Reasons to care about our American health care crisis – 300 million personal and 3 trillion dollars of them

Image result for healthcare as percentage of gdp projections graph

Image result for healthcare as percentage of gdp projections graph

The Compelling Case for Change

Every individual in this country has a personal story of how they have witnessed dysfunction and brokenness in our American health care system. All 300 million+ Americans have in the very least suffered a really screwed up and indecipherable bill (or set of bills from an uncoordinated system for the same service) with little price transparency and with lack of clarity on what services were actually offered and why. Many of us have been subjected to the extremely frustrating lack of coordination across systems, forcing us to attempt to connect the pieces together. A depressing amount of us have even witnessed ourselves or a loved one being harmed by a medical error or a health system acquired infection. A doleful companion to these visible operational challenges is the fact that we are all increasingly paying inordinately growing sums, over $3 trillion and counting, into health care, while getting increasingly little in return.  The 18th Century Scottish philosopher, economist, and essayist David Hume once observed of public debt that, “It must, indeed, be one of these two events; either the nation must destroy the public credit, or public credit will destroy the nation. It is impossible that they both can subsist, after the manner they have been hitherto managed…” One can easily substitute Hume’s concerns with public debt to its modern American equivalent of health expenditures to develop the same sense of urgency. In fact, as the above graphs on cumulative projections of American health care costs and government spending on health entitlements reveals, public credit and health care expenditures are inextricably linked, unsustainable, and crowding out all other areas of government expenditure as well as crowding out what we as consumers would otherwise prefer to spend our dollars on.  As will be discussed later, the great tragedy is that we are pouring money into reactive systems of care that do little ultimately to increase our quality of life and life span. It is largely non-value added money that is siphoned off from other valuable areas of the economy. This has to change.

We have a crisis on our hands, and it will take a concerted and united effort combined with a sense of urgency to destroy it. Lately, I have been drawing a tremendous amount of inspiration and sense of personal urgency through the reading of David Goldhill’s Catastrophic Care: Why Everything We Think We Know about Health Care Is Wrong.  For those like myself who are industry insiders, consider this a scathing and devastating indictment that we need to absorb, comprehend, and become devoted in our own little corners to remedying. Think of this book as the prosecution’s case against our industry. Do we have a defense? If not, how do we respond? Otherwise, I am afraid that the unsustainable industry as it stands today will be forced to deal with remarkable disruption and disintermediation when consumers and/or governments finally do revolt and demand change of a significant magnitude that will by then be required. Complacency should cease to be an option. For those who believe they are woefully inadequate to the task of understanding the complexity of health care (this group does not have to be mutually exclusive from the previously mentioned one of industry insiders), consider this book a remarkably easy layman’s guide that details what ails our health care system and why it should matter to you. In short, I find this book to be highly accessible and critical for all Americans to read. If it does not apply to you as a prosecution’s case, then it should easily apply to you as an easy to read and understand textbook that covers the range of issues that you as a consumer and voter should be familiar with as it relates to our broken health care systems.

The Prosecution’s Case

In of itself, Goldhill’s introduction is packed with enough vignettes and charges to make one think and feel deeply about the industry. Beginning with the visceral experiences, he presents his own personal stories of fears, frustration, and loss in the forms of how his son and father experienced health care. The former is a tragicomic string of inefficiencies, complacency, and poorly performing systems through an appendectomy, the latter a much more unfortunate set of circumstances that culminated in a hospital acquired infection and ultimately death. Along the way, Goldhill observes both technical and life-saving brilliance incongruously combined with administrative and operational incompetence. His pointed question, which should be our industry-wide challenging refrain is, “why does therapeutic excellence often exist side by side with such backwardness?”

It isn’t just the performance aspects of our health care system that causes alarm. The other side of the formula is the price of health care. It would be one thing if we could say, “sure, it’s bad, but at least it’s cheap!” But with health care creeping up on 20% of GDP, that is appallingly and depressingly not the case. Here is a thought experiment: what would be going on in the streets and in the media if we woke up tomorrow to $15.00 per gallon gasoline prices? I dare say this would inevitably become the subject for major political and social upheaval. And yet, this is exactly the type of inflation that has occurred over the last few decades in American health care. The critical distinction is that the dramatic inflation has been hidden from us, even though it still has just as significant of an impact to our bottom-line, take-home cash. In the book, Goldhill uses the simple example of a woman named Becky who works at his company: “Becky will actually contribute over $10,000 into American’s health care system this year – most of it through payments she is not aware of…even if we somehow tame the explosive growth in health care costs (literally reducing cost growth to zero), our system already assumes that Becky will pay well more than $1.2 million over her lifetime. And that’s assuming she never has a major illness, in which case she will almost certainly pay much more. Becky is pouring far more money into our health care system than she imagines.” Indeed, I would add that this out of sight and out of mind aspect of funding health care access is the primary reason we have increasing take home pay inequality in America, as I covered in a separate blog post.

“Why does therapeutic excellence often exist side by side with such backwardness?”

