The Health Care Bill: Progress or Retrogression? Becker

Studies show that men and women place a high value on even small decreases in their probability of dying at different ages. Presumably, the same is true of increases in the quality of their lives. This is why, given the rise in incomes over time, and the revolution in the development of blockbuster drugs and the advances in medical technology, the share of national income spent on health care would have risen over time in the US, even if it has had the best health care delivery system. Indeed, the share of income that is spent on health has risen quite sharply over time in every economically developed country, regardless of the nature of their health system.

Clearly, however, the American health system does have many defects, which contributed mightily to the growth of the share of medical spending to 17% of American GDP. Yet when I was recently asked whether I prefer the present healthcare bill to no change in the health delivery system for a decade, I answered “no change”. Even though the American healthcare  system can use many reforms, regrettably the bill that passed the House and Senate is a messy compromise to attract reluctant Democrats that is short on needed reforms. Instead, the bill is filled with many complicated, and generally bad, new regulations, higher subsidies, and greater taxes.

The most important needed reform is an increase the fraction of total medical costs that come from out-of pocket expenses in the form of large deductibles and significant co-payments. Out-of-pocket spending accounts for only about 12% of total American spending on healthcare, whereas the share of out-of –pocket spending is over 30% in Switzerland, a country considered to have one of the better health delivery systems. Partly because of this major difference, health care takes 11% of Swiss GDP compared to the much higher American percentage. As far as I can discover, nothing in the new bill really tries to raise the out-of-pocket share, and some changes would reduce it even further. These include tax credits for individuals and families that earn up to 400% of the federal poverty level (up to about $90,000 for a family of four) that enable them to get coverage through newly created Insurance Exchanges.

Another desirable reform is to reduce the reliance of the American health system on tax-deductible employer-based insurance since tax deductibility has encouraged low deductibles and low co-payments. It has also locked workers with health problems into their current jobs since they may not qualify for insurance at other companies because of these pre-existing health conditions. The bill does propose to phase out tax deductibility for the more expensive plans by 2018, but who knows if that will ever be implemented.

For the most part, however, the bill increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient health insurance. Many companies are already beginning to add to their projected future costs the anticipated increase in the cost to them of insuring their employees. These changes will particularly affect the costs of smaller companies since they are the main ones that do not provide health insurance for their employees. Since smaller companies are responsible for a disproportionate share of additions to employment during recent years, this provision of the bill will tend to reduce the demand for workers and hourly wages.

The US health care market is over-regulated rather than under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states. Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs is a desirable protection against unexpected health care risks. The bill generally pushes in the direct of greater regulation, such as the limitations imposed on how much health insurance companies can spend on administrative costs relative to their other costs, the mandated reviews of the premiums charged by health insurance companies, and the mandated provision of health insurance by small companies.

Health savings accounts (HSAs) have been one of the most important innovations in the health care field during the past decade. These accounts require large deductibles, such as $2500, that individuals and families most cover out of their own pockets. Unused portions of the amounts in these accounts can be carried over tax free from any year to future years, and can eventually be phased into their old age pension accounts. HSAs with large deductibles encourage individuals to economize on their normal health care expenses, such as visiting doctors for colds or flu shots that they could get much more cheaply at CVS, Walgreens, and other retail medical clinics. There is little mention of HSAs in the new bill, and certainly no encouragement to their expansion.

The American health care delivery system needs greater transparency and easier access to medical information by consumers. The bill takes a valuable step in this direction by encouraging the development of online medical records and medical histories for all individuals, no matter how many doctors they have seen, or how often they have moved. A few other parts of the bill would also increase information and transparency, but for the most part the bill obscures rather than enlightens consumers about the health area. Many of the most important taxes come early while the additional spending kicks in much later, so that it will appear for a few years as if the new system will cut medical costs. Consumers will get a false impression that they are getting a more efficient medical care system when in fact the new system will turn out to be both expensive and invasive of individual choices.

Proponents of the bill claim it will save hundreds of billions of dollars during the next ten years from cuts in Medicaid and Medicare, but it is far from obvious how such cuts will materialize. Moreover, some changes will clearly increase the costs of these programs, such as the expansion of Medicaid coverage to individuals well above the poverty line, and by additions to drug coverage of seniors under Medicare. I do not see how the bill will lead to Medicare savings since there is no increase in out of pocket payments by Medicare enrollees, and Congress is likely to continue to override any scheduled cuts in payments to Medicare doctors and others. The most likely attempt to cut future Medicare costs will be through greater rationing of health care to the elderly, but lobbying groups for the elderly will fiercely resist these efforts.

Adequate and appropriate coverage for persons with pre-existing health conditions is a challenge for any healthcare system, especially those with private insurance. Although the bill addresses this issue, it makes coverage of pre-existing conditions more difficult in one dimension by expanding rather than contracting employer-based health insurance. The bill prevents insurance companies from dropping individuals if they develop serious sicknesses, and also prevents these companies from imposing limits on how much they will pay to cover an individual’s health costs during any year. In addition, uninsured individuals with pre-existing conditions will be able to obtain health insurance through the new health insurance exchanges run by non-profit companies.

The only truly efficient way to handle the pre-existing condition issue is to try to develop an insurance system in which young adults, who generally have few serious existing medical conditions, can take out long-term healthcare insurance. Long-term health insurance programs have been proposed in the academic literature, but they have been implemented only to a very small extent. Perhaps the bill’s approach to pre-existing conditions is the best that can be expected at this point if nothing is done to wean the system from employer-based tax-deductible health insurance (which at least does provide long term health insurance for employees who stay with the same company for many years).

Although the impact on the costs to taxpayers of the more than 40 million uninsured persons in the US is usually greatly exaggerated, I do support a requirement that everyone has health insurance that covers medical catastrophes. Coverage limited to catastrophes would not be expensive for the uninsured since they are mainly young and are generally in quite good health. They could readily pay the premiums for catastrophic insurance from their incomes. The health care bill does make health insurance compulsory, but it does this in an unsatisfactory way by requiring rather extensive benefits, and by subsidizing coverage for individuals and families with incomes far above the poverty line.

So for all the reason I have given, and many more, no change in the present American healthcare delivery system would be much better than the new bill. The American system has many great strengths and some serious weaknesses. The bill will generally weaken the strengths and strengthen the weaknesses.  

 

 

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[Frank Barlage]

THE FOURTEEN STEP PROGRAM FOR U.S. DEBT AND SPENDING ADDICTION
By Frank Berlage CEO, Executive Managing Director
Multilateral Partners L.L.C.

“Humpty Dumpty sat on the China Wall,
Humpty Dumpty had a great fall”

