Tuesday, March 23, 2010

Health Care Wedge Effect 2010

On March 23, 2010, President Obama signed the Senate Bill into law that was passed by the House of Representatives. While the Senate may or may not approve the reconciliation amendments of the bill, the health care bill is law. Obviously, many pundits, reporters, academics, and partisan folks will argue back and forth how great or detrimental the bill is to the American people. This blog post will analyze the economics of the health care bill which are not partisan, rather focused on sound economic fundamentals and human action of free people. The premise of my analysis is based on the following economic factors.

  1. Central economic planning and distribution of health care goods and services will lead to disruptions in allocating goods based on the laws of scarcity (finite medical resources) and the unlimited needs of consumers.
  2. The law will further create a "wedge" between the consumer and supplier of medical goods and services since the third party payer system will be expanded which will further distort prices and allocation of resources.
  3. The unintended consequences at the "margins" of this law are will damage the health care system as well as the financial health of the nation.
  4. Guaranteeing health care insurance does not equate access to unrestricted health care goods or services.

Central Economic Planning of Medical Care
While this law has been debated for more than a year, many people fail to understand that the government already controls 29% of health care (SCHIP, Medicaid, Medicare, Veterans Affairs). Many flummoxed individuals seem to think there is a "free market" in health care. In reality, a single payer government system (government programs mentioned above) is competing with a flawed private third party payer system with managed care style as the primary insurance product.  An expansion of both systems added together yields massive distortions, intervention, price controls, rationing, and misallocation of medical resources. A free market in health care would require free exchange of goods between voluntary providers and consumers, private property rights, and prices to help allocate scarcity with needs. Centrally planned, state run markets always fail based on economic calculation problem postulated by Mises and Hayek.  As health care insurance providers are transformed from private entities into wards of the state as health care utilities, government expansion into the private sector will be complete when the system is 100% operational in 2014.

Economic Wedge
The economic wedge in health care (third party payer) is one of the main distortions in the health care market.  When the consumer and producer are separated further and further away from directly exchanging with each other, the greater the wedge effect distorts economic reality. The wedge is increased dramatically with the huge expansion of subsidies. Subsidies will increase demand for services while not adequately covering the increased costs brought on by the new demand. Up until 1943, consumers paid directly out of pocket with cash or check for most if not all standard medical care products and services. The bill signed into law will significantly enlarge the wedge rather than reduce it.

Unintended Consequences At The Margin
The bill will induce huge constraints, regulations, and mandates on medical providers such as specialists and the primary care providers. Many doctors and providers have already declared that they will either quit or retire from practicing medicine when the law enacted starts. With the expansion of Medicaid and the baby boomers quickly entering Medicare, many doctors and providers will stop accepting those patients since reimbursement rates are lower than the physical cost of delivering direct health care. Increasing the constraints and rules for practicing medicine, decreasing the incentives for people to enter the health care industry, and adding 30 million more patients to the medical system may create an enormous amount of chaos due to inadequate supply to cover the exploding demand for care.

Prepaid Medicine Is Not Health Insurance
The entire debate about health care reform has focused on health care insurance instead of improving the quality of care, decreasing cost, and increasing health care availability to the largest number of people. Insurance simply is not health care. Insurance is a product used to share and price risk against an unlikely event.  Medicare, Medicaid, and HMO laws transformed medical insurance from indemnity style insurance into prepaid medical care. So, instead a health care market where individuals pay for most services and only use insurance for unlikely medical events, individual now use medical insurance for virtually every single medical service with a majority of the liability resting on the 3rd party payer.  Thus, prices of insurance premiums must go up to compensate for the the added risk and benefits demanded. When premium receipts are not enough to cover all of the medical services promised, the insurer/payer must decide how to effectively ration care or increase the costs beyond affordability. Thus, giving individuals "insurance" does not guarantee limitless or even flexible benefits when the policy holder is not paying for the insurance or determining the type of coverage the consumer requires. The type of "insurance" that will result from the health care bill will not be "insurance" as much as it will be an entitlement and government subsidized prepaid medicine.