The Foundational Industry/Government Error

Goldhill articulates what he believes to be the primary culprit in our combined system of rising costs and operational backwardness – a funding and care selection model he indicates is defined by what he calls “Surrogates.” In this group, you could lump commercial insurers as well as government models such as Medicare and Medicaid. Goldhill observes that, “The dominant health insurance model requires us to turn over our role as consumers to what I call Surrogates: private insurers, Medicare, and Medicaid. The theory is that only the Surrogates have enough knowledge to control excess care, enough market power to discipline rising prices, and enough vested interest in our health to drive greater safety and quality. But the past fifty years suggest the theory is wrong; the Surrogates themselves create many of the incentives for bad behavior in health care…American health care relentlessly expands the definition of medical need, engages in administratively complex and nontransparent practices, and overinvests in expensive technologies because these actually serve the institutional (and financial) needs of the Surrogates. Conversely, the health care industry underinvests in service, safety, and efficiency, because these are not the Surrogates’ priorities (even if they are our priorities).” Of course, there is a lengthy history here on how we got to this point of over-reliance on Surrogates, some of which is covered in a separate post, where I will admit to relying heavily on Milton Friedman, and another separate post where I borrow heavily from Dr. Michael Accad’s wonderful  Alert and Oriented blog.

The Insulated Island of Health Care

A large part of the appeal and readability of Goldhill’s account is that his analogies, connections, and consistently simplistic and relatable terms he coins keeps the reader engaged and understanding of typically complex themes. One such term is “The Island of Health Care.” Any time you see this, you know you are entering into the zone of incomprehensible and nonsensical ways of doing and defending the ways in which health care operates. On this topic, Goldhill levels these charges:

Health care experts often make confident, absolutist assertions that appear truly ridiculous when held up to the mirror of the world outside health care. For example, they write about how technology is inexorably driving up the cost of care, often while working on a powerful laptop for which they paid a few hundred dollars. The secretary of health and human services says that catastrophic health insurance isn’t real insurance because it doesn’t pay for routine expenses; apparently, she’s never had an auto or homeowner’s policy. Truly brilliant analysts argue that health care can never be a normal industry because the need for care is so concentrated that in any given year roughly 70 percent of care is used by only 10 percent of the population. But a far greater concentration of spending in any given year is the rule for almost every other universally-consumed expensive good or service; surely, they know that we don’t use insurance to pay for purchases of homes, cars, weddings, and college educations?…
…Sure a person hit by a bus or having a heart attack has a unique ‘demand curve’ for medical services. But the fact that some health care is truly urgent doesn’t mean that all of it is…most care is no longer of this type; the biggest share we spend on health care now goes toward identifying and managing long-term conditions…Yet this new reality as barely intruded into the way we think about, pay for, and manage care. It’s like organizing the entire care-service business to protect us against only the possibility of a tire blowout on a highway…
…Forget the rhetoric: our health care system isn’t an example of ‘socialism’ or ‘profit-driven medicine.’ In fact, it is such a strange beast, I’m not even sure we have an appropriate label for it. The best analogy might be the Galapagos Islands, set so far offshore from the mainland of industry evolution and economic laws that is has produced odd, anomalous creatures of policy and regulation.
All I can say to this litany is “Indeed!”

The “Imperial” Health System

“Imperial Health System” is another one of Goldhill’s lexicographical innovations. What I enjoy most about this section is his focus on what actually matters to our health, largely forgotten and neglected in all of our political rhetoric and tug of war – our society and our lifestyles. This is what health care industry parlance is increasingly calling “Population Health,” although a fair amount of this term is still very much being used for inside the four walls of the hospital activities. Speaking of the Imperial Health System, Goldhill states that, “of the 34 rich countries in the OECD, the United States ranks a low 27 in life expectancy. Whenever a new study on comparative life span is published, most commentators draw conclusions about the weaknesses of our health care system, especially our unique lack of guaranteed universal access. Many note that we rank low in life expectancy (and other measures of general health) ‘despite’ spending so much more on care than any other country. This casual and universal conflation of health care and health represents the greatest triumph of imperial health care – a true hijacking of language. Despite all truly extraordinary achievements of medicine – and its promise for our future – health care remains a relatively small factor in determining life spans. We know what really matters in both length of life and physical well-being: income and education; minimization of smoking and substance abuse; diet and exercise; family life and public safety. The reason Swedes, Japanese, and Italians live so long isn’t their (very different) health care systems; it’s that they live like Swedes, Japanese, and Italians. And the reason Americans and Britons are on the lower end of longevity rankings isn’t our (again very different) health care systems. It’s that we live – and eat and exercise – like Americans and Britons.”

One interesting tidbit that Goldhill serves up is the fact that although he is a lifelong Democrat, his stance on the Affordable Care Act is that it doubled down on everything that already existed that was wrong with health care. His skepticism is made evident when he indicates that, “The whole bill is based on the fundamentally weird (but apparently bi-partisan) idea that ever more expensive health care can somehow be made affordable to all by clever financial engineering. The ACA is less a reform of our health care system than an extension of its past principles to their logical end.”