Humpty Dumpty is in many pieces and not surprisingly the solution will also require many pieces. Actually, Humpty Dumpty needs a comprehensive overhaul, one that will ensure prosperity and repair Humpty’s (America’s) deteriorating fundamentals in a permanent and meaningful way.
Meaningful change will involve an increase in domestic savings (a pool of capital available for investment) and an increase in demand (not much of a recovery if no one is buying), as well as the re-creation of a domestic supply of products. However, we need to focus on an internally generated supply of products and not simply on the service economy or more imports, (though balanced trade generally does have an important role.) The economy needs people to buy things but more importantly it needs to get the benefits of those purchases in more ways than just a one-off sale transaction. What’s required are the higher wages and profits that are derived from the production of those goods from all the way down the supply line.
There is no doubt that it can be very hard to increase demand and increase savings simultaneously, especially in an economy where the consumer is in debt up to his ears. Consequently, given the fundamental problems in the financial system and the economy as a whole, it is unlikely we will get either, demand or savings, without some high level of monetary expansion to monetize the bad behavior (debts) of the past. Unfortunately, relying solely on a monetary expansion is really like moving around the deck chairs on the Titanic, the arrangement may be different but the end result will be the same.
Therefore, it is important that we now act logically and not from dogma or philosophy because the decisions we are going to make are momentous and there is little doubt that what we do in the next few years will largely determine our future as well as the future for our children and grandchildren. What are required are statesmen and stateswomen with new profiles in courage.
America requires a comprehensive multi-step plan that provides for both savings and spending and yet recycles the benefits of each back into the domestic economy, not into countries on the other side of the globe. Instituting a comprehensive program will require faith and it will require the cooperation of the government class. More importantly, it can’t and probably won’t be implemented unless our political institutions believe they will be better off as well.
Again, the key is to increase;
1. Demand 2. Supply and 3. Savings. Here is a framework to bring that about;
1. Trade – The greatest danger to the world’s economies are large multi-year current account and trade deficits. Perennial imbalances in international trade and money flows are the root cause of the current crisis and were the root cause of the 1997 Asian crisis as well. When one or more countries incur large credit or debit imbalances over a multitude of years, those accumulated disequilibriums present massive risks to countries on both sides of the transactions. Currently, the U.S. and Iceland stand as poster children in this crisis, just as Thailand, Taiwan and other Asian nations did in 1997.
In the current crisis, China, South Korea, Taiwan, Japan and a number of other countries accumulated massive U.S. dollar holdings, holdings which were directly derived from their trade surpluses. The capital inflows to the U.S. of those balances then caused massive excess growth in investment in U.S. residential real estate, real estate lending and consumer goods but not manufacturing. (We didn’t use the money to build competitive industries because we ceded that role to China and other countries with lower tax rates and lower costs of production.) This capital inflow also massively increased the size of the U.S. financial sector over the past 15 years as that industry grew to handle the inflows. The U.S. trade deficits and the mathematical identity of those resulting foreign inflows suppressed inflation in the U.S. through the importation of price suppressing inexpensive foreign goods that were effectively purchased with the foreign capital inflow. The lower prices of those foreign goods reflected the effective quadrupling of labor that occurred as a result of political changes in China, India and other countries and to a large degree the dollar hoarding of those countries aimed at maintaining the dollar at levels not justified by the U.S. trade deficits.
Between 1995 and 2008, 94% of all U.S. capital investment was made as a direct result of foreign capital inflows. It was a mathematical identity with trade. Without those inflows, the current crisis simply would not have occurred and all the regulation in the world won’t change those dynamics the next time either if a similar trade deficit were to continue.
While the manifestations may be different depending on the crisis, the world does not benefit from substantially lopsided trade over long periods. This is especially true when the creditor’s investments can be withdrawn rapidly or the rate of growth of capital inflow slows markedly. For the United States, international trade is important but not if we are committing economic suicide.
For more than fifteen years, America’s leaders have allowed the largest current account deficit in world history to grow at an unprecedented pace. This occurred because their constituency loved low priced products, no matter how much they had to borrow to get them. It is important that we see the trade deficit as the root of our current problems and dispense with the excuses and rationalizations.
Because of the massively deleterious effects of such trade deficits, (notwithstanding the recent improvement), we need to establish a multi year program to create a positive trade balance because it is very likely that should consumer demand or foreign investment direct investment to the U.S. rise again, we will be back in the same situation. This is perhaps the most crucial part of any plan.
We are in a race to the bottom if we think we can compete with external developing country wage rates simultaneous to their currency manipulations. Therefore, in the absence of a world structure to prevent future massive disequilibriums, or in the absence of restraint by our trading partners, we need to unilaterally establish very small, gradually increasing tariffs on imports solely from countries that have had a lopsided trade surplus with the U.S. for more than 7 years. (Contrary to popular opinion, tariffs did not cause the depression of the 30’s as our trade imbalance in 1929 was only 4/10th of 1 percent of GDP.) These targeted tariffs should slowly increase at least 10% a year until trade with those countries corrects itself.
Disequilibriums in capital flows, excess real estate investment, economic and currency volatility and the shut down of manufacturing in multiple industries are not benefiting us, to put it mildly. If the special abilities in products or services (the Law of Comparative Advantage) have not worked for both sides of bilateral trade, (growth of manufacturing in each country’s area of expertise) after 7 years, then something is seriously amiss.
No one wants trade conflicts but we need to be acutely aware that if current accounts and trade balances continue to show large imbalances, then another crisis is inevitable. The institution of very small and gradual tariffs is now an appropriate remedy because the American economy will need an addiction detox program that is without a great initial shock. Consumers and businesses will make the necessary changes and eventually source American but they will need time to adapt. That said; tariffs should be implemented faster on imports from those countries that have been determined to be currency manipulators i.e. those that have aggressively and purposely held their U.S. dollars with the objective of exploiting their currency advantage despite their staggering trade surpluses.
In sum, too much foreign money and not enough qualified borrowers or qualified real estate investments relative to the size of that money led directly to our situation. For those who don’t really think trade deficits and international capital flows are the major root cause of our problems, one need only to look beyond the U.S. to Iceland, Spain, Ireland and other countries that are in crisis with many of our common trade and money flow denominators of excessive capital inflow or outflow, balance of payment and trade deficits. Manipulated international trade is not good to anyone if the result means recurrent disequilibriums that cause periodic world financial collapse. International trade should be the outgrowth of logical thought, not a mindless mantra.
2. Make a Real Effort to Eliminate Government Waste. Clinton and Reagan talked a lot about reducing government but since the end of their presidencies government has only gotten bigger and more inefficient. We need to mandate that federal, state and local governments complete a market based review of their employee structure and annually eliminate the bottom 5% of government departments and employees that are inefficient or redundant. If General Electric could do it, the U.S. Government can do it. Easier said than done many say, but with a cohesive policy, it can happen. A government with an employee base like molasses is an inefficient enterprise indeed. Try to find a non-government employed family who doesn’t agree with this. Separation of powers notwithstanding, we also need uniform state legislation that mandates balanced state budgets. (Californians will appreciate that one.) In 1909, the US federal government had an annual budget of $US 0.8 Billion. With this it governed a population of just over 90 million people. The cost of government was about $9 per capita. In 2009, the US federal government has an annual budget of $US 3 trillion five hundred and 50 billion ($3,550bn.) With this it governs a population of just over 300 million people. That's a cost of about $11,675 per capita." It is fair to ask, are we 1200 times better off? Government has simply gotten too large, too pervasive and most certainly, too protected.
3.Reduce Personal Income Taxes. We need to reduce personal income taxes by 45% across the board and convert our system to a flat tax. It may be trite but Adam Smith’s invisible hand will still allocate resources far better than the government, in fact it isn’t even close. Year after year taxes have been raised through the elimination of deductions and exemptions for those with the capability to invest and take risks. Without investors who have the accumulated capital to take big risks, there is no future for our economy. We seem to be in the early stages of glorifying the average, instead of celebrating the achievers who provide benefits to all. A reduction in personal tax rates will provide enough incentives and momentum to business and entrepreneurs to expand the economy to a point where tax revenue to the government will rise even if at a lower percentage tax rate. This is not warmed-over trickle down theory but fact based and supported by the data in many countries.
3a. Increase Real Purchasing Power, After Tax Income and Investment. Perhaps the consumer doesn’t have any spending power because after paying federal income taxes, state income taxes, local income taxes, social security taxes, property taxes, sales taxes, motor vehicle taxes, national park entry fees, gasoline taxes, hotel room taxes, transfer taxes, capital gains taxes, estate taxes et. al., there simply isn’t anything left over. There is no doubt that the middle class consumer, in the face of his tax burden, has been frantically borrowing for many years to maintain his standard of living. And on the investment side many investors haven’t seen the benefit of taking the risks to build manufacturing plants when the tax system is dominated by the philosophy, “Heads we win, tails you lose.” Investors may not make long term manufacturing investments in America if they question their capital gains. This is especially true when those gains are not tax indexed to inflation, a premise which should be, not incidentally, steeped in a basis of anyone’s reasonable concept of fairness.
Undoubtedly, we also need to simplify tax reporting and lower tax rates. We need to re-channel the vast army of brilliant minds currently doing tax returns to creative and productive enterprise. We need to give Americans the just rewards of their own efforts and then stand back. America will spring to life in a manner not seen since the beginning of World War II. If you have any doubt of this dichotomy, review the income tax rates and the one page tax filing forms used by the U.S. Government at the beginning of America’s rise as an industrial power. Countries that forget their roots cannot continue to lead.
4.Reduce Corporate Income Taxes. We need to reduce corporate income taxes by 75%. This will bring home business and money for capital spending to expand our base of higher paying manufacturing jobs. It will also stabilize and reinvigorate the securities markets. Many of our leaders, like the auto makers, have forgotten that we live in a global world. This is not the late 40s or 50s, the world doesn’t have to buy American cars and no company has to be located in America. The government class has to be convinced that, without tax reduction and reform, the goose is very close to laying her last golden egg.
