in a specialized and dynamic economy. Cutting down the tall poppies uses violence for the cut. And you need to know exactly which poppies to cut. Trusting a government of self-interested people to know how to redistribute ethically is naïve.

Another problem is that the cutting reduces the size of the crop. We need to allow for rewards that tell the economy to increase the activity earning them. If a brain surgeon and a taxi driver earn the same amount, we won’t have enough brain surgeons. Why bother? An all-wise central plan could force the right people into the right jobs. But such a solution, like much of the case for a compelled equality, is violent and magical. The magic has been tried, in Stalin’s Russia and Mao’s China. So has the violence.

From there, McCloskey draws a creative conclusion on why people are sentimental and psychologically drawn to socialism. She observes that people make connections about central planning and sharing learned in the home and from there taking an illogical leap that government enforced sharing is therefore of the same moral equivalence.

Many of us share socialism in sentiment, if only because we grew up in loving families with Mom as the central planner. Sharing works just fine in a loving household. But it is not how grown-ups get stuff in a liberal society. Free adults get what they need by working to make goods and services for other people, and then exchanging them voluntarily. They don’t get them by slicing up manna from Mother Nature in a zero-sum world.

McCloskey lands with the defense of and the superiority of the classical liberal model:

It is growth from exchange-tested betterment, not compelled or voluntary charity, that solves the problem of poverty. In South Korea, economic growth has increased the income of the poorest by a factor of 30 times real 1953 income. Which do we want, a small one-time (though envy-and-anger-satisfying) extraction from the rich, or a free society of betterment, one that lifts up the poor by gigantic amounts?

We had better focus directly on the equality that we actually want and can achieve, which is equality of social dignity and equality before the law. Liberal equality, as against the socialist equality of enforced redistribution, eliminates the worst of poverty. It has done so spectacularly in Britain and Singapore and Botswana. More needs to be done, yes. Namely, more growth, which is sensitive to environmental limits and will require a proliferation of rich engineers. Let them have their money from devising carbon-fixing techniques and new sources of energy. It will enrich all of us.

To borrow from the heroes of my youth, Marx and Engels: Working people of all countries unite! You have nothing to lose but stagnation! Demand exchange-tested betterment in a liberal society.

Some dare call it capitalism.

While 2016 was indeed a bleak year for classical liberals, represented largely by the political success of the unfrotunate combination of economic populism and economic nationalism/protectionism, McCloskey’s article represents the ideal of a well-articulated defense of classical liberalism/libertarianism that are extemely important – now more so than ever.

U.S. Labor Market Trends – Alarming Data for Young Men

To the 21-30 year old men in the United States, I say a hearty Merry Christmas and a Happy New Year! I hope that your dutiful and doting parents gifted you with all of the latest video games and up-to-date console technology while simultaneously making your extended stay in their basement as comfortable and with as much hospitality as humanly possible.

Much like an Onion article, the above is meant to be partial satirical tongue in cheek while still hitting remarkably close and painful to the home [basement]. To get to the reality of the labor market forces for the United States as a whole and this young male adult group as a subset within it, we have to go on a longer journey through economic time to see the trends to show how today might be materially different than yesterday. Economist Russ Roberts recently interviewed fellow economist Erik Hurst on his EconTalk podcast on the topic of the dynamics of the U.S. labor market over the last two decades. Hurst and colleagues have researched and published a great amount of studies related to the labor force participation rate since 2000, and are on the cusp of releasing even more related to my specific topic at hand for this post. As a quick contextual note, whereas most headline trends focus on the unemployment rate (defined as the number of people without work/the number of people actively working or looking for work), Hurst and colleagues have emphasized the ratio of people actually working as a portion of the overall population. Arguably, this latter metric is a more useful guide as to strength of a nation’s labor markets and overall economic health, and is the metric Hurst and Roberts focus on throughout the discussion.

Hurst’s focus at a higher level is on the labor market for workers with less than a Bachelor’s degree for education attainment. Within this population, Hurst observes and makes the case that the downward trends in labor force participation is highly correlated with the decline in manufacturing employment over time. Meantime, downward trends in manufacturing were masked at the aggregate level (while still negatively impacting some local communities) by the housing boom that drew young male adults with lower education levels into select markets with relatively high pay for an extended period of time. Thus, Phoenix and Las Vegas localized booms masked Detroit and Dayton localized busts when the data was aggregated at a national level. Well, we all know how the low-interest rate, government subsidized and promoted, Freddie and Fannie leveraged housing boom turned out. In essence, while the housing boom masked the underlying job-market structural weakness for workers with lower education levels, it was more akin to a hasty application of Bondo on a rusty car than a replacement of the car panels. In other words, it was destined to come undone.