Like it or not, health care is an industry…

It may seem jarring and unseemly to think of institutions chartered with providing life-giving and life-saving care as also an industry focused on making money, but this is a reality and I would argue is a benevolent, not a malevolent force and we need to use it even more and in more transparent and consumer-driven ways. I could do a whole section on the fact that industry combines the virtue of profit-making prudence with many other virtues such as generosity, justice, mercy, etc., but for expediency I direct the interested reader to check out Deirdre McCloskey’s book Bourgeois Virtues for more on that topic. For his part, Goldhill states that, “We may not like thinking of health care as an industry, but it is one. Roughly 15 million Americans now earn their living from health care; forty-eight of the Fortune 500 largest companies are in the health business. The majority of people in this industry are motivated by a desire to do good, to help others. But they are also driven by their economic incentives. As a business, health care has done very well by the conventional wisdom that care is fundamentally different from everything else (can you imagine anyone proposing with a straight face that antitrust laws be suspended so that a region’s oil producers, refiners, and distributors be allowed to cooperate to achieve lower prices? Well, that’s essentially the premise behind Accountable Care Organizations, a key structural reform in the ACA

The reason Swedes, Japanese, and Italians live so long isn’t their (very different) health care systems; it’s that they live like Swedes, Japanese, and Italians. And the reason Americans and Britons are on the lower end of longevity rankings isn’t our (again very different) health care systems. It’s that we live – and eat and exercise – like Americans and Britons.”

…so we need to create true consumers for the industry to function properly 

This post has the great risk of parting the reader into a natural left versus right camp, but one benefit of Goldhill’s book is that I sincerely believe he is trying to find and articulate a consumer-driven solution that might appeal to both the sides of the left/right political spectrum.  Goldhill consistently returns to the necessary role of consumers making decisions in the market in any industry, and no less so than in health care. He holds up the example of Singapore above all as the health care model he appreciates the most. There is a role for insurers there, but they are not the comprehensive surrogates that they have become in America. In other words, they actually function like insurance companies. Singapore subsidizes health care funding for the poor, but the consumers themselves make decisions on how to spend those dollars across all income spectrums. The contemporary equivalent of this in American policy debates would be funded health savings accounts for Medicare and Medicaid. To these ends, Goldhill strikes his balance between left and right forces here, and adds his observations on just how bad for consumers this market is today. Here is one health care consumer analogy that Goldhill pulls out that would be amusing if it were not so tragically true of how health care interacts with consumers: “Can you imagine taking your care to a body shop and, moths later, receiving a separate bill from the guy who reattached the fender? And the shop saying it couldn’t discuss the matter with you? The real premise behind restoring the primacy of customers is to force providers to chase us with lower prices, fewer errors, and better service. On the Mainland, we actually do relatively shopping around; sellers offering discounts and better service find us. It’s our current Surrogate-driven system that forces us to do the work and get pre-approval for reimbursement, to discover which facility is good at which treatments, to find a doctor, to coordinate the work of specialists, to negotiate price, to uncover safety records. Simply put, health care performs badly because it can get away with it.”

I really like this point about sellers here. Too often, health care experts make the point that consumers are not educated enough to make their own decisions. This assumes that consumers have to be perfectly informed, and since they can’t be, they might as well rely entirely on the Surrogates. Goldhill makes the point that we don’t have to be perfectly informed for a functioning market. In a consumer-driven market, sellers will be forced to innovate on the marketing and outreach and customer services aspects as well on the actual performance of their business. They will have it in their interests (of survival) to educate and inform the consumers. Competition will be driven by pricing and outcomes transparency. Only in this type of market paradigm will we see prices hurtle down and outcomes increase.

The ACA is less a reform of our health care system than an extension of its past principles to their logical end.

The Policy and Industry Changes Required

The health care mess is so complex and is several layers thick that there are many ways to propose consumer-driven corrections. Many of these that I am personally favorable to were highlighted in the early days of Paul Ryan’s “Better Way” set of plans for health care reform. Goldhill lays out his own proposals that I think have the merits of threading the left/right needle that might make it politically feasible. Much remains to be seen on what will come out of the united GOP’s ACA repeal and replace plans, and Goldhill’s ideas preceded the contemporary debates by a few years and may not have any impact on the debate. Still, given the choice between the status quo (assuming failure of the GOP to move replace all the way through), I would take Goldhill’s prescriptions, including government oversight and management of some forms of catastrophic insurance, any day of the week. The important factor is that the majority of the market should move to consumer-driven decision-making, which is the benefit of a Health Savings Account driven reform model. In Goldhill’s words, “…to recognize that change is inevitable and unpredictable; choice, dynamism, and competition of ideas (and business models) are essential to progress. Ironically, in the one service where the potential human benefit from innovation is greatest – health care – all our impulses have been to enact policies that impede choice, competition, and all the dynamism they unleash….Creating a more prominent role for consumers doesn’t mean eliminating that of the government’s: it means making consumers, rather than industry, the government’s partner in pursuing health policy. Even in Singapore, government plays an essential role in health care. Critics often label this attempt to rebalance forces as ‘free-market health care.’ Well, this book proposes national cradle-to-grave catastrophic health insurance, mandatory health savings accounts, large-scale health grants for the needy, rigorous enforcement of price transparency and antitrust legislation, and a national health database. Only on the Island of Health Care could this be described as ‘free market.'”