5.More Engineers, more Scientists. We need significant incentives for those that create the products. Hewlett Packard notwithstanding, the fact is that today’s products and technology require more than just a garage for start up. It requires a universe of qualified scientists and engineers. Let’s provide significant incentives for our engineering and scientific universities. For example, if tuition was free at engineering and scientific universities demand to be an engineer, scientist or mathematician would rise and more people would pursue occupations accretive to everyone in the economy (and perhaps we would have a few less people engaged in some other professions that are not really known for their productive contributions.)
Throughout history, the creation of goods has been the foundation of every great power. When a travel agent calls his workout coach, little in the way of tangible prosperity is created. An excessive services sector should be appointed only to those countries that have successful manufacturing as their foundation. We need to get back to the basics of real prosperity and we need the skills to get there.
6. Build our Manufacturing Base and Focus. Today’s excess capacity is, in reality, a foreign excess capacity. America needs to re-build its own manufacturing base and it needs investment tax credits for domestic manufacturing. Want to see America shine? Provide substantial tax credits for investment in highly productive domestic machinery. Give industry a competitive edge over emerging country wage rates and things will improve quickly. If we have no choice now but to monetize our debt burden, we can be sure that at some point when the recovery comes, that new money will eventually come back around to bite us with excess nominal demand. As a consequence, we need to be ready with a domestic manufacturing base to meet that increased nominal demand that will almost certainly be engendered by the creation of so many government stimulus, spending, bond purchase and monetary programs. We also need to move investment toward making things and away from services and real estate. Our politicians should give great weight to the consideration of removing pension and health care from the manufacturer’s burden and let them produce. Why, and at what point, did the ever so tangential aspects of providing healthcare and pensions become the employer’s burden? We need to provide incentives to the users of healthcare services to seek the best price. We are missing a market price based foundation. To some degree, we need to re-connect the consumer of healthcare services as the payer of the services. In any case, more government in the healthcare sector is probably not the answer. Let’s return to the goal at hand and that means allowing business a focus on their primary function which should be the creation and marketing of their products.
7 . Reform Immigration. The immigration process should be made significantly easier for those coming to America with education, capital and productive skills. Conversely, it should be made much more difficult for those looking for a free ride or a welfare handout. Our immigration allocations should be stridently biased in favor of engineers, scientists, skilled workers, those with high levels of education or capital. It should be biased against the unskilled worker. Race, religion and national origin should have nothing to do with it. If a better educated, more contributed immigrant means there are not enough people to pick grapes then so be it and the pay to grape pickers will go up. Supply will then be reallocated based on the higher pay and we may pay a little more for our grapes. But that cost will be more than offset by the contributions of those immigrants that are motivated and capitalized. Why have we not efficiently utilized our immigration allocations?
8 Increase Savings and Demand for Domestic Products – Let’s get our savings and demand systems in line with the creation of domestic products. We need to create tax free savings accounts that specifically allow tax free withdrawals that are used exclusively for purchases of domestically made products. If you want America back on her feet, provide incentives for the purchase of her own products. 1. Once you have the engineers and the scientists designing the products and 2. the investment tax credits for making them, we will need 3. a tax policy to channel the demand.
Furthermore, as a nation, we need to establish large pools of savings capital to fund the infrastructure and the retirement of our citizens. Australia, for example, requires a deduction from each paycheck where the proceeds go to a Superannuation Fund earmarked for each investor. Their plan is a real savings pool that has become one of the highest per capita investment funds in the world. We need to recognize that Social Security and Medicare, as currently structured, are fraudulent. Contributing social security deductions to the government general fund is not real savings in a deficit economy because the benefits will either not be paid or, if paid nominally, will be monetized through inflation to non-economic levels. Consequently, our current system will offer little support to those that actually need it at retirement given the actual and contingent liabilities of the U.S. Government. We need to truly segregate a national pension fund and earmark the accounts by law with the ownership resting only with the account holder. 10% a year of real segregated deductions ought to do it. With real pools of capital, savings and investment can then blossom out of the reach of excessive government spending.
9. Fix the Legal System. America needs to clean its pipes and overhaul its tort system. Let’s stop blocking the creation of prosperity by throwing sand in the wheels of commerce. While much of our bad litigation is a pox on big corporations, it can be fatal to small business people. Let’s face it; out tort system is out of control. When judges are legislating from the bench or entertaining novel tort theories based, not on the law, but on arbitrary social objectives, we then have a legal system that can’t be trusted. A reliable and trusted legal system is a first pillar of investment but an inconsistent legal system is a legal system that won’t be trusted and eventually won’t be invested in. We need to force judges to accept reasonable motions to dismiss tenuous legal actions early in the legal process. Furthermore, perhaps it is also time for the lawsuit loser to pay the winner’s legal costs. We need to focus our energies on those resources that are accretive to the economy not a hindrance.
10. Fund VC capital – We need to provide significant incentives for the venture capital industry to allocate investment to product creation and manufacturing. If that requires government funds, so be it, but the funds should be administered through the private sector. Despite the venture failures at the turn of the millennium, venture firms are still better capital allocators than government. Many of our political leaders have little background in the complexities and resources required to start even the smallest businesses and they often don’t understand the burdens. For example, government requirements for hiring only a few employees combined with the compliance of the general business regulatory structure can consume the entire capital of a startup company in a very short time period. Consequently, the capital required to really get the ball rolling is now truly beyond the capacity of most individual engineers, scientists or entrepreneurs. Therefore, American needs significant incentives to allocate larger amounts of capital to early and mid-stage companies so that they can grow. However, given the depleted resources of our financial industry, the shrunken pools of capital for investment and the absence of a cohesive program to re-invigorate the entrepreneur, things look dark for the future growth of all small enterprises. Without a nurturing environment for our small companies, it is likely that we will see restraints on their developmental growth into large industries. Without a vibrant pipeline of new industries there will be fewer jobs at any level.
11. Controls on mortgages – Some of our more recent major crises found part of their roots as a result of various sectors of the real estate market going awry (i.e. 1989 to 1995 and 2005 to the present.) If we complete the steps outlined herein, it is likely that better returns on equity will be derived from manufacturing and more capital will be attracted there. Hopefully at that point the oversupply of capital allocated to real estate (the only investment game in town) will be less likely to occur and the economy can regain the balance with manufacturing that was prevalent in earlier decades. Nevertheless, in an age of intermediation and syndication, we need some basic controls on real estate lending and speculation, especially when the entire financial system can be at risk from recurring excesses and poorly disseminated risk. A reasonable first step would be legislation requiring reasonable minimum down payments for both residential and commercial real estate. In the securities industry, margin requirements were instituted for a reason. Left to their own devices, people often get carried away and over-leverage at the wrong time. We also need to slowly moderate incentives for debt, including various interest deductions which often induce people to take on more debt than their incomes justify. For example, Australia has no home mortgage interest deduction and while affected by the world crisis, their housing market has remained intact.
12. Fairness and Savings - We need to reduce property taxes, especially for folks over 65. Property taxes are difficult taxes to begin with but they are most inequitable when assessed unfairly. Many people work their whole lives to reach their senior years when they hope to have their homes paid off. What they often find is that at retirement, they can’t make their property tax payments. People shouldn’t lose their homes to property taxes. A good start would be federal legislation that overrides the excessive property tax policies of some states. New York is a good example of the excess. (Perhaps such a policy might rescue the over-tax burdened areas of upstate New York from perennial recession.)
13. Quarterly Shortsightedness - We need to radically change our quarter by quarter investment and earnings focus. I doubt Warren Buffett would have ever made a dime if he had a hard deadline to make by end of the next quarter or when the next analyst’s report was coming out. A company needs to be able to set their long term plans for capital expansion several years ahead and then be able to stick with a competent CEO even if those expenditures reduce income in the short term. We need a longer term focus, one that doesn’t give short term thinking senior executives an overriding incentive to bet the ranch to get a bonus.
14. No Replay It is important not to repeat the errors of the depression period of 1929 to 1938. In addition to the obvious errors of letting the money supply drop by a third and allowing large numbers of banks to fail, other egregious mistakes included the New York Fed more than doubling its discount rate in two separate moves within a one week period between October 9th and October 16th in 1931. Another blunder was made in 1932 when the marginal income tax rates on high income earners were raised more than 100%. The same mistake was made again in 1936 when high income marginal income tax rates were increased 25.4%. During this period, policy makers allowed a political agenda to overshadow sound economic reason. These policies radically impaired the capital investment needed to expand jobs just when it was most needed. Another major gaffe occurred between August 1936 and April 1937 when the Fed increased reserve requirements by more than 100%. This specific change had a severe negative effect on bank lending at exactly the wrong time and actually led to two depressions. That second downturn occurred in May 1937 just when most observers were actually expecting a firming recovery. Therefore, we need to learn from our mistakes and implement the positive steps outlined in steps 1 through 14. Clinging to the ideology that those that are successful are uniformly evil simply because of the few recurring rogue actors threatens to undermine our entire structure. If we continue on this road, those who would risk and invest will be precluded from doing so by lack of capital, ability or incentive. It is important to remember that large individual and institutional pools of capital are the backbone of our economy and always have been.
In sum, it is not just Americans that have to worry about America’s economic decline. A continued decay of our economic strength will almost certainly result in a decline in our military power and reach. This may mean a significant change in the stability of the world. Dictators and totalitarian regimes that have been deterred from aggressive actions may soon find a free hand. The potential ramifications of such a power vacuum could be overwhelming with dramatic permutations that are not currently foreseeable.
Rest assured that if we don’t rebuild our manufacturing industries in short order the probabilities are extremely high that America will, like an attractive house surreptitiously eaten by termites, eventually be unable to support its structure. However, the longest journey starts one step at a time and thus we must make the tough decisions as it will only become more difficult, if not impossible later on.