Thursday, March 11, 2010

War...What Is It Good For?

Our country finds itself in difficult times. The financial mess is far from over no matter what the rubes or financial gurus tell us. The economy is broken and may actually be much sicker than it was back in 2007. The unemployment rate is incredibly high in addition to the "under"-employment rate. The banks still possess billions if not trillions of dollars of toxic assets on their balance sheets which serve as a ball and chain around the feet of these major financial institutions. Congress’s game of playing “who can propose the most destructive form of intervention in the market” is the equivalent of someone doused in kerosene accelerant running around a campfire.

All of the issues addressed above are significant "domestic" threats to liberty, freedom, & our property rights derived from Lockean "natural law" doctrine. Our “natural rights”, Locke postulated, are not man made, but rather derived from our humanity and our birthright. Thus, we possess the right to our own life, the right to our liberty, and the right to our property. Locke wrote in his Second Treatises of Government about a "social contract" to "voluntarily" elect a government to PROTECT and SECURE these natural rights through the state provide some form of social order.

The reason I focus on natural rights relates to the primary role the government is called to execute: to protect and serve LIBERTY and not to protect us from ourselves or keep us safe. If we are safe but not free, liberty dies and tyranny will spread like a virus and manifest an ever growing state. If a government transforms into a police state with a limitless degree of surveillance, the likelihood of a "safer" condition would obviously be more likely, but at what expense to liberty?

The founding fathers knew the threats war posed to liberty and erected a deliberate framework of safeguards to prevent against such an intrusive form of government. One of the safeguards is the procedure for declaring war in Article I Section 8 of the Constitution, an enumerated power left only to the Legislature and not the Executive. Knowing the lessons of history, the founders knew all too well the temptation Monarchs and Kings had exercised in past who used this power to stir trouble with other nations at the expense of their own economy and their citizens’ liberties. Therefore, the founders left explicit powers to the Legislature to issue a formal declaration of war, which evoked the consent of the governed (through their representatives) to speak on their behalf after honestly debating the merits for and against said military action against another nation. To finance Wars, inflationary monetary policy was commonly used, which robbed citizens of their purchasing power and acted as indirect confiscation of one's property through the devaluation of the currency.

The U.S. has been fighting two [undeclared and unconstitutional] wars for what seems like an eternity in Iraq and Afghanistan. The conflict in Afghanistan has endured twice as long as WWII. Yet, we do not appear to see when the conflict will end. Furthermore, the current Presidency has adopted a basic nation building mission without any clear objective of how to end the conflict or determine what grievances must be met to declare victory. Americans are all too familiar with the typical Wilsonian foreign policy strategy of spinning the use of military force to keep the world safe for Democracy through intervention in a region that has come to be known as the "Graveyard of Empires" after every other occupying force in history there has met defeat.

Our empire is magnanimous to say the least in its naiveté of thinking wars do not come at the expense of unintended consequences, the devastation of wealth, and diminishing of their citizens’ prosperity. The U.S. economy is rotting from within after its refusal to address the systemic financial lesions, which require deep and painful treatment for a real cure. To acknowledge our domestic problems without admitting the faults and foolishness of our foreign policy interventionism is both unfair and arrogant. Is it taboo to think American believes she is impervious to financial ruin? Or, is it just history repeating itself from reluctance and egotism comparable to what the Soviet Union experienced? We as honest citizens much face the reality of our problems and address them honestly with real solutions to undo what has been done before the day of reckoning comes to our doorstep.

Sunday, March 7, 2010

Reactivating Liberty: Natural Law vs. Positive Law

Over the past few years, I've immersed myself in the books on history, our founding fathers, Austrian economics, and theories of political economy which have helped me understand causes of why this country has drifted away from the ideals those revolutionary heroes fought and died for in the late 1700s. One of these fine men was John Locke. John Locke was one of the founding philosophers of "liberalism." Now, this concept of "liberalism" is a far cry from what we consider to be modern day liberalism which is more in line with early 20th Century "Progressivism."