As Roberts indicates in the back and forth dialogue, manufacturing employment in the U.S. has been declining steadily since the 1950s, and this type of “creative destruction” is inevitable in any free-market economy and is not a malevolent force in the long run, especially since people, particularly younger generations, can see the market shifts and react and adjust accordingly. Agriculture is an excellent case in point – whereas agriculture used to employ 80% of Americans in the late 18th and early 19th centuries, it is now less than 2%. Within this type of adjustment to labor market reality, a slice of the population that is 50+ laid off manufacturing and construction workers is a challenge, just as a 55 year old blacksmith in 1915 was challenged with adjusting. But for the economy as a whole, this is a short-term problem. More ominous for the long-term would be a group of 25 year-olds with no discernible skills facing a structurally challenging labor market over the long-run. And indeed this is what Hurst reveals in his research.  Hurst’s conjecture, and Roberts seems to agree, is that the jobs of the past in manufacturing and construction likely are not coming back, so we are likely stuck with a relatively lower labor force participation rate for a long period of time, especially given (as we will prove in a moment) that it is the young rather than the old who are under-employed.

Beginning with some framing and comparative trends, since 2000 and amongst workers aged 31-55 without college degrees, hours worked throughout the year have decreased over 10%, from 2000 hours per year to 1750. This trend is a constant decline and not simply a result of the recession in 2008. Whereas other population groups have recovered, men without college degrees uniquely have not. And just to make the point that is made in the podcast about population sizes, the percentage of men without college degrees is still the overwhelming majority – close to 70%. I think this number shocks most of us who have college degrees and cluster with others just like us. Of course, there are other forms of developing education and skills, but American job markets seem to unfortunately place a singular premium on college degree attainment. Dropping out of college is about as useful, if not worse, than not going at all, and unfortunately, viable post high school training in vocations seems to be lacking.

The most provocative component of this podcast, and connected back to my choice of media graphic and opening satire, is that Hurst has also captured through a wealth of census information that much of this decrease in working hours amongst men is driven by younger men aged 21-30. Within this age group, hours worked have decreased a stunning 15% between 2000 and 2015. Even more depressing, fully 18% reported not working at all during the previous year. You might incredulously ask how on earth someone could get by living such a lifestyle. The answer is cohabitation, and yes it is with parents (did you expect me to say with a wife?). Fully 70% of those who reported not working were living with parents or another close relative. 90% of them were not married nor do they have kids. Hurst points out this these stark declines and the contrasts between young and old are unique to men. In short, women ages 21-30 are similar to their older peers in labor force participation. You might say that the education and labor force participation of young women is picking up the slack where young men are relatively idle.

Given this much higher level of idleness/not working, you might naturally ask what these young men are doing with their time. Using time studies, Hurst indicates that almost 100% of their time differences in lost work time since 2000 have shifted to computers and video gamesPerhaps even more distressing (for those of us with a propensity to value work and look down on idleness, anyway) is that these young men are reporting the same or higher levels of happiness compared to comparative years in which their age group was more occupied with paid work.

In short, a substantial portion of our population is idle in the form of young men without college degrees, and they are seemingly completely satisfied with the lifestyle. Roberts and Hurst spend some amount of time discussing more arcane economic concepts about whether the job market weakness causes a flight to video games and cohabitation, or whether the causation is the other way around and great video games draw young men from the labor market and push their reservation prices higher (the wage at which they could be drawn back into work). Either way, I have to believe that over the long run and when this group of men reaches their 40s and 50s that levels of satisfaction with an idle lifestyle coupled with dim long-term romantic relationship prospects and parents’ failing health (for which their more productive siblings will expect them to care for, no doubt) that the consequences to mental health and other factors will not be a positive societal force. Less malign, I also have to imagine that as more women graduate from higher paying fields such as medical school and engineering, and as relatively less men put in the effort in a critical part of their lives to develop useful skills, the existing gender gaps in aggregate pay will close. This is part of the quiet gender revolution in workforce status and relationships vis-à-vis men that is lost in all of the gender pay-gap handwringing that I posted about in a different blog (again, tellingly, on the back of another EconTalk podcast).  As far as prescriptions for how to improve the plight of the young idle male, I concur with points made by Roberts on this podcast that our primary education system has to become more competitive, diverse, open to vocational models, and more flexible and adaptable to change to provide the skills required in a global, digitally innovative, and constantly changing society.

 

The Defense of Free Trade

This is about as robust and comprehensive a defense of free trade as I have seen in quite some time, from one of my favorite economists, Russ Roberts. Here is a key excerpt that was quoted in the Wall Street Journal:

Suppose a scientist invents a pill that once you take it lets you live until 120 with no health issues whatsoever. Once you turn 120, you die a peaceful death on your birthday. Suppose the scientist, in a gesture of good will, charges $10 for the pill.