This effectively means allowing government a role in ensuring that the person who has that urgent accident or that fatal disease are well-taken care of. It also means that the much more significant impact consumer, the one with diabetes and heart failure, begins to be a conscious consumer of how they interact with and the value they get out of the health system. Furthermore, it starts to provide the much-needed incentives to both consumers and health care industry players to actively seek and reward healthy lifestyle choices in much more meaningful ways than the current policy of tinkering at the margins with value-based payments.

For the industry’s part, much of the current market direction and focus is on interoperability of systems, cognitive computing/artificial intelligence, predictive analytics, and preventive care. Let’s hope that the bulk of these efforts and industry innovation focuses less around volume targeting and billing/revenue optimization (where much of “innovation” has occurred in the recent past) and more around the health, wellness, and fabric of our community/social determinants of health that matter. Let Americans become more like the Japanese and Swedish, and let’s slay this health care monster, before it slays us.

“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.


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.

Explaining the EpiPen (hint – the company can jack its prices up because of government intervention, not because of the lack of it)

This author does as admirable of a job as any I have seen, so I am sharing it.

The only point he leaves out that I would like to make is the laughable hypocrisy of government officials, including one candidate for President, claiming we need more government intervention and price controls. I have a better idea for policymakers – how about trying something that comes completely unnatural to you – get out of the way and let innovators do what you could never do, actually create products that people want at lower cost and higher quality, if only you would let them. I promise it will be more effective and help the poor and middle class a lot more than your prescriptions (lame pun intended.) But I suppose that is the point, your job security is only justified if you are seen as hyperactive in your “protection” of the people. If only the people knew that the only protection we often need is actually precisely from you – the paternalistic functionary.

Here is the key crux of his argument, wrapped into a simple market analogy of chairs:

Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.

(You’re going to say this is an unfair comparison because drugs are potentially dangerous and chairs aren’t – but 50 people die each year from falling off chairs in Britain alone and as far as I know nobody has ever died from an EpiPen malfunction.)

Imagine that this whole system is going on at the same time that IKEA spends millions of dollars lobbying senators about chair-related issues, and that these same senators vote down a bill preventing IKEA from paying off other companies to stay out of the chair industry. Also, suppose that a bunch of people are dying each year of exhaustion from having to stand up all the time because chairs are too expensive unless you’ve got really good furniture insurance, which is totally a thing and which everybody is legally required to have.

And now imagine that a news site responds with an article saying the government doesn’t regulate chairs enough.




Healthcare isn’t a marketplace

A great summation exhorting us to stop using the term “marketplace” to describe healthcare.

The key point and question that the author goes on to answer is:

A market is a place where buyers and sellers, functioning as independent agents in pursuit of their self interest, meet to negotiate a mutually agreeable exchange of money for products/services.  At Wharton, they taught us, furthermore, that an efficient market has three basic qualities: A critical mass of buyers and sellers, low transaction fees, and information transparency between buyers and sellers.   Do either of those two scenarios remind you of the American healthcare system?

The rest of the post is succinct and on point.

Government – the only sphere on earth where abject failure leads to more power and responsibility

It is a curious and novel tendency that government failures don’t lead to accountability and a search for knowledge and truth, but rather inexorable demands for yet more powers. Witness the increasing calls for the public option in healthcare insurance. Are we really going to trust the powers who gave us the VA and the monumental failures of Obamacare with even more arbitrary and market upending powers that will be impossible to claw back? This is a remarkable centrifugal force unique to government. Try getting away with this in the private sector and see how long it lasts.

The problem isn’t the scapegoated free market (that has not actually existed in healthcare for decades) or insurance companies when we witness rising premiums, the failure of insurance exchanges, and the decades-long march of healthcare costs rising faster than the rate of inflation. Although one can’t help but engage in just a tiny bit of schadenfreude at insurance companies groaning under the weight of their own Faustian bargains with the government in support of the Affordable Care Act (the tradeoff being forced and locked in customers in exchange for standardized coverage plans coverage of pre-existing conditions, and an overall environment of cross-subsidization of low-risk policyholders to higher risk ones). Too bad that there are real lives at stake and 20% of our economy continuing its long rapid descent into a massive government intervention – making this no small laughing matter.

The problem is the unintended (and often intended, as is the case of the mergers of health systems and the demise of the private physician practice) consequences of strangulating regulations and inept government policies foisted on the market by the tyranny of experts who are too arrogant to perceive that no individual or collection of elite individuals could ever effectively replace the collective and mysterious emergent order of free individuals making free choices. This aforementioned comedy of errors was entirely predictable, at least among those not within tenured positions within CMS and HHS and the rent-seekers that lobby them for rules that further entrench their monopolies (ahem, large insurers and large health systems).

Speaking of the tyranny of experts, I can’t help but view them as analogous to the competing architects in a Monty Python sketch in which one accidentally designs a slaughterhouse and one designs something that does exactly the opposite of what he says it will do – still somehow winning the contract. For the time-strapped for comedy, the best analogy occurs starting at the 3:15 mark.