Frank Berlage
CEO and Managing Director
Multilateral Partners L.L.C.

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THE REAL CRISIS

I have watched with interest the varied explanations of our current crisis. However explanation after explanation fails to find the roots of this crisis and offers little in new insight. The derivation of our existing problems is specific but because the connections are not direct, the real crisis is not being addressed. Let me explain:

The international bottom line of any country is its trade surplus or deficit. In excess, this can be as much a bottom line as it is for any corporation and can be a country’s most comprehensive measure of economic health. Ours is not good. Why?

In our modern economy with easy international transfer of both goods and money, rising demand for imports commensurate to a monetary expansion can result in an allocation of capital and labor to countries with the lowest cost of labor. The most obvious example is, of course, China but it includes many other countries as well.

In the early 1990’s, in China, India and other developing countries, the quadrupling of world labor as a result of political changes, combined with low wages and an initial input of foreign capital, resulted in a significant increase in the production of less expensive goods. Exported cheaply to the U.S., low cost imports, and U.S. domestic component manufacturing based increasingly on imports, bred higher profitability for U.S. companies. Many of those companies found they could dispense with high cost American labor and regulations. This protocol in turn produced the highest profit margins in U.S. history for American corporations. Consequently, the stock market during that period produced stock prices that reflected those record margins.

Low cost imports expanded to such a degree that secondary U.S. manufacturers soon realized that their failure to also lower their costs as well might result in their extinction. The process accelerated and rapidly many products labeled “Made in U.S.” were really only assembled in America and were quite dependent on foreign labor inputs.

(Background note: A golf club is now represented to be “manufactured” in the United States by simply screwing on the imported head of the club and then attaching the imported grip to the imported shaft. In reality it is anything but domestically made. Such easy assembly and the elimination of high cost domestic proprietary metallurgy and labor as well as the mitigation of domestic environmental costs results in profitability to the manufacturer that is not really justified by domestic economics. In many respects this leaves corporate profitability dependent on the strength of the U.S. dollar.)

Therefore, the stock prices of these assembly and importing corporations or their mercantile subsidiaries rose because the new “productivity” had resulted in increased profitability for anyone willing to assemble, import or produce offshore. Such profitability then attracted the attention of many other tertiary U.S. corporations and by the mid 90’s the production transfer to low wage countries was in full swing and thus accelerated even further.

Over time, such increases in production accrued very large dollar reserve balances to China and other emerging nations just as the same process had made similar accruals to Japan over the past 40 years. Developing countries became the recipients of even more international capital investment and as a result of the profitability of their exports and internal taxation receipts, there was the manifestation of a massive accumulation of U.S. dollars.

As time went on, foreign ownership of dollars piled up in a myriad of ways. Now with many hundreds of billions of “dollars” accruing to the emerging countries faster than it could be spent, the emerging countries looked for outlets for investment or methods of holding the capital until permanent alternatives could be determined. No one in Asia wanted to be caught in another ’97 currency crisis and so they endeavored to keep high foreign currency reserves.

We then reached a critical point and it did not occur by accident. The early accumulations of U.S. dollars were not sold by China and most other emerging nations. Consequently the imbalances in trade were not corrected through a lower dollar that would more accurately reflect the U.S. trade deficit. Since the relative overvaluations of the dollar were not being mitigated, there was a foundation for a crisis in its formative stages. In fact the dollar reserves held by these countries as a result of their massive surpluses in trade were intentionally expanded with the intent of adding advantage to already lower labor cost. This accelerated the ability of emerging countries to take competitive advantage of U.S. industries in a fashion similar to what Japan had done over the past 30-40 years. These fundamentals sowed the seeds of potential radical problems for the U.S.

To clarify why this is important, let us look to the early days of our country. For example, if, in the 1800s the U.S. purchased 100 million dollars more in tea from Britain than we shipped them cotton from the South, the dollars sent to the British would generally be sold and pounds would be purchased. Holding dollars and monitoring dollar investments was somewhat cumbersome since wire transfers and jet airplanes were a long way from creation. Even for the largest international institutions in the 1800s, the risk of holding foreign currency was often too great. Thus a sale of dollars by Britain would result in a lower dollar very early in such a period of imbalance and a rise in the British pound. This natural self correcting mechanism of capitalism would take hold and the following year America would be forced by the currency change to buy less tea (since it is now more expensive due to a lower dollar) and the British would be enabled to buy more cotton (since it is now less expensive due to a higher pound). In short order the imbalances would be corrected, as they should, and the balance of trade would right itself. This is the way capitalism is supposed to work.

Today, we have a stark difference and therein lies the cause of the current crisis and the risk to American capitalism. It is therefore important to compare apples and apples or in this case hard goods against hard goods. Our 750 billion dollar trade deficit is mostly in manufactured products or commodities. To see the degree of the problem, it is necessary to compare this deficit figure to our manufacturing base (excluding services) of roughly one trillion five hundred billion (1.5 trillion) which is roughly about 11 % of our 14 trillion dollar GDP. (Much of the rest of our economy is mostly non-exportable services i.e. your workout coach washing the car of my travel agent.)

