Massachusetts is a Health-Reform Debacle

In an October 15th op-ed in the Wall Street Journal, Governor Deval Patrick proclaimed that “Massachusetts is a Health-Reform Model.” The reality is that since its inception in 2006, the reform has been a debacle. Its most insidious characteristic could perhaps be that it is being touted as a model for the entire country. The Massachusetts healthcare program is actually the antithesis of economically sound and beneficial reform.

Patrick at least correctly described the problem with healthcare as one of cost. The solution, though, is not the plan implemented in Massachusetts. There are two paths government intervention in a market can take: it can structure a set of mandates that force prices to rise, or it can implement price controls which inevitably lead to shortages. The Massachusetts model achieves both.

Instead of giving consumers more choice and control, the Massachusetts plan shifts power to government. It imposes a set of mandates that have forced prices up for all. Massachusetts is not only the costliest state in the country for insurance, but also is experiencing the greatest price inflation. The high costs fall on both the people directly, as well as putting a crunch on state government. Governor Patrick self-congratulates a balanced budget, but also must acknowledge that rising healthcare costs crowd out other government spending. The plan has not completely annihilated the budget because it receives an outsize subsidy from the Federal government. Thus, the rest of the country is actually subsidizing healthcare in Massachusetts – if the model was expanded, that subsidy only can come in the form of higher taxes. In the meantime, the available supply of healthcare in Massachusetts is declining as waiting times increase. Higher costs, lower quality – this is the Massachusetts model.

Mitt Romney, who signed the program into law as Governor, infamously quipped in a Presidential debate, “I like mandates. The mandates work”. Unfortunately, mandates are counterintuitive to free market principles. Mandates create distortions that lead directly to higher costs for all - this is a logical and empirical precept. Romney believed the cause of high healthcare costs is the uninsured utilizing the system and that their expenditures were being spread to the insured. He claimed in 2006 that, “Every uninsured citizen in Massachusetts will soon have affordable health insurance and the costs of health care will be reduced.” The opposite actually ensued as insurance has become less affordable, though more subsidized, and costs have risen dramatically. The Massachusetts reform was based on the specious concept that the uninsured are driving up costs. This conclusion unfortunately directed attention away from the real underlying sources of outsized inflation in healthcare costs.

In a market, the distance between payer and consumer is directly proportional to the level of pricing inefficiency. The current system of insurance propagates a discrepancy between the people who receive the healthcare, and those who pay for it. The cost of a visit to an emergency room is not exorbitant because of the uninsured who visit, but rather because virtually no one who visits actually pays the bill directly. Add on the fact that billions of dollars are wasted each year on unnecessary procedures in an effort to stem litigation. The Massachusetts model does not address either issue, and thus is failing miserably.

It is possible, fortunately, to tackle these problems. The current distortion in the tax code must be fixed such that all healthcare expenditures are treated equally. Additionally, health savings account should be expanded to become the norm. Consumers should direct their own dollars. Healthcare needs to be reformed in a way that gives consumers vastly more control than they currently have. Tort reform must be enacted to not only directly reduce the cost of healthcare, but also to eliminate the wasteful spending that indirectly increases costs.

As costs are contained, healthcare becomes more affordable. And as prices drop, the ranks of the uninsured will follow. Those who then still cannot afford healthcare can be subsidized by the government. There is little logic in transforming the entire healthcare system into a government controlled program when only a small portion is in need of help. If anything, the government needs to vastly reduce its role, as it currently controls roughly half of all medical expenditures. This has only further exacerbated the problem.

There seems to be a consensus that the central problem with healthcare is cost. The divergence, though, comes from the root cause of the high prices and how to reduce them. Prices are out of control because approximately 80% of costs are paid by someone other than the actual consumer, as well as a tort system that encourages wasteful spending. The Massachusetts reform addresses neither issue, and instead gives more control to the government. The results are as expected – higher costs and lower quality. Massachusetts is a health-reform debacle that provides ample evidence of a failed experiment and a blueprint of what not to do for the rest of the country.