Should we let the scientist sell the pill? Is it good for the country? It’s good for almost everyone. But it’s going to be very hard on a very large group of people immediately:

Doctors. Nurses. Health Care administrators. People who build hospitals. People in medical school. People who teach in medical schools. People in health insurance companies. Pharmaceutical companies. Researchers. You get the idea. It’s millions of people. This is a very disruptive technology.

What’s going to happen to all those people?

Mass unemployment. All of the skills of all of those people are no longer valued. The past investments made in those skills are now wasted. Incomes of those workers will inevitably plummet overnight. . . .

Most people would argue that the millions of health care workers have no right to stop people from living until 120. And on the surface, that’s the whole story—long life and a very tough transition for millions of people from lives of financial well-being and deep satisfaction to a much bleaker future.

But that’s not the whole story. We’re missing a huge part of the story.

The other important part of the story is that everyone is suddenly a lot wealthier. All the money we once poured into health care will now be able to be spent on other things. What are those other things?

We can’t know. No one can. But a whole bunch of areas are going to expand and some of those are going to soak up the time, talents and energy of former doctors, health care administrators and so on. . . .

And young people who planned to go to medical school or become chemists in the pharmaceutical industry or nurses or data analysts in the insurance business will now turn elsewhere. What will they do instead? There is no way of knowing but they will try to find skills to invest in that lead to financially and psychologically rewarding lives. The dreams of those young people have been shattered. They will have to find something else to do. But their opportunities will now be much wider than just something other than health care. The areas outside of health care are now much wider because the increased wealth we all have can now go into new areas and opportunities.

Enjoy!

 

 

“How to Cure Health Care” – Milton Friedman’s 2001 essay on the subject is still remarkably relevant

If I suddenly discovered that I had a serious disease and was handed a medicine concocted in 2001 as the only antidote available, I would very likely panic, despairing that surely something more timely and up to date could have been developed in the intervening 15-16 years. Alas, it seems that America’s healthcare system has been stuck in a reverse funhouse of distorting mirrors for so long, that it is equal parts amazing and depressing to read an essay from Milton Friedman on the subject and discover that the same advice he had for healthcare in 2001 is precisely the advice that would have cured our ailments if only we had followed it. Unfortunately, as he predicted, we did just the opposite, just how we have been doing it for decades since World War II. Thus, for this particular disease, hand me that vial from 2001, because everything else from then on has been cooked up by quacks and witch doctors. The hard medicine from 2001 might be painful to swallow, but it is the right palliative for the long-run.

In the essay, Friedman begins by noting the most important features of modern healthcare. First, there have been major advances in technology and science, which is no bad thing. Second, for several decades we have witnessed rising costs in healthcare relative to overall economic growth on an inflation-adjusted basis. Finally, healthcare features a decreasing satisfaction level amongst both consumers and producers. Within this feature set, Friedman notes that healthcare is unique amongst many other industries in not catalyzing technological advancement to actually lower per unit costs over time.

What distinguishes health care from these industries? Friedman has the answer – government involvement. Unique amongst all industries, healthcare is the only industry in which government plays such a dominating role in the production, financing, and delivering of medical services. And despite the role of the nominal private insurers in the market, I would point out that government finances, whether directly through Medicare and Medicaid, or indirectly through subsidies, a critical mass of over 50% of healthcare finance. Where the government leads on payment models, commercial players, largely structured in local monopolies, inevitably follow, making a mockery of any claims that this is a “market” in any sense of the word. Commercial insurers are not much different than government directed contractors.

The role of third party payment models
Within this doleful narrative, we can firmly point the finger at third party healthcare payment models as the culprit for the out of control expenditures and the mess of unintended consequences we have found ourselves in. And how we got third party payments is another lesson in how one muddled government intervention leads to the need for yet another, building an unsustainable house of cards that always needs one more card stacked on top. In this case, wage controls in the World War II era led employers to provide medical coverage as a benefit to get around controls and to more effectively compete for talent. By the time the IRS got wind of it and attempted to tax these benefits, they had become so popular that Congress intervened to make them a non-taxable benefit. Here is the catch though- the tax exemption was only provided to employers. Any consumer out on the marketplace buying insurance on their own receives no such benefit. Thus, people are conditioned and majorly incented to look for health coverage from their employer. Friedman summarizes the ill logic behind reliance on third party payment models and employer-based insurance:

We have become so accustomed to employer-provided medical care that we regard it as part of the natural order. Yet it is thoroughly illogical. Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer? Why not return to the much-reviled company store when workers were in effect paid in kind rather than in cash?

The major perverse impacts of employer-based insurance are that people delegate their healthcare provisioning and decision making to entities and individuals ill-equipped to perform those responsibilities. Furthermore, employees inevitably give up the ability to achieve in direct wages what is now siphoned off to healthcare coverage.