Every 12 months this variable trade deficit of 750 billion now equals well in excess of 40- 50% of our manufacturing base. Such numbers are staggering and nothing like this has ever been seen in modern economics, certainly not on the kind of scale and sustained basis as we have seen in the U.S. over the last 15 years. It is more aggravated for the U.S. because services make up such a large part of the economy. But it could only happen because our relative currency value is manipulated by various trading partners to subsidize their exports. The manipulation in addition to the wage differential creates a deadly cocktail for American industry.

For example, Japan, a country without abundant natural resources, learned early in the post war period that if they allowed their currency to rise at a rate commensurate with the growth of their trade surplus then their future production would drop as the effective cost of their labor rises (due to a rising yen) and consequently their economy would slow as would their accumulation of our dollars. Since ownership of American and other reserve currency dollar based international assets have always been an attractive alternative, the Japanese have, over time, collectively accumulated dollars and dollar based assets instead. Consequently, it is no wonder that, despite one of the highest per capital wealth rankings in the world, the average Japanese housewife continues, even to this day, to pay excessive prices for imports. Additionally, since so much of the Japanese wealth lies offshore, much of their trade gains have never been realized to their full degree by a value adjusted yen within Japan because much of their current account surplus has never been repatriated.

In the 1990s, the Chinese observed the rise of Japan’s national wealth using these tactics and they in turn also refrained from the sale of dollars accumulated from their trade surplus. They effectively stopped the rise of the Yuan and any correction to the trade imbalance.

The resulting tide of cheap imports to the U.S. and the expansion of monetary policy to pay for them seemed to make economic sense to both American politicians and monetary authorities because it seemed that the rise in the money supply was not resulting in too many dollars chasing too few products (classical inflation). The reason was simply because there were not “too few products”. Massive increases in Chinese production and an effective quadrupling of worldwide labor saw to that. (India, China, Vietnam etc.)

Foreign capital inflows and the growth of the U.S. financial industry as a result prodded excess valuation which in turn prodded excess and reckless lending and investment in real estate on both the debt side and equity side. This resulted in overvalued collateral upon which the over-indebted consumer could borrow.

Keep in mind that high returns on equity were not being found in new U.S. manufacturing projects because new manufacturing projects were being done outside the country. Consequently, investors looked to real estate as the primary alternative.

Politicians comforted themselves because it seemed that since inflation wasn’t rising there must not be a problem with the trade deficit. They erroneously believed that the absence of inflation was because there was a rise in American “productivity” (more goods for fewer hours worked). But unfortunately this “productivity” rise was, in large part, an illusion derived from the cheap labor input of imports and the assembly of imported components rather than lower cost U.S. vertically integrated industrial efficient production. While technology gains did contribute to productivity improvements, it did so to a much lesser extent than the factors of a quadrupling of world labor, dramatically less expensive import pricing and the massive expansion of emerging country production.

As time went on, even those knowledgeable to comprehend the back page of the Economist Magazine failed to ascertain the implications of an American balance of payments deficit that was rising into the stratosphere. Furthermore, politicians and economists comforted themselves that the balance of payments deficit was just a small part of the GDP without making the correct comparison by excluding non-exportable services.

Anyway, there just wasn’t a constituency demanding that the government turn away the cheap imports which were satisfying a massively over indebted electorate while at the same time depressing inflation as the result of the offset of declining priced imports. It was an unrecognized circular conundrum. Consequently, without the political backlash of inflation, rapid monetary expansion continued unrestrained and the foreign investment capital of China, Japan and other emerging countries continued to pour into the New York to be distributed throughout the country as real estate loans, credit card balances etc. Few realized the impact and even fewer understood that since 1995, 94% of all capital investment in the U.S. could be explained as a result of foreign capital inflows. The size of those inflows created capital placement problems throughout the U.S. economy. Overwhelmed, the quality of real estate investment, development and lending began to decline

Eventually, the dollars lent to the U.S. and placed in N.Y. by the Chinese, Japanese and emerging nations overran the number of qualified borrowers and qualified investment opportunities. This led to excesses in the construction of condominiums and houses not seen before in the history of the country. It wasn’t rocket science.

Historically a solid year for housing starts in the U.S. has been 1.3-1.4 million starts and top of a market boom conditions rarely exceeded 1.7 million starts. However as the capital flowed in, the solution adopted by the financial industry to a shortage of qualified borrowers was simple, lower the standards. Like magic the banking and mortgage industry created millions of new “qualified” borrowers. If you are a waiter and tell us you make $200,000 a year, no problem; loan approved. Thus the explicit standards for lending were reduced dramatically and housing starts exploded to 2.1-2.3 million units.

Intermediation disconnected the lender of the funds from the borrower and the new gate keeper (the loan broker) was paid by commission on his volume of debt. All of this occurred with either omission or commission of the ratings agencies and their packaged AAA approval on a variety of derivative products sliced and diced by new algorithms. Inevitably, collateralized debt obligations premised on Milliken’s junk bond models, Sklar’s theorem and Gaussian copula models were marketed across the globe without a black swan warning.

Adding to the calamity, CEO’s of financial companies made their bonuses by essentially writing naked put options as credit default swaps and immediately adding those premiums to the bottom line. In the trillions, these CDS’s were essentially insurance policies without required reserves.

Ultimately, in 2007 and 2008 rising interest rates, a declining U.S. dollar and rising commodity prices pricked the bubble and the leveraged and over-indebted U.S. consumer laid out the white flag. Fair-value accounting led to massive write offs and foreign capital inflow slowed.

Today, a large part of the debts to foreigners remain but the equity investments made with that capital are in distress. Interest rates have come down, the dollar decline has retraced and commodities have fallen. However, once the bubble popped the astronomical consumer debt levels have held sway and without a lot of money printing, it will get worse. Money printing will eventually result in a declining dollar anew but unfortunately the U.S. government has little alternative but mitigate the debt burden by reducing the purchasing power of that existing debt.

The consumer, at 70% of the economy, has run out of home equity loans and credit cards. The absence of manufacturing wage rates has added to the more permanent pressure and now foreigners are much more reluctant to lend their capital. Our example and problems have encouraged and aggravated similar problems and variations in many countries throughout the world including Iceland, Spain, Ireland and Hungary among others.

What to do?

Household debt relative to our GDP must be reduced significantly while consumer savings must rise commensurately. The process that gets us there won’t be pretty.

While free trade is a positive for the world, the self correcting mechanisms of the currency markets cannot be short circuited such that perennial imbalances are allowed to cause disequilibriums in multiple markets. If one or more countries can accumulate the currency reserves of another in large enough quantities, it can create intended and unintended consequences that can be devastating. When the U.S. has traded with a country for 7 years at a deficit, it is a sure bet that the law of comparative advantage has failed.

Therefore, the U.S. has to come to terms with a trade system that is presently neither fair nor self correcting. We need to realize that our currency’s role as the world reserve currency should not be a catalyst for destroying American manufacturing. If we fail to learn this lesson, then this will only be the first of many crises. We need to negotiate, discuss and encourage a balanced currency valuation. But if all else fails we must reticently penalize the imports of those countries that artificially cap their currencies and underpin their exports at our expense and destruction. We have only two choices, either the Chinese and emerging countries buy more of our products or we to buy less of theirs. The status quo is untenable.

The U.S. economy could be described as a house with termites. Year after year the termites have eaten the wood but from the outside the house still looked beautiful. Fifteen years later when someone slammed the door too hard the house caved in.

Frank Berlage
CEO, Managing Director
Multilateral Partners L.L.C.