Cash for Clunkers Should be Heaped

Demand has been so high for the Cash for Clunkers program that Congress increased funding from the initial $1 billion. The basics of the program are simple (and borrowed from the British “Cash for Bangers” – not nearly as catchy). The government will cut you a check for $3,500-$4,500 for turning in your gas guzzling clunker and buying a new, fuel-efficient car. There are certain parameters, of course. The clunker must be scrapped, and the amount paid depends on the gain in fuel efficiency.

Because the clunker is junked, the government is essentially handing out a check. As in, it is a four thousand dollar payment in exchange for purchasing a new car, and eliminating an old one. As the precept goes, every dollar of government spending must be paid for with a dollar of taxes. Thus, the taxpayer is shelling out a few billion dollars to get old cars off the road. Yes, some might posit that there is an ancillary Keynesian stimulation benefit – giving people money to spur the purchase of new cars (for the simple counter, see the precept two sentences prior).

Should the taxpayer be in the business of paying money to get old cars off the road? The approximate math of the program stacks up as follows. The $1 billion covers the purchase of 250,000 clunkers. The average car is driven about 15 thousand miles per year. That totals just less than 4 billion total miles driven. Assume the average fuel economy of the clunkers was 15 miles per gallon, and the average increase was 10 miles per gallon (the level required for the maximum government handout). The new cars, in aggregate, will use 100 million less gallons of gas. As a not so insignificant side note, the cost savings to the subsidized owners of the new cars would be roughly $300 million per year.

The reduced gasoline consumption is significant. That translates to roughly two billion less pounds of carbon dioxide production. An acre of trees consumes about 10,000 pounds of carbon dioxide per year (this varies widely, depending on the type of tree and the density – but the approximation is what counts here). Thus 200 thousand acres of trees would equate to the amount of gasoline usage eliminated. The cost to plant an acre of trees varies widely as well, though for this analysis $1,000 per acre will be used. It would then cost about $200 million to plant the equivalent trees. The $1 billion spent to buy the 250,000 clunkers would be enough to plant five times as many trees as would be required to cover the difference in carbon dioxide emissions. Yes, enough to cover twice the total CO2 produced by the clunkers in the first place.

Of course, the issue goes well beyond the simplified math. Average fuel economy has been steadily increasing over the years. Trading up from clunker to new car is part of the natural progression. If the government wanted to facilitate the process, there is an economically sound way to do it: reduce the burden of government spending and taxation. The economy will grow, jobs will be created, and people will have more money with which to buy new, more fuel efficient vehicles.

Who Should Pay for Betty Beauchaine's Hot Dog? (Have your cake and eat it Part II)

A cover article in the July 28th Wall Street Journal describes the efforts of healthcare professionals to reduce repeat visits by patients (“Cutting Repeat Hospital Trips – Simple Idea, Hard to Pull Off”). The first paragraph ends with the question, “Can hospital persuade discharged patients such as Betty Beauchaine to pass up a Fourth of July hot dog?”

The article proceeds to describe Betty as a 75-year old who suffers from heart failure. She went to the table at a picnic and said “I’m going to have a hot dog. If I’m dead in the morning, I’ll never know.”

Good for Betty! As great-grandmother, she has lived a lifetime and earned the right to make those kinds of decisions. From her statement, it is clear she is fluent in the risks and rewards of her behavior. She wants to eat the hot dog, and knows that it can kill her to do so.

But the Federal Government wants to take that decision away from her. Actually, it has been trying to do that for quite some time. Medicare has already socialized healthcare to a substantial degree. Thus, the outcomes between the delicious rewards of a July 4th hot dog and the ultimate risk of death generally fall on society to pay for. If Betty makes it through the night, but needs to head to the hospital as a result of the nitrate stick she consumed, everyone pays.