Then in the 1960s the U.S. Government enacted Medicare and Medicaid, driving third party payment models across even more populations. What is the logical impact? As Friedman notes, “nobody spends money from someone else as frugally as his own.” The third party administration of healthcare costs means no incentives for the individual to control those costs. As Friedman observes:

Enactment of Medicare and Medicaid provided a direct subsidy for medical care. The cost grew much more rapidly than originally estimated—as the cost of any handout invariably does. Legislation cannot repeal the nonlegislated law of demand and supply: the lower the price, the greater the quantity demanded; at a zero price, the quantity demanded becomes infinite. Some method of rationing must be substituted for price, which invariably means administrative rationing.

Astoundingly, healthcare as a share of our national income has risen from 3 percent in 1919 to close to 20 percent in 2016. To put this in perspective, Friedman comments that in 1946 seven times as much was spent on food, beverages, and tobacco than on healthcare. By 1996, healthcare had passed these collective categories.

What is Insurance? In healthcare, it bears little resemblance to what it typically means

In every other aspect of our lives, insurance means coverage for the catastrophic, long tail events that we never expect to happen but which would wipe us out financially if they did occur. It is the hurricane that reduces our house to rubble or the wreck that totals someone else’s car and puts them in a hospital. In healthcare, government meddling has forced this to become coverage for everything, however routine the expense. Much of this is based upon the employer incentives to move compensation into healthcare coverage, but even more pernicious is government mandates on what health plans must cover. It is analogous to auto insurance covering oil changes by force of government mandates. In this event, we would not marvel at oil change prices spiraling out of control. Similarly, it is little wonder that healthcare costs have exploded; between third party payment obfuscation, administrative bloat, and mandated coverages of all healthcare expenses, it would be an economical gravity defying miracle if costs didn’t explode.

“The Black Hole of Bureaucratization” 

One malignant outcome of third-party based payment systems is the concomitant growth in administrative functions, be it comprised of the administrative state for government programs or administrative bloat from commercial insurers required to finance, provision, deliver, and indeed ration medical care. As Friedman indicates, since the patient no longer has an incentive to care about healthcare costs and since the provider of health services has to worry about whether a certain service is covered by the third-party payer, a middle layer is required. In this model, the physician becomes little more than an employee of the insurer or the government, taking their guidance on what can be performed for the patient. In turn, the patient’s voice is squelched, as they are merely told what can be done within the confines of their plans.

Here is where Friedman delivers what I believe to be one of his most innovative economics insights, what he calls Gammon’s Law – which is defined as bureaucratization that causes both a rise in inputs and expense alongside a decrease in outputs and outcomes. Gammon’s Law is based upon observations of a British physician named Max Gammon, who performed an extensive study of the British National Health Service and noted that in this bureaucratic system that there was both an increase in expenditure as well as a fall in production. He noted that such systems behave like ‘black holes,’ ‘sucking in resources’ and ‘shrinking in terms of emitted production.’

There are some astounding statistics from the U.S. healthcare system that I believe are so shocking that their true gravity is hard for the human mind to grasp and that demonstrates Gammon’s Law at work. Friedman observes that inflation adjusted costs per patient day since 1946 have increased from $30 to $1,200 in 1996. A more recent update for this from the Kaiser Foundation updates this number to $2,200. This is a stonking seventyfold increase! Further highlighting Gammon’s Law at work, hospital staff per bed increased ninefold from 1946 to 1996. Given other trends in the industry, I highly doubt that this force has dissipated in the intervening 20 years. This Hospital Staffing Ratio from Statistica suggests a great amount of staffing per bed in the U.S.

In order to head off any common simplistic conjectures that medical science and technological progress are the reasons for the dramatic increase in inputs and expenditures, Friedman observes the following:

….True, medical machines have become more complex. However, in other areas where there has been great technical progress—whether it be agriculture or telephones or steel or automobiles or aviation or, most recently, computers and the Internet—progress has led to a reduction, not an increase, in cost per unit of output. Why is medicine an exception? Gammon’s law, not medical miracles, was clearly at work. The provision of medical care as an untaxed fringe benefit by employers, and then the federal government’s assumption of responsibility for hospital and medical care of the elderly and the poor, provided a fresh pool of money. And there was no shortage of takers. Growing costs, in turn, led to more regulation of hospitals and medical care, further increasing administrative costs and leading to the bureaucratization that is so prominent a feature of medical care today.