July 21, 2008

[Don the libertarian Democrat]

"Although the impact on the costs to taxpayers of the more than 40 million uninsured persons in the US is usually greatly exaggerated, I do support a requirement that everyone has health insurance that covers medical catastrophes. Coverage limited to catastrophes would not be expensive for the uninsured since they are mainly young and are generally in quite good health. They could readily pay the premiums for catastrophic insurance from their incomes. The health care bill does make health insurance compulsory, but it does this in an unsatisfactory way by requiring rather extensive benefits, and by subsidizing coverage for individuals and families with incomes far above the poverty line."

I agree with you. I differ on the politics. I think that the main issue this time was going to some kind of Universal Coverage. Now that we've crossed that line, sort of, the issue of costs, etc., will become more important.

Politics is about Interest Groups. Sometimes it's easy to see where we're going, and sometimes not. Health Care is such an issue. In the long run, which you seem to focus on a lot, such a plan as we favor is possible. But we won't get there in a straight path, however much we'd like that.

[HawkScott]

I'm not claiming to be an expert by any means, but as a college student close to graduation, I can only imagine how much harder it just got to find a job. Articles such as these http://www.foxbusiness.com/story/markets/industries/transportation/update-caterpillar--million-q-charge-health-bill/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+foxbusiness%2Flatest+%28Text+-+Latest+News%29&utm_content=Yahoo+Search+Results and http://www.bloomberg.com/apps/news?sid=auDlhzXGuFjI&pid=20601087 have really got me thinking: what is in the water in Washington? With unemployment hovering around 10% and companies still reeling from the recession, it really makes me wonder how long it will take or even if the economy will recover. I'm preparing for the worst. I hate to sound negative, but this couldn't have come at a worse time for companies who are still struggling to remain in business.

I guess we will have to wait and see what Washington will cook up to save us when our employers either cut healthcare benefits completely or drastically reduce them.

[Dr. A. Bajaj]

The biggest source of over-spending in our health-care system in the USA is the usage of third-party payments (insurance) for even routing medical care. This has clearly led to massive cost escalation in the long term. Indeed, take any service/good which is highly regulated, with high barriers to entry for providers, paid for by third-party (so the consumer is relatively immune from rising prices) and you will get the mess we have.

Many players are eating off this bloated pie: pharmaceutical firms, hospitals, physicians, health care device vendors and lawyers.

I will outline a simple set of goals below, without discussing how they can be achieved. These goals will reduce health care costs dramatically and immediately.

1. Outlaw third party payments for anything but catastrophes. This is similar to Prof. Becker's suggestion to increase out of pocket payments, but perhaps a step further.

2. Set pricing controls on pharmaceuticals that follow an index of prices in other markets. Hypothetical E.g., Lipitor here cannot be more than twice as expensive as the average price in Canada, UK, Germany & France.

3. Limited "pain & suffering" ceilings on lawsuits.

4. Pay Doctors and Hospitals not based on number of procedures, but based on underlying ailment, and outcome.

One rejoinder may be: "How can you expect the average person to pay for expensive procedures out of pocket?"

People have forgotten the power of a free market. My take: HAVE FAITH IN THE FREE MARKET. In a free market, if there are a group of consumers that can pay only $5 for an office visit, then guess what: THERE WILL arise doctors and clinics to meet that need at that price point. they may not be as fancy as the clinics charging $50 for a visit, but in a free market, each one gets the service for which they can pay, and here is the good part: technology trickles down so everyone gets advanced treatments. They just don;t get them all at once. For example, most cars have anti-lock brakes today, though 20 years ago only the high end cars did.

The one belief we need to discard is that everyone, regardless of ability to pay, is ENTITLED to the same technology/treatment. That is a socialist ideal that is impossible to meet in the real world, unless the same level represents a low denominator.

[Senior Homes]

The US health care market is even more regulated than it being under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states. Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. How can you expect the average person to pay for expensive procedures out of pocket?" People have forgotten the power of a free market.

[Jack]

Hawkscott: While I was deeply moved by news of Caterpillar having to take a $100 million charge off from its $40 billion gross revenues but soon my thoughts turned to wondering just why they been enjoying a $665 per retiree, tax free subsidy from the federal purse. Also wondered why the concept of such a subsidy is unknown to those of us operating small businesses and sole proprietorships.

As for the poor timing for recession damaged companies I wonder if you thought about the timeliness for some 40 million not covered, with poor access to H/C or those in mid-life with pre-existing conditions perhaps struggling the loss of career long jobs and the related H/C insurance?

I wish you and all young grads the best in this tough job market, but perhaps it will be some small comfort for many that "insurance" companies can not boot them off their parent's policies until they turn 26.

[evision]

http://www.sangambayard-c-m.com

[Worldvacation]

Unlike Becker, Posner at least acknowledges that the new health care law includes "some economizing measures" - but like most other commentators on the right, he ignores the most important such measure: The Independent Paymet Advisory Board. The IPAB has the potential to be a much more significant cost-control mechanism than the measure Posner cites -- the so-called "cadillac tax' - or any other provision in the new law. With independence akin to the highly successful Base Closings Commission, IPAB will have real power to control what Medicare pays to providers. Since Medicare is the biggest single payer in the market, it largely sets the market. As a result, the IPAB's decisions will bend the health care cost curve over time.

The "cadillac tax" is a good idea too. It is a "sin tax" like taxes on cigarettes and cop-killer armor-piercing bullets (if only!). Serious health care economists predict that almost no companies will ever actually pay a penny in such taxes, as it is intended to (and will) discourage them from offering the types of gold-plated insurance plans that will be subject to the tax. But it's not the most important cost-containment measure in the new law. Not by a long shot.

[Andy]

"For the most part, however, the bill increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient health insurance..."

I own a small business, and I surely cannot pay for that!

What's In the Health Care Bill

[Scott]

Why isn't anyone asking the following?
Are we as Americans now going to allow the government to dictate our lifestyles?
For example: What will stop insurance companies from imposing higher rates to those whom don't exercise; those that consume fast or even fatty foods; those who drive more than 2 hrs daily; those with large breeds of dogs known to be aggressive; those that live in high crime districts; those with lower incomes; those with family medical problem history; those that communicate via cell-phone more than 1 hr daily(may increase chance of brain tumors); teens that text more than 10 times daily (may increase risk of carpel-tunnel syndrome); those that undergo homeopathic remedies?
This list is endless. Our right to choose how we want to live may very well be at stake.

[Rodrigo Salcedo]

Becker,

I agree with some of your points (especially about employer-provided health care) but I have to disagree with the general thrust of your argument. The health care market doesn't function like the iPod market. For instance, you write:

>>The most important needed reform is an increase the fraction of total medical costs that come from out-of pocket expenses in the form of large deductibles and significant co-payments.>The US health care market is over-regulated rather than under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states.>Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs is a desirable protection against unexpected health care risks.<<

You're right, and yet the business of an insurance company is to pay out as little as possible of the premium money it collects. That sort of market incentive demands regulation to curb abuses.

America needed a fundamental shake up of its insurance system and reimbursement schemes. This bill was not it, but as a prelude it was far better than doing nothing.

[Rodrigo]

Somehow I lost most of my comment..

You right that shifting costs to consumers is among the most important reforms we can make. However, families are limited in their ability to comparison shop for health care for several reasons:

1) They are under a time crunch, whether real or perceived.
2) They are limited by their health plans as to where they can get service.
3) They don't know, necessarily, what services they need or will be given until they are sitting in an examining room talking to a physician.
4) There are no posted prices and families are not in a position to second guess the judgment of a provider, who in concert with their insurer decides the cost and quantity of the services the family will receive.

If that's an accurate depiction of the way families can shop for health care then there is little they can do to change the mix of services they buy and who they buy them from - things they must be able to do if cost-shifting is going to change providers' incentives. The only thing they can adjust is the total quantity of health care they consume.