Should hot dog eating be banned? Of course not. Should healthcare be socialized? Of course not. Americans should be free to make decisions for themselves and receive both the benefits and suffer the potential consequences.

Your Implied Tax Rate Is...

The wool is being pulled over the eyes of the American people. The President has revealed a budget with $3.5 trillion in spending and a $1.2 trillion deficit. The wool is in the latter number, and the eyes are really our collective pockets. Every dollar the government spends must eventually be paid for with a dollar of taxes. At some future point in time, the deficit must be made whole. But since the money is not being taken out of the peoples’ pockets today, outrage over the obscene level of spending is muted.

Unfortunately, most people are not computing their implied tax rate. As in, if instead of deficit spending, taxes were raised to cover the difference, tax rates would be much higher than they currently are. Estimated receipts for 2010 are $2.4 trillion, with $1.2 trillion of that coming from income taxes (both individual and corporate). If the entire budget deficit were covered by an increase in income taxes, rates would have to double. Double. Double? Double! Repeat: Double!

For reference, $940 billion of the remaining $1.2 trillion in receipts comes from social security and other payroll taxes – thus, it is assumed for purposes of calculating the implied tax rate that the increase is covered by income taxes.

If taxpayers understood that their implied tax rate is double in order to cover the budget deficit, would it still be tolerated? Of course, if actual income tax rates were doubled, would income tax receipts double? Both questions are a few notches beyond rhetorical.

The question remains on how to adjust the implied tax rate given that the taxes will be paid in the future. Is the number higher because of the interest cost on the debt, or should it be lowered due to the massive inflation that will no doubt be generated by the absurd government spending and printing of money?

Maybe we will all feel better after seeing our government healthcare provider. Wait – is that cost included in our implied tax rate?

Have Your Cake, Eat it Too, Pay Tax on Cake, See Government Doctor

A proposal is being floated to tax sugary drinks such as soda and Gatorade. Coincidentally, a proposal is being floated to socialize the healthcare industry. The two are inextricably linked. If everyone is paying for everyone else’s healthcare, unquestionably behavior linked to health should be dictated by everyone.

As the precept goes, when something is taxed, there is less of it. Thus, by taxing the consumption of sugary drinks, there will be less consumed. A better diet will no doubt lead to better health, and thus the collective costs to society will be lowered. The same, of course, goes for things like cigarettes. If the taxpayer is on the hook for treating lung cancer, then it is in the taxpayer’s interest to minimize smoking. It should not end there, though. Really any behavior that poses a risk to health should be taxed, or banned altogether.

It must be so. Another precept is that price ceilings lead to shortages. As in, the myth being propagated that the government can simply control healthcare prices is just that. There is no messianic hand wave that will magically keep costs under control when healthcare is “free” to all. Thus, the only way to keep the cost of socialized healthcare even remotely palatable is to massively regulate behavior.

Everyone must be coerced to live a healthier lifestyle. No activities with injury potential can be tolerated, and should be banned. Eating right and regular exercise will be a requirement. People must be eating their five servings of fruits and vegetables, taking their vitamins, and getting plenty of cardiovascular workouts. Urine samples can be used to ensure the proper consumption of essential nutrients. The government will regularly screen blood samples of the population to monitor important indicators of health. A workout database can be constructed to keep everyone on a regimen. People will log their routines via a government web site. Better yet, exercise equipment – whether at a gym or in the home – can be fitted with a wireless device to automatically send data to the centralized system. Government inspectors can regularly make visits to properly calibrate the meters. We will need full genetic screening of the population as well. The government must know each individual’s susceptibility to various ailments, and enforce proper preventative measures.

Or…We can choose to live in a free society where people make their own decisions, and also assume responsibility for the consequences of their actions.