The concepts of liberalism relate to the rights of the individual through natural law that posits the existence of laws set through nature that manifest universal truths and "unalienable rights."  Natural law follows the idea that humans are born with certain rights given to us through our humanity: the right to one's own life and individual sovereignty, the right to one's liberty, and the right to one's property attained through the use of one's labor.  Individuals may recognize these rights as defined in the Declaration of Independence, which is one of the greatest natural law documents in history.  These rights are derived through the ability of humans to use logic and reason.

Our natural rights have consistently been threatened by the expansion of positive law.  Positive law is the opposite of natural law.  Positive law holds that a government or state authority in power has the sole ability to decide what is lawful and what is not.  Positive law is run by the whims of the majority while discarding the concerns of the minority.  If 51% of the people of in a State want to ban cell phones while driving, ban Christianity or Judaism, ban smoking, or ban alcohol; these laws will be legally binding as long as the legislature was democratically elected. [1]

The distinction between natural law and positive law is critically relevant today. The trend of an ever expansionary government has used the means of positive law to erode liberty in favor of more government control. While many citizens today, regardless of political ideology, have noticed the power grab by both the Obama and Bush administrations, the centralization of power and movement away from natural rights can be traced clear back to the Civil War and the Progressive movement in the early 1900s.

In order for American to return to greatness and the belief in the individual, she must dig deep and recognize what "Liberty" means. We must first understand and believe in the theory of natural law. Sadly, in today's modern times, Liberty is a foreign concept as opposed to entitlements, subsidies, redistribution of wealth through positive law which are the accepted norms our country. Liberty has virtually been erased from our DNA and now only exists as a dormant gene yet to be reactivated. American must find the will and desire to replace her authoritarian, collective, and positive law ideologies and replace them with the belief in individual sovereignty, Lockean liberalism, and the reverence to natural law.

[1] ideas for this paragraph found in Constitutional Chaos, Andrew P. Napolitano

Wednesday, March 3, 2010

Cash for Appliances = Another Broken Window

"Cash for Appliances" (shockingly) had exactly the same result as the failed "Cash for Clunkers" program.  People lined up to essentially receive a subsidy handout for a good or service.  Here's a quote:
"Expected to last for two weeks, Cash for Appliances ran out of money in just seven hours. That's all it took for Iowans to grab their share of $2.7 million in federal funding. Many Iowans were greeted with a busy signal or a failed connection when they tried to get a deal on Energy Star-certified appliances. By 3:00, the website said the fund had already run dry."
The evidence as stated above is an example of what happens when the government (through central planning policies) tries to allocate resources and "stimulate" demand.  What the "laymen" should understand and focus on is the law of unintended consequences.  The program cost $2.7 million dollars.  What taxes will need to be raised in order to fund people buying such products they would not buy if the products were not subsidized by someone else?  What future economic growth will be impaired to give people a quote "free lunch?"  What will happens to the supply chain allocation or distribution when the subsidies run out?

These are the REAL issues that people should focus their attention.  Instead, we will be told what a "success" the program has been since it ran out in less than a day.  Everyone will focus on the so-called "stimulus" effect of demand that was created.  Yet, we know this gimmicky corporate/social welfare and free-lunch subsidy to the appliance manufacturers and consumers is not sustainable and will do MORE harm than good according to the law of economics known in many circles as "the broken window fallacy."  We are ignoring the essence of opportunity cost and buying into this Keynesian nonsense of stimulating aggregate demand by throwing a rock at the window of one sector of the economy (present/future) to reward or give a handout to another.  This creates no net gain, prosperity, or wealth production for the macro economy other than propping one industry at the expense of one to many other industries, tax payers, or economic sectors.