So what will cost-shifting accomplish? Americans will generally buy less health care and be on balance poorer and sicker. The total level of health care spending will probably decline, but the rate of increase after the poverty shift may not change very much at all. That doesn't sound like what we want to accomplish.

[Rodrigo]

To scott:
>>Are we as Americans now going to allow the government to dictate our lifestyles?<<

You list a number of factors insurance companies might price discriminate against Americans but then rail against the government and accuse it of trying to dictate lifestyles. How do you make that jump?

[Jack]

Scott asks:

"Why isn't anyone asking the following?
Are we as Americans now going to allow the government to dictate our lifestyles?"

.......... to be fair on this one, perhaps our democratic/republic has become a bit unrecognizable, however, according to our beliefs and the oldest Constitution in the world, it is WE who elect and direct our government. Perhaps it's worth adding that we've no such control over "insurance" oligopolies who are exempt from even anti-trust regulation. Ask those of CA's Anthem/BlueX what input they feel they've had as premiums were increased by 39% in just one year.

"For example: What will stop insurance companies from imposing higher rates to those whom don't exercise; those that consume fast or even fatty foods; those who drive more than 2 hrs daily; those with large breeds of dogs known to be aggressive; those that live in high crime districts; those with lower incomes; those with family medical problem history; those that communicate via cell-phone more than 1 hr daily(may increase chance of brain tumors); teens that text more than 10 times daily (may increase risk of carpel-tunnel syndrome); those that undergo homeopathic remedies?
This list is endless. Our right to choose how we want to live may very well be at stake."

............ It IS good for you to ask such questions and for those of you who'll have to deal with such policies for the next 75 years or so to inquire about other corporate intrusions such as 60% of employers using credit profiles as a major hiring criteria. In fact it might be worse even than you imagine. Consider, a middle age guy today, perhaps trapped in one "insurance" company by a "pre-existing condition" and reaching an age where it may well be profitable to force him/her out. So they implement some of the changes you fear, thus dealing themselves and out if the now chubby cell phone using salesman is the victim of a costly illness.

But........ consider, each of your fears above are due to efforts by "insurance" companies to cherry-pick their most profitable "risk" pool. "Risk" in quotes as most of their payouts leave substantial margins to cover risk, profits and multi-million buck "compensations" for CEO's and upper execs.

Now consider Medicare. Despite it being for older and likely "sicker" folk with perhaps many "pre-existings" they accept them all.

As for the "risky" behavior, we as a society may well decide it's in our interest to ban transfats (as NY and some other venues have) driving while cellphoned or drunk (both offer about the same risk of injury to oneself and others) and insist motorcyclists wear helmets. Each of these decisions may be controversial but will, or have been, decided by elected officials, not by cherry picking companies.

Lastly, here's a question for your final. Once we've (belatedly) decided all of our citizens deserve rational access to H/C and we are all in the same risk pool, what useful function do "insurance" companies play that justifies 30% or more of overhead while the overhead for Medicare is in the range of 5%?

Oh, and for extra credit since those working for large corps, any governmental entity, the military, Vets, those on welfare, totalling some 80% of our population have access to H/C why would we want to bear all the sorting costs to exclude mostly those who work for small biz or are between jobs?

[Jack]

Rodrigo: Exactly. In thinking about shopping for market based H/C I like to compare to buying other complex products, perhaps a car. We don't buy a wheel, engine etc but the complete product of which we know something of its reputation, reliability, warranty etc.

That would lead to an HMO sort of model as proposed by the Clintons, trouble is we might know what we'd be asked to pay but what was offered would likely be a very fat contract. That might not be an insurmountable problem were there a strong consumer bill of rights replete with an option to seek a 2nd opinion and service beyond the provider group if one were not satisfied.

As our incomes are too disparate today, I'd think we'd still have to use something like a federal voucher so ALL could play. But there'd still be problems of poor service in the rural areas or perhaps in high cost areas like my home state of Alaska or NY.

Today's "insurance" companies are well position to join with providers or compete with providers to offer a service in return for payment or a voucher.

Well, this bill is surely not the H/C of the coming century so we'll see whether it goes to single payer or competing provider groups.

[Jack]

Andy: I'm understanding that those with less than 50 employees are not affected, but I'm not sure.

As for "I own a small business, and I surely cannot pay for that!" ............ assuming there is any additional cost (I don't know) you'll be competing on a level playing field with other small biz who are now offering H/C to their employees. BTW what do you working folk do for H/C access now?

[Glenn]

Without the tax subsidy -- or even with the tax subsidy, if the subsidy were given to the individual for purchasing his own insurance or self-insuring by contributing to a health savings accouunt -- it is unlikely that there would be much or any demand for health insurance without large deductibles. Who would buy one of these pre-medical plans?
In my mid-fifties I purchased a plan for nursing home or at-home care that guarantees that my premium won't increase based on my individual experience and my insurance won't be cut off. (It can go up with those of other insureds if overall costs increase.) One of the most common kinds of insurance is life insurance. The life insrurance companies do not cut off their insured when they reach old age. It seems likely that the supposed "abuses" of health insurance companies are a result of the fantastic array of mandates and regulatory requirements they are subject to and the fact that most people are in employer group plans fostered by the tax subsidy. This would seem to be a more likely explanation for these phenomena than the idea that medical insurers for some strange reason are uniquely evil and greedy in the insurance industry.
the problems Scott mentions would not be problems if insurance did not cover medical expenditures from practically the first dollar spent. If you paid the first $10,000 or so of your medical bills you wouldn't be worrying about an insurance company controlling your life. Medical insurance would be like home insurance or life insurance.
I recommend an interesting article by one Goldhill in the September Atlantic monthly, which non-subscribers can still view without charge. It is a fairly lucid analysis of the problems caused by the current insurance subsidy that will be made worse by the "reform" just enacted. Employer medical insurance expenditures tend to be invisible to employees, who do not realize how much they are paying for insurance. Only in an accounting sense does the employer pay for the insurance -- in reality the employee pays in lower cash wages. As Goldhill shows, while many are frightened at the thought of paying their own medical bills, they would have much higher cash incomes if insurance -- really pre-paid medical plans --were not provided by their employer.

[free credit repair]

Thank you for this very informative article of yours. You have explained everything well. I appreciate that you shared this to us.
it can be both. everyone does have a health insurance but not for the small companies because it cannot be affordable for the company owner.

[Jack]

I'm more than a bit surprised at many of Becker's arguments for the status quo and/or small tweaks of a fundamentally flawed system:

"Clearly, however, the American health system does have many defects, which contributed mightily to the growth of the share of medical spending to 17% of American GDP. Yet when I was recently asked whether I prefer the present healthcare bill to no change in the health delivery system for a decade, I answered “no change”.

.......... Interesting. CBO scores the H/C bill as lowering accumulated federal debt by a trillion-three over two decades as compared to the current arrangements. Could be wrong, I suppose, but is there any evidence that a "stay the course" would save anything? or provide for the 40 million with hit or mostly miss access?

Even though the American healthcare system can use many reforms, regrettably the bill that passed the House and Senate is a messy compromise to attract reluctant Democrats that is short on needed reforms. Instead, the bill is filled with many complicated, and generally bad, new regulations, higher subsidies, and greater taxes.

.......... Agreed, and it looks as though lobbyists got to a lot of them on both sides. A shame that the public option is not allowed to provide competition with the current oligopolies. I'd think a federal option plan would lead to something of a universal contract that might lead to the nationwide competition that would be difficult to implement if contracts differ widely from state to state.