Maybe We Can Steal Prosperity

It might be time to start getting creative to deal with the current economic crisis. In Hazlitt’s classic Economics in One Lesson, he described the concept of the government spending money to stimulate the economy. He claimed that the purchasing power argument, whereby money is funneled through the government and thus spent in the economy, was akin to a thief robbing you and spending your money at restaurants and to buy cars. He says, “But for every job his spending provides, your own spending must provide one less, because you have that much less to spend. When your money is taken by a thief, you get nothing in return. When your money is taken through taxes to support needless bureaucrats, precisely the same situation exists.”

While on the surface Hazlitt sounds completely and totally logical, the concept of stealing money to get the economy going might not be all that far fetched. Hazlitt was writing well before the modern era. He must not have pondered all the consequences of widespread theft, and the numerous benefits to the economy as a whole. Maybe the government should create a new agency that hires thieves (yes, more employment) to break into people’s houses and steal their stuff.

Not only does the thief have money to spend in the economy, but the victims (if that word is even appropriate in this case) will now need to replace the stolen items and thus create more demand in the economy. But wait – what about the concept that the money used to replace goods could have been used to buy new goods instead? First of all, those stolen from probably had too many goods to begin with, and were likely sitting on cash – so the thief actually stirred up demand. Second, the insurance company will compensate for the stolen items anyway.

Yes, the cost of insurance is miniscule compared with the value of the goods. Thus, the actual cost of the theft is spread out over the entire insurance-buying population. And when the insurance companies become insolvent from paying out the increased volume of claims, the government can simply intervene and subsidize the industry.

And where will the extra money come to pay the insurance companies? Well, the government can simply print more money. What about the inflation? No problem, the government can set a ceiling on the price of goods. What about the shortage of goods that comes from the regulation of a price ceiling? Hey, the government now has a stockpile of stolen goods to meet the demand!

Somehow this should work, no? No. It just simply does not.

“Facts are the only antidote to a seductive vision” – Thomas Sowell

And So Begin the Trade Wars...

The Obama administration is taking directions straight from the playbook, "How to Turn a Recession Into a Depression." It was written about 80 years ago and has recently resurfaced at the White House. Step one is protectionism.

The U.S. fired the first shot, rescinding the ability of Mexican truckers to operate here. The retaliatory strike was received yesterday - higher tariffs on American goods exported down South. The result is that everyone loses.

There is no more universally accepted concept in economics than the benefits of free trade (and, of course, the harmful effects of protectionism). Though there might be some isolated beneficiaries of a protectionist agenda, both economies are worse off. Resources are distributed less efficiently, and perhaps more importantly, consumers pay more for goods. Real wages go down. Yes, the poor are generally hurt most by barriers to free trade.

The United States should be moving in the opposite direction. We need more free trade, not less. Congress has already inexplicably stalled free trade agreements, such as the one with Colombia. What should be done is a unilateral free trade agreement, whereby the United States assumes the role of leader of the free (market) world and drops all of its barriers to free trade.

While protectionism provides a siren song, it is free trade that promotes economic growth and job creation. It is free trade that benefits consumers and increases real wages. A vociferous free trade policy will be enormously helpful in facilitating this economy out of recession.

Congratulations, You’re Broke: Down 20% and $11 Trillion Vastly Underestimate Wealth Destruction

The Federal Reserve released data yesterday showing a 20% drop in household wealth from a peak in the second quarter of 2007. The wealth loss for the year of 2008 was $11.2 trillion, $5.1 trillion of which came in the fourth quarter. As astounding as the numbers are, they almost certainly vastly underestimate the magnitude of wealth destruction the country is experiencing.

Part of the differential is obvious – the markets have continued to plummet in the first quarter of 2009. One estimate, given the decline in stocks and housing prices, lops another $2.5 trillion, or 5%, off of household wealth. Leaving all prediction of future stock and housing market movements aside, the Fed number still likely comes under the reality. Given the leveraged nature of home ownership, the actual wealth decline from an absolute drop in price is magnified.