Friedman turns to the important question of what outputs are we getting for this increase in inputs? His answer is that it is almost impossible to tell given overall improvements in diet, clothing, housing, hygiene, sanitation, general improvements in public health, better diagnosis and treatment of conditions, etc. In short, while life span and life expectancy have increased, little of that is likely attributable to the increase in health system spend. In fact, the number of days people spend in a hospital have gone down over time. While obviously that can be a good outcome and a result of better care within the walls of a hospital, it is also directly correlated to cost pressures hospitals face – pressure that leads to a maniacal pursuit of getting patients out of beds and out of the door. In summary, we can’t point to any discernible improvements we have achieved in outcomes to pair with the seventyfold increase in expenditures. Again, Gammon’s Law of the black hole in all of its fearsome gravity sucking power.

Conclusions

In a comparison between the U.S. and other developed (OECD) countries, Friedman articulates that the hybrid system that America employs is particularly bad at controlling costs. In this respect alone, the U.S. has a relative disadvantage compared to peers such as the U.K. and Canada that have single-payer and monopoly over delivery systems. Of course, there is a tradeoff with these systems in access and innovation. Following the previously mentioned maxim on infinite demand when a good is effectively zero, the inherent tradeoff is administrative controlled rationing and inevitable queuing. Another major disadvantage of these systems is that the incentives push politicians to focus less on delivering best-in-class care to a primary focus on controlling costs.

At long last, we have arrived at the palliative against Gammon’s Law in healthcare. Of course, every classical liberal, of which Friedman is an apostle, a veritable “hero of the faith” whom we study and revere, dreams of a healthcare system that becomes as efficient and as consumer-centric as the likes of Amazon. We should be able to get on an intuitive dashboard and observe ratings of physicians and systems on the value that they drive. We should be able to observe both their pricing and outcomes, including being able to drill into the details by condition and procedure of concern to us in that moment. Competition should drive them to provide meaningful information to consumers in order to capture market share. We should have great care-based (not insurance-based) relationships with our primary care providers and other care planners and providers. A classical liberal is going to logically deduce, as does Friedman, that the idealistic path to get there is to eradicate Medicare and Medicaid, remove the tax exemption for employer-based coverage (in return for lower tax rates directly to consumers, of course) and a return of insurance to its proper role of covering catastrophes. Friedman observes that since these are going to be politically impossible in the short-run, we should aim for the next best thing – flexible health savings accounts. Friedman concludes his essay by outlining his policy proposals further:

A medical savings account enables individuals to deposit tax-free funds in an account usable only for medical expense, provided they have a high-deductible insurance policy that limits the maximum out-of-pocket expense. As noted earlier, it eliminates third-party payment except for major medical expenses and is thus a movement very much in the right direction…

…Medical savings accounts offer one way to resolve the growing financial and administrative problems of Medicare and Medicaid. It seems clear from private experience that a program along these lines would be less expensive and bureaucratic than the current system and more satisfactory to the participants. In effect, it would be a way to voucherize Medicare and Medicaid. It would enable participants to spend their own money on themselves for routine medical care and medical problems, rather than having to go through HMOs and insurance companies, while at the same time providing protection against medical catastrophes.

A more radical reform would, first, end both Medicare and Medicaid, at least for new entrants, and replace them by providing every family in the United States with catastrophic insurance (i.e., a major medical policy with a high deductible). Second, it would end tax exemption of employer-provided medical care. And, third, it would remove the restrictive regulations that are now imposed on medical insurance—hard to justify with universal catastrophic insurance.

This reform would solve the problem of the currently medically uninsured, eliminate most of the bureaucratic structure, free medical practitioners from an increasingly heavy burden of paperwork and regulation, and lead many employers and employees to convert employer-provided medical care into a higher cash wage. The taxpayer would save money because total government costs would plummet. The family would be relieved of one of its major concerns—the possibility of being impoverished by a major medical catastrophe—and most could readily finance the remaining medical costs. Families would once again have an incentive to monitor the providers of medical care and to establish the kind of personal relations with them that were once customary. The demonstrated efficiency of private enterprise would have a chance to improve the quality and lower the cost of medical care. The first question asked of a patient entering a hospital might once again become “What’s wrong?” not “What’s your insurance?”

In the aftermath of the surprise election putting Trump in charge of a unified GOP Congress, it is encouraging that the policy proposals developed under the moniker of “Better Way” produced by Paul Ryan and other Republicans in Congress make incremental gains in these areas. I have summarized these policy proposals in another post, and while they don’t go nearly as far as Friedman or I would want, it at least has the advantage of incremental gains, particularly in the area of health savings accounts. Given that Obamacare went even further in the wrong direction compared to Friedman’s prescriptions, further exacerbating the decades of bad decisions full of unintended consequences that is the hallmark of U.S. healthcare policy, getting at least a portion of that proverbial 2001 antidote vial is good momentum. Of course, Trump is the ultimate wild card on where he intends to take healthcare reform, but I hope he looks no further than some of the sensible plans that are already there. The ball is being handed off right in the gut. Don’t fumble it, Mr. President.