Limiting health insurance plan choice is harmful to consumers

A significant component of the Affordable Care Act is the forced standardization of health care coverage through prescribed components that must be carried by insurance plans. Ultimately, this approach has been tremendously disruptive and has moved millions of people off of the plans that in the previous market paradigm they were happy to buy. I refuse to call it a free market since it really has not been that for decades. This disruption is the impetus behind much of the lampooning of Obama’s language, which later proved to be an astoundingly incorrect bit of marketing and hype, that if you had a plan that you liked you could keep it.

Standardization of plans ostensibly removes buyer searching costs for complicated products. Such as approach would only make economic sense if the searching costs were higher than the benefits obtained from the selected product. The challenge is that this sets a remarkably paternalistic precedent – if we dupes in America can’t be trusted to buy health coverage that suits our needs, perhaps we can’t be trusted to buy financial instruments or real estate either. It also has the perverse effect of cutting off product innovation that caters to individuals and unique segments of the healthcare market. Something to consider and question: can government possibly keep up with the changing demands of consumers as well as the unpredictable emergent order that drives market-betterment ideas and innovations? Even if government might be approximately right on the first iteration of defining product standards, it would be impossible for them to keep up with the pace that a free market comprised of consenting adults engaging in commerce could drive. Furthermore, a significant philosophical challenge is that such an approach mandated by government significantly violates an essential freedom of consumers to choose for themselves what is best for them. Finally and perhaps most perniciously, such an approach allows government to enact their own views of desirable social policy through diktat. The Supreme Court case of Burwell vs. Hobby Lobby  is an example in which a private employer was forced to provide contraceptives against their own religious beliefs. Whether one believes Hobby Lobby is outside of the societal norms in their stance on contraceptives is quite beside the point. The point is really whether we believe government should be powerful enough to be able to force anyone in society to choose which product to purchase and what it should contain. This is the first-order principle freedom-loving citizens should be concerned with.

In the book The Future of Healthcare Reform in the United States, Richard Epstein, of the NYU School of Law, pens the following compelling narrative on the challenges with the elitist assumptions of government needing to protect consumers through standardized plans:

Any decision such as that made in healthcare markets – to require given firms to offer a particular type of contract with predetermined coverage – does not facilitate competition but thwarts it by restricting the dimensions over which innovative firms can compete. To be sure, it is unlikely that either midsize firms or ordinary consumers can canvass the entire market. But they can make a series of initial cuts to focus on the market segment they care about most. At this point, one of the key drivers of good competition is the ability to offer a particular configuration of goods and services that make sense to some segment of the overall market. The standardization of service packages thus prevents innovation along certain key dimensions, which hardly improves the overall competitive market. Put otherwise, product differentiation is the great and beneficent spoiler because it allows rapid and discontinuous changes in the market such as the rise and fall of BlackBerry and the now possible decline of Apple in the face of potential disruptive technological developments from a host of competitors. In my view, these large gains dominate any negative effects. Indeed the constant use of product differentiation, both large and small, in market after market, suggests healthcare regulators engage in a dangerous gambit by limiting product choice to a few set choices in order to reduce the buyer’s costs of search. People can truncate searches using sensible strategies. They do not have similar ways to expand market options.

Imagine if government decided that our smartphone choices were overwhelming to consumers and determined that we should all have certain features based upon some government committee’s determination of a rightful specific set of requirements. I suspect the product so described by the committee in the duly published 500 page document would prescribe usage of something resembling the BlackBerry more so than the iPhone. And despite Hillary Clinton’s fondness for this device, we obviously would be immediately worse off as consumers. Further imagine that the government decided that we could no longer buy the phones at Apple stores or Best Buy, but purchasing of these devices had to occur at government licensed locations. Behold the entirety of the healthcare market: a market in which there is an inherent paternalistic assumption that consumers are too ignorant and overwhelmed to make their own choices. The government committee decisions on what we can buy and where we can receive our products described in the smartphone analogy is precisely the kind of marketplace we have allowed our government to create in healthcare. Perhaps it is time to step back and ask ourselves why and whether we are getting good outcomes out of this approach.


Let’s repeal Obamacare and replace it with something more consumer-centric

At long last, Republicans have started to coalesce their various one-off healthcare reform ideas from the past 6 years into a semblance of a comprehensive Obamacare repeal and replace proposal. There is much to appreciate in this proposal, which includes oft-repeated catchy taglines of, “a better way,” “patient-centered,” and my personal favorite, “backpack.” I will discuss more on the backpack later. The whole presentation, which I have linked above, can be watched in a recent AEI video.