Much more importantly, though, the Fed calculation misses a vital side of the wealth ledger – liabilities. The “New Era of Responsibility” budget entails a deficit for next year that is greater than the previous eight years combined. It also projects similar deficits as far as the eye can see. The estimates of GDP growth are suspect, but the spending bonanza is certain, and gargantuan. Trillions upon trillions of new debt to finance the spending is slated for the next several years. A household’s credit card debt represents a net reduction in overall wealth. The government’s debt represents a net reduction in the country’s collective wealth. The massive projected increase in government spending is essentially a repugnantly awe-inspiring obliteration of household wealth.

Yet it gets worse. There are several aspects of household wealth that are difficult to put a number on, but are nonetheless a vital aspect in the calculation, even if the amount itself is theoretical. A household’s wealth includes the present value of its projected future income stream. To the extent that potential future income has been squashed, there is a corresponding reduction in household wealth. Unemployment is on the rise, millions of jobs are being lost, and wages and bonuses are being suppressed. Exacerbating the loss of potential future income is the decreasing value of what little money households have left. As the government prints more and more dollars to satisfy its corpulent spending habits, the value of that money decreases.

From the theoretical to the abstract, the picture gets even uglier. There is a wealth value associated with simply being an American. Sadly, this value is diminishing. Again, while the computation of the number is vague, the logic is clear. The American way of life has intrinsic economic value. It comes from the rule of law, the natural resources, the technology and infrastructure, and our core fundamental values. It is a major part of what causes millions to flock to our borders and seek entry. The level of economic freedom we enjoy is a vital component of household wealth. But it is on the wane, and headed down a terrifying path.

Thankfully, all of the above aspects of wealth destruction can be reversed. To do so, we must get government to about-face from socialistic tendencies to pro-growth fiscal sanity. And we must right the ship towards economic freedom. We must drastically change the course we are on, lest the phrase cometh, “Congratulations, you’re broke!”

The Good News: Rich-Poor Gap Has Been Obliterated

Is there a light amidst the economic darkness? Those who have for years been excoriating the widening of a rich-poor gap should now be ecstatic. As countless trillions of dollars of wealth has been wiped out in the bursting of the housing bubble and the ensuing financial market meltdown, there can be no question the difference in wealth between rich and poor has shrunk considerably. Be careful what you wish for.

Nobel Laureate Paul Krugman is one such cheerleader. Back in the day, Professor Krugman was expounding on the technicalities of comparative advantage, and how free trade is one rising tide that lifts all boats. Since then he has become unhinged. Krugman has borrowed with enthusiasm the phrase Great Compression to describe the period from 1933 to 1945. Many have been and currently are enamored with the concept of economic woes leading to higher equality of wealth - or lack thereof.

This obsession with the rich-poor gap should seemingly be satiated by the massive destruction of wealth in the present. No need to worry anymore about private jet travel – that mode of transportation is now reserved for only government officials. Are Wall Street bonuses a thorn in the side? No longer – modern finance has one foot in the grave (the cemetery being lower Manhattan). The dreaded McMansions are becoming a novelty of a previous way of life. Got 401(k) envy? Now it must be only half the jealousy.

Yes, the economic meltdown and present march towards socialism is evening the playing field. As unemployment rises, by definition more people are earning similar wages (a number that trends towards zero). While the stock market continues to free fall, the collective lack of wealth increases. As economic growth disappears, the dimming of prospects becomes more universal.

The debate over trickle-up or trickle-down economics also diminishes. The slowing of economic activity means there is no trickling in any direction. The real bright side is that hopefully we can dispel the notion that getting rich is bad and that it is desirable to have as narrow a rich/poor gap as possible. The means certainly do not justify the ends, but actually create a self-fulfilling prophecy whereby all get poorer. The desire might be good-hearted, but it is simply wrong-headed. Everyone suffers. Only sound economic principles will lead to economic growth and enhanced prosperity for all.

The "Stimulus" is an Abomination of Rational Thought

The House is set to vote today on the now infamous "stimulus" bill. Yesterday, President Obama cruised down the block to make his pitch to Congress. He pleaded to "keep politics to a minimum." Unfortunately, the President has it backwards. The "stimulus" bill is maximum politics - it is logic and reason that are kept to an absolute minimum.