As bonus material, it is always a personal pleasure to observe the affable and remarkably quick on his feet Friedman address some of these questions and issues directly. Here are some great videos on this very subject.

If we must target wages for poverty reduction, wage subsidies > minimum wages

If we agree that poverty and welfare reduction are valuable goals that government should enact and that we want to supplement wages as a result, then this quick four minute video provides a simple explanation as to why wage subsidies are drastically superior to minimum wage policies. I would add that much of the muddle that we make of poverty reduction – whether it be food purchasing programs or healthcare financing, and all of those programs’ attendant bureaucracy, could be made much more efficient and effective through a wage subsidy. Plus, we could actually target poverty directly while supporting jobs and in turn reducing the rest of the inefficient welfare state.

Of course, those in government always prefer the minimum wage – it gives voters the impression that they did something to reduce poverty while shoving the consequences off of the government liabilities and accounting books, the problem being that it is less effective, drives down employment, and/or increases prices to consumers. In general, Marginal Revolution’s economics videos are always brief but insightful.

Support for Decentralized and Limited Government from the 18th Century Scottish Enlightenment

In the wake of my second-highest viewed post of all time, which covered the topic of decentralization of government (please don’t ask for actual viewing values; allow a man writing an obscure blog his small relative victories), I was pleased to get philosophical support from one of the greatest writers on the topic of government and political science of all time – David Hume. Most people who have enjoyed, or endured, depending on one’s perspective, an Economics 101 course are well familiar with one lion of the Scottish Enlightenment, Adam Smith. Smith gave credence in his Wealth of Nations to a philosophy of full-throated support of the individual liberties of merchants practicing their crafts and generating profits unencumbered by the meddling state that was a novel philosophy and code of ethics for the times. Smith forcefully advocated that betterments in society occurred in imperceptible and novel ways through people seeking profits, guided by the “invisible hand” of the pricing mechanism, which effectively coordinated their ideas and actions in ways that no government planner could match. Never mind that both modern day proponents and detractors of Smith both seem to believe that Adam Smith was some form of Machiavellian profit maximizer and utilitarian, thereby completely missing his comprehensive views of bourgeois ethics that he espoused in his perhaps even more compelling and powerful book, The Theory of Moral Sentiments, in which Smith speaks of the “impartial spectator” within us which guides and regulates our behavior such that it is socially acceptable and in most cases benevolent. The impartial spectator of Smith is driven by a mysterious combination of divine nature and the nurture that occurs as people (or the vast majority of people comprising society) interact with each other and seek approbation and praise of others. Scorn is something most of us do our best to avoid. In other words, while profit-seeking is a virtue of prudence, the vast majority of people operate in their daily lives with other self-regulating and self-controlling virtues that balance the prudence of profit-seeking. All of this social self-regulation is performed through emergent order without the need of heavy-handed law and government.

I digress, so back to the topic of David Hume. Hume was a Scottish Enlightenment contemporary and great friend of Adam Smith, and it is through his remarkable Selected Essays as compiled by Oxford World Classics that I find support for decentralized government under a different and additional rubric than I articulated in my original musings on the subject. Specifically, in his essay on Of The Rise and Progress of the Arts and Sciences, in which Hume generally makes the case that people living in free governments are much more likely to contribute to the progress of arts and sciences than those living in autocracy, Hume makes compelling arguments for divided and decentralized government. The first point Hume articulates is this:

A large government is accustomed by degrees to tyranny, because each act of violence is at first performed upon a part, which being distant from a majority, is not taken notice of, nor excites any violent ferment. Besides, a large government, though the whole be discontented, may, by a little art, be kept in obedience; while each part, ignorant of the resolutions of the rest, is afraid to begin any commotion or insurrection: not to mention that there is a superstitious reverence for princes, which mankind naturally contracts when they do not often see the sovereign, and when many of them become not acquainted with him so as to perceive his weaknesses. And as large states can afford a great expense in order to support the pomp of majesty, this is a kind of fascination on men, and naturally contributes to the enslaving of them.
In a small government any act of oppression is immediately known throughout the whole; the murmurs and discontents proceeding from it are easily communicated; and the indignation arises the higher, because the subjects are not to apprehend, in such states, that the distance is very wide between them on their sovereign. ‘No man,’ said the prince of Conde, ‘is a hero to his Valet de Chambre.
In other words, a large central government presiding over a wide swath of people and with large amounts of power can more readily get away with persecuting minorities, be they ethnic minorities or minorities in dissenting thoughts and views. Additionally, the further removed from proximity to a ruler or ruling elite, the more prone people are to superstitious reverence and obsequious behavior towards them. I loved the quote related to no man being a prince to his valet, since such close proximity as to that of a valet makes us all aware of any human’s noxious flaws and weaknesses. I would gently point out that Americans are no strangers to this superstitious reverence for powerful leaders – witness the rise of the bumptious Trump riding a wave of American voters seeking brash authority. Witness also the esteem, admiration, and honor we typically reserve for presidencies such as the two Roosevelts, who consistently abused executive power and authority. Contrast that to practitioners of great executive power restraint, such as Calvin Coolidge and William Howard Taft, who receive no such comparative historical encomiums.
Hume proceeds in the essay with the following observations:
But the divisions into small states are favorable to learning, by stopping the progress of authority as well as that of power…To balance a large state or society, whether monarchical or republican, on general laws, is a work of so great difficulty, that no human genius, however comprehensive, is able by the mere dint of reason and reflection, to effect it. The judgments of many must unite this work: experience must guide their labour: time must bring it to perfection: and the feeling of inconveniences must correct the mistakes, which they inevitably fall into, in their first trials and experiments. Hence appears the impossibility that the undertaking should be begun and carried on in an monarchy; since such a form of government, ere civilized, knows no other secret or policy, than that of entrusting unlimited powers to every governor or magistrate, and subdividing the people into so many classes and orders of slavery. From such a situation, no improvement can ever be expected in the sciences, in the liberal arts, in laws, and scarcely in the manual arts and manufactures. The same barbarism and ignorance, with which the government commences, is propagated to all posterity, and can never come to a period by the efforts or ingenuity of such unhappy slaves.

In other words, a centralized government taking on too much power is reduced to trying by sheer exertion of a “Tyranny of Experts” to borrow the William Easterly phrase, of trying to plan for and rule a great diversity of people. As Hume implies, it is an impossible task that starves us of all natural freedoms and the ingenuity that we would have exhibited without the heavy hand of a meddling government, and it makes us “unhappy slaves.” Or as Hume’s good friend Adam Smith might say, it also torches our invisible hand and extinguishes the impartial spectator within. Lest anyone think that I am speaking of some distant and ancient European monarchy, I am looking at you America and your Centers for Medicare and Medicaid Services, your Health and Human Services, your Obamacare, and your Dodd-Frank.

 

“Slaughter & Rees Report: ‘Mr. President, You Are Mistaken, Sir'”

In a similar vein to my recent post on the Trump/Carrier “deal”, but with far more professional credibility from the authors – spanning the gamut of journalism, economics, private sector, and government experience, including one author’s (Matthew Slaughter) service on the Council of Economic Advisors for President George W. Bush and current service as the Dean of the Tuck School of Business at Dartmouth – this article, delivered as a letter to President-elect Trump, represents additional logic behind free trade. While my post largely focuses on the philosophy of individual freedom and dangers of government picking winners and losers, the Slaughter and Rees Report lines up several empirical reasons of why protectionism is actually economically harmful and counterproductive. It is worth the read.

Exhibit A: Industrial policy that protects the few at the expense of the many – Carrier keeps jobs in Indiana but on the backs of taxpayers and consumers

Image result for Carrier JObs

I just received an article from the Wall Street Journal that indicated that Carrier has agreed to keep roughly 1,000 jobs in a manufacturing plant rather than shift the employment to Mexico. Rather than celebrate this as a great example of private and public partnership and the deal-making style of Trump that successfully and benevolently puts Americans first, I am going to put a different, and perhaps unpopular, spin on this and call it what I believe it to truly be – arbitrary manipulation and industrial policy developed by government for the benefit of the few at the expense of the many.

Of course, the “saving” of 1,000 jobs is a positive thing on the surface, and it will no doubt lead to declarations of success and subsequently votes for the protectionist politicians who promoted it well into the future. Less visible will be the unintended consequences and foregone opportunities of non-government intervention. I will start with the obvious and work my way to the more philosophical, but just as important, reasons to decry, rather than to celebrate, such government interventions:

  • The 1,000 jobs were kept and promoted at a hefty price tag per worker. At a $7,000,000 tax incentive agreement, this works out to $7,000 per job “saved.” This means the rest of Indiana taxpayers are subsidizing this arbitrary policy. No doubt, you will find many lower-paid workers subsidizing their higher-paid brethren. I am sure the Indiana taxpayer could think of a million different things they could do with that $7,000 to help their own careers and families. This is the unintended consequences that are diffused and don’t get highlighted in the media that happens with industrial policy. This is also what happens when rent-seeking corporations get the ear of government officials who control too many of the levers of economic policy. They get to decide how to use our tax dollars and declare it a successful investment with little accountability or visibility to what ends those dollars could have gone to had they left them in our pockets.
  • The inability to shift labor to take advantage of wage rate/productivity imbalances leaves costs higher for American consumers in the long-run. Once again, this is government meddling in support of one small class of citizens at the expense of the many.
  • Preventing Mexico from taking advantage of their comparative advantages in their specific mixture of labor force participation, wages, and productivity will continue to put pressure on their citizens but not allowing them to grow economically, which further puts pressure on its citizens to immigrate. Being able to take advantage of cross-border trade is mutually beneficial and is not the zero-sum game that protectionists such as Trump believe it to be. The great irony is that plugging one “problem” of imbalanced trade only exacerbates another one of immigration- or at least in the sense that self-described American Economic Nationalists believe trade and immigration to be problems.
  • Sustaining or creating new abusive and arbitrary government power to take tax dollars from citizens in support of the few establishes/continues a dangerous precedence. What well-connected company or connected political body will take their turn next in using their connections to politicians to extract resources from the rest of us under the auspices of “America first?” Do we really trust the government to pick and choose these winners wisely and with all of our freedom, liberty, and economic interests in mind? I hope to someday make this a rhetorical question.
  • I keep coming back to this point from previous posts – but what right does the government have to tell me as a consumer where I can and can’t buy goods? By implication – browbeating, cajoling, and incenting them to stay (using my money) in America through taxpayer funds is ultimately an act to usurp my rights to buy goods from the provider who can make the highest quality good at the lowest cost and in the end is little more than theft of my resources to support their own arbitrary decisions.

Finally, freedom and liberty requires a tradeoff of uncertainty in outcomes that don’t always redound to every individual, but is the only way with which we can grow economically (and in turn emotionally and spiritually) in the long run. The fundamental question then becomes do we want to bequeath to our future generations and children an open and dynamic society where people are free to create the exciting and enriching occupations of the future, or do we want to confine them to the known quantities of the past and present?  We shouldn’t demand equality in outcomes, but rather demand the equality of opportunity combined with blind justice – good arbitration when conflicts arise over contracts between free people. Otherwise, we should keep government at a safe arm’s length that is akin to a good and impartial referee who knows a foul when it sees it and has a consistent redress for those fouls irrespective of the player that committed them. Instead, what we have these days is a referee who changes the rules in the middle of a game to the advantage of his favorite and most well-connected players. On this note of equality of opportunity and why it is extremely important, I land with a powerful excerpt from Deirdre McCloskey’s remarkable book, Bourgeois Equality, of which I have written more at length about in a separate post, but for today’s topic pull out this specific section:

The ideas of equality [in the English and Scottish Enlightenment period] led to other social and political movements not uniformly adorable. Hannah Arendt remarked in 1951 that ‘equality of condition…is among the greatest and most uncertain ventures of modern mankind.’ Alexis de Tocqueville had said much the same a century earlier. And Scottish equality has a harsh, even tragic side. It entails equal reward for equal merit in a marketplace in which others, by freedom of contract, can also compete. As John Stuart Mill put it in On Liberty, ‘Society admits no right, either legal or moral, in the disappointed competitors to immunity from this kind of suffering; and feels called on to interfere only when means of success have been employed which it is contrary to the general interest to permit – namely, fraud or treachery, or force.’ Yet in the real world, unhappily, if the poor are to be raised up, there is no magic alternative to such competition. An ill-advised and undercapitalized pet store, into which the owner pours his soul, goes under. In the same neighborhood a little independent office for immediate health care opens half a block from a branch of the largest hospital chain in Chicago, and seems doomed to fail the test of voluntary trade. Although the testing of business ideas in voluntary trade is obviously necessary for betterment of the economy (as it is too by non-monetary tests for betterment in art and sport and science and scholarship), such failures are deeply sad if you have the slightest sympathy for human projects, or for humans. But at least the pet store, the clinic, the Edsel, Woolworth’s, Polaroid, and Pan American Airlines face the same democratic test by trade: Do customers keep coming forward voluntarily? Does real income rise?

We could all by state compulsion backed by the monopoly of violence remain in the same jobs as our ancestors, perpetually “protected,” though at $3 a day. Or, with taxes taken by additional state compulsion, we could subsidize new activities without regard to a test by voluntary trade, “creating jobs” as the anti-economic rhetoric has it. Aside even from their immediate effect of making national income lower than it could have been, perpetually, such ever-popular plans – never mind the objectionable character of the violent compulsion they require – seldom work in the long run for the welfare of the poor, or the rest of us. In view of the way a government of imperfect people actually behaves in practice, job “protection” and job “creation” often fail to achieve their gentle, generous purposes. The protections and the creations get diverted to favorites. Laws requiring minority or female businesses to be hired, for example, tend to yield phony businesses run in fact by male whites. In a society run by male whites or inherited lords or clan members or Communist Party officials, or even by voters not restricted by inconvenient voting times and picture IDs, the unequal and involuntary rewards generated by sidestepping the test of trade are seized by the privileged. The privileged are good at that.