What this proposal does not promote is my own personal preferences of a drastically reduced role for health insurance, a product that should be beaten back into its proper place for coverage of catastrophes only. The price-obfuscating impacts of coverage for every service and the price-decreasing impact that would ensue if consumers were able to see prices and outcomes more transparently by paying more directly out of their pockets is not part of this proposal. Nor does it address the supply-side needed reforms such as lifting the competition stifling (and therefore price increasing) impacts of the various regulatory mandates and rent-seeking political lobbying of regional monopoly hospitals that prevent new hospitals and clinics from opening. Finally, while it promotes Medicare and Medicaid reform, it leaves Medicare, which is mostly a middle class welfare and wealth transfer that has a naturally price inflating impact, largely intact. These are my caveats for why I don’t consider this a perfect proposal. That being said, the main themes presented certainly stanch the government takeover of healthcare bleeding and presents significant and politically feasible patient-centric reforms in place of the current construct of byzantine, dizzying, and unsustainable complex web of government controls and mandates. For this fact alone, this substantial reform proposal should be applauded and supported as a significant improvement to the status quo that just might get enough electoral support if Americans pay attention to it and can keep from being distracted by the ongoing Trump/Clinton circus. As a former boss of mine used to tell me, “don’t let perfect be the enemy of good.”

The focus is clearly on consumer choice, portability, decentralization of decisions to state and local levels, and sustainability of Medicare. It is this concept of portability that is referenced as a backpack of items that will allow consumers to move across companies and states and maintain their same coverage and access to health services. Paul Ryan opened the session indicating that Obamacare is singularly focused on quantity of people insured, while ignoring the staggering costs in the system that Obamacare caused that are, in his words, causing the act to collapse under its own weight. Not to mention the tremendous loss of individual freedom and choice that resulted from centralized decision making and mounds of mandates arising out of D.C. Allowed to blossom, these are salient points that I believe will resonate with a public that has been remarkably skeptical and loathing of Obamacare. The marketing pitch is clear – consumers, take back your choice and freedom to choose the health plans that are right for you and not dictated by a government bureaucrat. Perhaps it is more appropriate to say take it back from thousands of bureaucrats, as one Congressman indicates in the video, there are fully 159 agencies and commissions currently involved in interpreting and implementing the dictates of Obamacare.  Several congressmen, including Budget Committee Chairman Tom Price (R-GA), Education and the Workforce Committee Chairman John Kline (R-MN), Energy & Commerce Committee Chairman Fred Upton (R-MI), and Ways & Means Committee Chairman Kevin Brady (R-TX) took turns articulating the proposal once Ryan got off the dais. Below, I have summarized the important components of the proposal, ranked in order of my opinion on which are the most important to least important.

  • Extending the health insurance tax break to individuals that businesses currently receive, and capping the amount that businesses can receive tax breaks. This concept will sever the link that causes Americans to be solely dependent on their employer for health insurance and promotes portability and accessibility of insurance. Hopefully, it results in more people taking the initiative to get insurance on their own and subsequently bargaining for higher direct compensation from their employers. The capping of tax breaks for businesses is intended to serve as a cost inflation and “over-insurance” containment provisions. Coupled with the ending of specific coverage mandates, also part of the proposal, this could go a long way towards incenting people to get more affordable coverage that makes sense for their life situation and promote innovative models such as high deductible plans, insurance coupled with wellness programs that promote actual health and wellness, and insurance that covers catastrophes only complemented with health savings accounts. These forces could make a major dent in insurance cost inflation and concomitantly overall health cost inflation.
  • Free up insurance purchasing across state lines – this simple and sensible act will drive up competition and will do much more to drive consumer choice and put downward pressure on prices than the continually failing exchanges and insurance co-ops (most of which have declared bankruptcy by now) could ever do, even though that was their ostensible original purpose. The challenge is that it is impossible to drive choice and cost containment when you also force standardized minimum levels of coverage and mandated cross-subsidization of high risk individuals.
  • Promotion of Health Savings Accounts – Provisions of Obamacare amazingly and wrong headedly penalize HSAs through the tax codes. This proposal would wisely end those disincentives and work to actively promote their use. HSAs are popular despite their government created disadvantages.. Furthermore, usage of HSAs promotes pricing transparency and healthcare service usage portability and flexibility.
  • Medicare Reform – The proposal kills off the unpopular and unaccountable Independent Payment Advisory Board and promotes consumer choice through expansion of the popular Medicare Advantage Program.
  • Provide state block grants for Medicaid – this will provide greater flexibility at the state level to craft cost saving programs at the localized level.
  • Provide for ability of Small Business Group Purchasing Associations – the proposal would allow for small businesses to band together for group purchasing of insurance coverage. While I prefer a high degree of an individualized market(which hopefully the tax breaks to consumers will promote), the fact is that most employees now expect and HR departments like to offer health insurance as a hiring incentive. Allowing small businesses to band together and to receive the same tax incentives as larger businesses will promote further consumer access with the nice boon to small business employment. Currently, Obamacare punishes small businesses through a web of complex rules that force them to either cover employees on increasingly expensive and bloated plans or pay a tax penalty per employee that they do not cover.
  • Protection of Pre-Existing conditions coupled with state incentives to create risk pools. While I would submit that a free-market system that promoted insurance for catastrophic conditions only would solve for this without the need for regulatory enforcement, this provision that is currently part of Obamacare is one of the few things that is actually politically popular. Thus, it is important from a politically feasible standpoint to keep it. One way of potentially holding down cross-subsidization amongst premiums and spiking premium costs for the average holder is to also create risk pools for certain conditions as a backstop to insurance coverage. The concept of risk pools is also promoted in the proposal.