Has the President, or any Congressman for that matter, even attempted to put forth a rational argument as to how the "stimulus" will actually accomplish its stated mission of stimulating the economy? Of course there have been claims as to what the results will be: According to Congressional Budget Office Director Doug Elmendorf the “stimulus” will provide a substantial boost to the economy - an increase of GDP between 1.2 and 3.5 percent by Q42010 and a boost in employment of between 1.2 and 3.6 million jobs. President Obama said that the American people "want us to put together a recovery package that puts people back to work." He cited recent announcements by companies like Caterpillar and Home Depot regarding job cuts nearing 100,000. But there has been nary a whisper about how increasing government spending has even the chance of achieving that.

The reason for the silence is simple: There is no plausible explanation. As Thomas Sowell stated, "Facts are the only real antidote to a seductive vision." And the fact is that the government cannot create economic growth by spending money. If it could, then there would be no reason to limit the size and scope of the “stimulus”. The seduction lies in a simple equation to calculate GDP which includes G (government spending) as one of its terms. Increase G on one side, and GDP must increase on the other. The logic flaw is that G must be increased at the expense of the other terms. A dollar spent by the government is a dollar less to be spent or invested by the people. Private investment will fall more than government spending will increase. Further, “stimulus” proponents are expecting some kind of Keynesian multiplier effect that simply does not exist (both empirically and logically). The last 100 years can be examined, and there will be no evidence to support the irrational theory that increased government spending leads to economic growth and job creation. Common sense will tell the same thing.

Not that such a link has even really been attempted. The President and a majority in Congress are simply expecting the people to go along with it. They are playing on fear, on the assumption that something must be done. They make no pretense that the people deserve at least a cursory explanation of just how economic growth will be spurred. The reality is that the “stimulus” bill is an excuse bill. As in, the economy is being used as an excuse to push a particular agenda. White House Chief of Staff Rahm Emanuel at least had the decency to express this view by referring to the crisis as “an opportunity to do the things you couldn’t do before.” Would the people normally tolerate a massive increase in government spending on an unprecedented scale? A debate about the desired size and role of government would be welcome – that would be an honest discussion. To claim, however, that an increase in government spending and economic growth go hand in hand is mind-bogglingly ridiculous.

A member of Congress who votes in favor of the stimulus is saying one of two things: “I have abandoned all sense of rational thought” or “I am using the current economic woes as a guise to ludicrously increase government spending.” Voting in favor of the “stimulus” is simply irresponsible and signals a departure from any sense of obligation to represent the people. The Constitution compels the government to promote the general welfare of the people. The “stimulus” does the opposite.

As always, an entry that is critical of the “stimulus” should include an alternative. There is only one way the government can stimulate the economy to grow and create jobs (empirically and logically): reduce taxes and spending. A pure flat tax which eliminates the taxation on investment (capital gains, dividends, and interest) will spur economic growth and job creation the instant it is signed into law.

Instead Spend the Trillion To Privatize Social Security

As the new year begins, Congress is looking to ram through a trillion dollar "stimulus" package. Obviously the concept is ridiculous: Extract money from the private sector and have the public sector spend it. The goal, though, is correct: Increase economic growth.

If a trillion dollars is on the table, why not use it correctly? The government should issue a trillion dollars of Treasuries - which are currently trading at low yields/high prices. Deposit them into private savings accounts for each taxpayer, based on current age and projected social security liability. Replace the payroll tax with a compulsion to contribute to the newly created retirement account. Three birds are killed with the same stone.

First, the Ponzi scheme known as social security is fixed.
Second, a real lock box is created for the taxpayer: an account with their name on it.
Third, economic growth will be greatly stimulated.

If for whatever illogical reason privatizing social security is too much for Congress to stomach, there is another simple alternative stimulus package: flat tax.