"The most important needed reform is an increase the fraction of total medical costs that come from out-of pocket expenses in the form of large deductibles and significant co-payments. Out-of-pocket spending accounts for only about 12% of total American spending on healthcare, whereas the share of out-of –pocket spending is over 30% in Switzerland, a country considered to have one of the better health delivery systems. Partly because of this major difference, health care takes 11% of Swiss GDP compared to the much higher American percentage. As far as I can discover, nothing in the new bill really tries to raise the out-of-pocket share, and some changes would reduce it even further. These include tax credits for individuals and families that earn up to 400% of the federal poverty level (up to about $90,000 for a family of four) that enable them to get coverage through newly created Insurance Exchanges."

.......... The flaw in relying on HSA is that of too many of our working folk living too close to the edge; they simply can not save nor stand $2500 deductibles plus the inevitable co-pays. It works better for upper income folk, but gimme a break! what is "saved" from price shopping a flu shot is wiped out by one grossly overpriced ride through a CT or MRI machine. And why ARE insurance paid flu shots compensated far above "clinics?" If there is something to be saved why are the insurance companies not providing incentives themselves?

"Another desirable reform is to reduce the reliance of the American health system on tax-deductible employer-based insurance since tax deductibility has encouraged low deductibles and low co-payments. It has also locked workers with health problems into their current jobs since they may not qualify for insurance at other companies because of these pre-existing health conditions. The bill does propose to phase out tax deductibility for the more expensive plans by 2018, but who knows if that will ever be implemented."

....... Getting rid of tax deductibility just now and raising the upfront cost for most would raise a howl as loud as that of getting rid of the mortgage interest deduction, another one that should be done away with too. (The market distorting effect being that of making home "investment" one of the few in which interest is deductible but capital gains go untaxed.)

.......Locking mid-life employees into companies via insurance plans is a real stinker every economist should rail against due to the lost opportunity cost of their free mobility to seek other employment or to strike out on their own where buying individual "insurance" is costly and often impossible. Often a whole family depends upon the insurance of one wage earner which is completely irrational. The H/C bill offers considerable improvement.

"For the most part, however, the bill increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient health insurance. Many companies are already beginning to add to their projected future costs the anticipated increase in the cost to them of insuring their employees. These changes will particularly affect the costs of smaller companies since they are the main ones that do not provide health insurance for their employees. Since smaller companies are responsible for a disproportionate share of additions to employment during recent years, this provision of the bill will tend to reduce the demand for workers and hourly wages."

.......... Yep. And surely someone must have considered unbinding employees by imposing something of a revenue neutral tax on companies for about their traditional share of H/C insurance and setting the employees loose with a voucher to "go shopping".

"The US health care market is over-regulated rather than under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states. Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs is a desirable protection against unexpected health care risks. The bill generally pushes in the direct of greater regulation, such as the limitations imposed on how much health insurance companies can spend on administrative costs relative to their other costs, the mandated reviews of the premiums charged by health insurance companies, and the mandated provision of health insurance by small companies."

......... Well, perhaps, but perhaps not. Today it seems much of the expense is that of the birth taking place in a hospital where the "standing by just in case" costs are substantial. For the young and often poor, what would be the effect of high out of pocket costs on abortion rates? Then....... for some reason despite the high costs the US has high rates of infant mortality that seem to trace to the lack of good care during pregnancy for those lacking "insurance".

If it was simple I suppose we'd have solved it in the era of FDR, Truman, Nixon, or Clinton who rightly said the "Worst thing we can do is continue doing what we've been doing".

[Hildebrand, The Insurance Warden]

Yes, yes, yes!

But, wait. Long-term health insurance removes incentive to keep oneself healthy (since the insured can lock in insurance at a favourable rate and then let his health deteriorate through poor diet and sedentary lifestyle).

As an alternative, I favour the development of chronic condition health insurance, which functions rather like long-term care insurance or disability insurance. It pays out at the time a chronic condition develops, providing funds for future care, even after the coverage ends.

Of course, this option requires the citizenry to exercise personal and family financial responsibility, which might be why you did not mention it as a feasible alternative.

[Brian Davis, Austin, TX]

Where's Jack? Jack, employers of 50 or fewer employees are "exempt" from the requirement to purchase or fund a group health plan. At least in the early year(s) the 50 really means 80 because the employer of 81 may subtract the first 30 before a monetary penalty attaches on account of an employee or dependent who incurs uncovered medical expenses. Clear as mud? The tax gimmes/subsidies available to small employers go to those with 25 and fewer employees and a group health plan. In all honesty I haven't yet put a pencil to how this will work if, say, the employer has little or no taxable income. The only questions I've gotten so far from small-business clients are 1) how many employees can I have before I'm under ObamaCare and 2) how many employees do I need to let go so I'm not under ObamaCare. They don't believe, nor do I, that any benefit, support, or subsidy will materialize.

[Jack]

Brian: Thanks! It's good some one is parsing the details! For my part I'd hoped the whole thing would be decoupled from employers. What could be more distorting and less in the interests of the individual than having an employer shop for a bargain deal and tell the employee that's it? Or worse, sitting up with advisors trying to figure out how to duck it entirely?

As WE all have to pay the bill anyway it would seem a tax based system would be much better, or, if we don't have the spine/sense to get rid of the employer based thing (for whatever beyond me reason -- so the guy is doubly screwed when out of a job?) then it would seem the contribution can be done as SS. And for now, with our disparate wage structure it would have to include subsidies for those of lower incomes. Hey........ sounds a lot like the Bill!

BTW being something of a fan of the power of capitalism, I don't favor the trend toward more subsidies of lower incomes any more than I'd favor the tax payer chipping in for a company's plant, equipment etc. Whether and employee or a new delivery truck the employer benefitting from it should pay at least the cost of feeding, housing and maintaining it........ which would point to wages beginning at about twice our current min wage, perhaps except a short training period. Consider that doing otherwise is to distort the economy by not deploying our scarce rescources most efficiently. If Walmart and others have to raise prices a few pennies in order to "stand alone" w/o a billion/year in wage subsidies, so beit. Honesty is best!

[shikasara]

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DUI Attorney

[Sumeet]

2 simple points:

- if the key issue that needed to be addressed was health care costs while maximizing coverage, this bill does a great job of dancing around the issue.
- the bill that became law may as well be called health insurance bill rather than a health care bill (it pays lip service to holistic health care issue)

Dr. Bajaj makes the right point and I am amazed that this point has not been made more widely . . . a big chunk of health care costs arise due to health care intermediaries. It would be great to extract data from hospitals and other service providers (including insurance companies) that lays out what fraction of our health costs are administrative costs and what fraction of costs are actually direct health care costs. (In a capitalistic society even the charity business has created a metric for this - all major charity organizations reveal what fraction of your charity $ go to actual charity). With due respect to Gary Becker, that may be atleast as important as % of out of pocket spending.

This is not to suggest that insurance companies have no role to play - they do - but their role has been inflated to a point that health care costs have ballooned. And insurance companies could well make more money by playing a smaller role in this category.

The political process needs to decompose the cost structure of health care and address the medical and non-medical cost elements separately. In the status quo (now, in 2014 or in 2018), we are merely taking broad swings without knowing whether we are attacking the most relevant parts of the problem.

This is not rocket science . . . its not even brain surgery . . . its plain business sense.

[Jack]

Sumeet Great! I'm expecting that Round Two will center around the question of "Why do we need "insurance" companies once we are all in the same risk pool. The overhead for "insurance" seems to be quoted in the 30% and above range, but surely does not count the amount of clerical work of complying with a thousand plus differing companies and contracts.

Canada's single payer system uses one clerk to our eight. And before the laments of their level of service begin consider:

"In 2006, per-capita spending for health care in Canada was US$3,678; in the U.S., US$6,714. The U.S. spent 15.3% of GDP on health care in that year; Canada spent 10.0%.[5]"

......... for nearly twice the cost we should be able to provide a very high level of H/C for ALL of our citizens.

"In 2006, 70% of health care spending in Canada was financed by government, versus 46% in the United States."

........ Interesting to consider in the "private-public" debate that we're already at 46% public.