These are simply the highlights. I will need to dig into the documented details of the plan to provide additional thoughts, but I certainly appreciate the direction this is heading.

“The Silly and Harmful Drug War”

Drug Venn

Economist Dan Mitchell captures my sentiments precisely on the issue of the illegalizatoin and prosecution of drug offenders in a recent blog post. His introduction is a succinct summary that I align with:

I’m not a fan of the War on Drugs, even though I’m personally very socially conservative on the use of drugs. Regardless of my individual preferences, I recognize that prohibition gives government the power to trample our rights, that it is borderline (if not over-the-line) racist, and that it leads to horrible injustices.

I’d much prefer for law enforcement resources be allocated to fighting crimes that actually have victims.

Mitchell then goes on to describe how drug illegalization is not only expensive, it is economically counter-productive. Expanding on this, my own additional thoughts on the matter is focused on the strain of social conservatism that opposes drug legalization strictly on moral grounds, which makes it philosophically impossible for them to support legalization as any sort of priority. My counter argument is that there is moral logic to overturning current illegalization approaches that should allow even social conservatives to not have to look at their shoes when professing support for drug legalization. This does not have to be translated into support for the idea for drug use per se, think of it as more of an endorsement in support of compassion for those who get trapped in a cycle of addiction and further support of policies that are actually more effective at getting them out of that cycle. Additionally, think of it as defense of individual liberty and freedom when individual choices do not cause others harm. True crimes and prosecutions should have a victim. In my opinion, the potential and evident harm of power ceded to the government to prosecute this issue is far more problematic than actions of individual choices made by drug users. It is clear from decades of experience that to criminalize drug users’ behavior through aggressive use of the justice system is not only tremendously expensive, it is inhumane and places people into a spiral of poverty, recidivism, and subjugates people guilty of what ultimately amount to minor offenses against society into a prison system that is a veritable petri dish for spawning more malignant forms of lifelong crime.

To put it bluntly, I would submit that there is an inherent immorality in stances that support locking up people for years over drug use and immorality in policies that ultimately support and enrich murderous drug gangs that benefit from inflated drug prices that criminalization fosters. Would it not be far better to spend our justice system and prison dollars on actual hardened criminals rather than locking up drug offenders, a policy which tends to turn more benign people in need of charity and help into the very hardened criminals we are presumably seeking to numerically reduce?

If we want a role for the state in combating drug use, we should spend it on abstinence, mental health, and drug recovery and rehab programs that are far more compassionate and effective as well as less prone to creating hardened criminals who are much more difficult to redeem later on. An added bonus is that this approach is less costly and less prone to creating government abuses.

“The GOP’s Mexico Derangement”


Bret Stephens has a biting critique of the GOP in his recent Wall Street Journal op-ed. Stephens, as ever, is able to criticize the party that he aligns with most often with eloquence and forcefulness that I admire. The GOP’s myopia and fixation, to say nothing of the lack of economic soundness and adherence to liberty, small government, and plain moral decency – was a primary source of frustration of mine with the party long before the rise of Trump. The combination of stances on immigration, free trade, and Trump are the main reasons I will be casting a Presidential Libertarian ballot this election season.

Some of the piquant highlights of the article, in which Stephens addresses common canards leveled against Mexico and Mexican immigration are as follows:

Mexico is a failed state. Mexico’s struggles with drug cartels—whose existence is almost entirely a function of America’s appetite for dope—are serious and well known. So are its deep-seated institutional weaknesses, especially the police forces that collude with the cartels and terrorize rural areas.

Then again, Mexico’s 2014 homicide rate of about 16 murders per 100,000 means that it is about as dangerous as Philadelphia (15.9) and considerably safer than Miami (19.2) or Atlanta (20.5). Are these “failed cities” that you don’t dare visit and that should be walled off from the rest of America?

Mexico steals U.S. jobs. Donald Trump recently resurrected this chestnut by inveighing against Nabisco and Ford for shifting production to Mexico from high-cost Illinois and Michigan. Never mind that one reason Ford made the move was to take advantage of Mexico’s free-trade agreements with the European Union and other countries, meaning that opposition to free trade is the very thing that drives business abroad. Then again, Mexico is the second-largest purchaser of U.S. products; the Wilson Center’s Christopher Wilson has estimated that “six million U.S. jobs depend on trade with Mexico.” That is especially true for border states. ‘Mexico is the top export destination for five states: California, Arizona, New Mexico, Texas and New Hampshire, and is the second most important market for another 17 states across the country.’

Illegal immigrants are a drain on the system. This whopper should be sold at Burger King, since illegal immigrants pay billions in state and local taxes, along with about $15 billion a year to Social Security—the benefits of which they are unlikely ever to get back. Entire U.S. industries, agriculture above all, depend on illegal migrants, without whom fruits and vegetables would simply rot in the field.

If there is a drain, it’s Mexicans going home—roughly one million returnees between 2009 and 2014, according to the Pew Research Center, outpacing the number of Mexicans moving north by about 140,000. That owes something to growth and stability in the Mexican economy, which is largely a function of the North American Free Trade Agreement.

This makes Mr. Trump’s opposition to Nafta all the more misjudged. Without it, Mexico could easily have become Venezuela, run by an Hugo Chávez-like strongman, that would have posed a real threat to U.S. security, as opposed to the one in Mr. Trump’s imagination.


Do the Chinese have an unfair advantage?

According to Donald Trump, the United States loses to China, Mexico, Japan, and just about everyone else in the world. The redress he proposes is a 45% tariff on Chinese goods that he would likely expand to others he lumps in as having unfair advantages over us and a border wall. Has any nation ever made itself great (or great again) through isolation from immigrants and trade wars? Before we jump off into the chasm of a 45% tariff on the Chinese (and others) perhaps we should think about the actual impact of an increase on our goods, particularly the low-cost goods that benefit the poor. As Daniel Henninger lays out in a recent Wall Street Journal Editorial, the tariff is one of Trump’s few actual policy proposals. Henninger elaborates powerfully on the perils of Trump’s proposal in what I have copied below:

At the core of the Trump campaign is one policy idea: imposing a 45% tariff on goods imported from China. In his shouted, red-faced victory speech Tuesday, he extended the trade offensive to Japan and Mexico.

Some detail: Combining the value of goods we sell to them and they to us, China, Mexico and Japan are the U.S’s Nos. 1, 3 and 4 trading partners (Canada is No. 2). They are 35% of the U.S.’s trade activity with the world. The total annual value of what U.S. producers—and of course the workers they employ—sell to those three countries is $415 billion.

Wal-Mart has 1.4 million U.S. employees in stores filled with foreign-made consumer goods. With a 45% price increase, many won’t be working for long.

Mr. Trump says the threat alone of a tariff will cause China to cave. Someone should ask: What happens if they don’t cave? Incidentally, unlike Mexico, China has between 200 and 300 nuclear warheads and 2.4 million active-duty forces. Irrelevant?

As with anything Trump does, the tariff proposal is a naked calculation to rile up the easy to excite masses that are befuddled by economics. His supporters may not recognize this, but all of this is really in the same vein of support as those that support Sanders.  People with pitchforks want to believe that all of their wage stagnation must be the result of some faceless enemy in a foreign land or a Mister Burns character at J.P. Morgan. They will inevitably fall into the trap of rallying behind either Sander’s envy and class warfare or Trump’s foreigner warfare. On the latter, these same individuals will grab their pitchforks once again and demand price controls once their prices down at Wal-Mart also increase 45%. They will fail to see the increase as the predictable result of their own actions. It is a vicious cycle to find succor and assistance from government men with no scruples and who possess the knowledge that true arbitrary power is created on the backs of those ignorant souls willing to make deals with dark power for fleeting and ephemeral gains. This information and knowledge asymmetry is how individual liberties are willingly ceded by voters to those who make pandering promises who know what power they can gain.

I want to turn to the canard that the Chinese have an unfair advantage in trade with Americans. I have always been puzzled by a complaint that if the Chinese manipulate their currency to an unnatural low point that we should in turn punish them. If the Chinese do manipulate their currency (and it is highly debatable whether they do), then the logical conclusion is that in doing so what the Chinese government is actually doing is using Chinese taxpayers to subsidize American consumption. In other words, currency manipulation would necessarily mean Chinese citizen oppression by the Chinese government to support our low prices and consumption habits here. One might disdain this from a sense of humanitarianism and fellow feeling for the Chinese, but what it shouldn’t be is a cry of unfair advantage for the Chinese. We should be thankful for the good fortune that Chinese government ineptitude provides us with cheaper goods! Cafe Hayek states this much more effectively than I just did, so I copy the comments from a recent blog post in the form of a letter to a former student:

Dear Mr. Hester:

Thanks for your reply.

You say that I am “naïve to forget about” the “unfairly low prices which the Chinese ruling elite impose on us.”

Please.  Low prices in America – especially if they are made artificially low at the expense of non-Americans – are no imposition on Americans; they are a blessing to Americans.  (Do you think that we earthlings would be made richer if our rulers adopt policies that require us to start paying more for the light and heat that we have until now imported from the sun at the low price of $0?  If not, why do you think that we Americans would be made richer if our rulers adopt policies that require us to start paying more for the goods that we have until now imported from China at low prices?)

Also, Chinese low wages are largely the consequence of the Chinese people being enslaved, tyrannized, and impoverished for decades by an unspeakably cruel Maoist regime.  Do you honestly believe that this terrible history gives the Chinese people today an unfair economic advantage over Americans?  If so, you must regret that we Americans were denied the advantage-rich experience of being forced to live in a collectivized, starvation-ridden society ruled by murderous despots.  My gosh!  If we, too, could today boast the horrifying recent history of China, then we, too, might be as poor as the Chinese and, hence, we, too, would enjoy – as do today’s Chinese – all the splendid “advantages” bestowed by such an impoverishing history!

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030