How Do We Establish A Free Market Healthcare System in the U.S.?

Posted on October 16, 2014 by jackheidel

As I discussed in my last post, it is critical and urgent for the U.S. to sharply reduce the cost of healthcare, both public and private. There are basically two different ways to do this: with either a “single payer” system like most of the rest of the developed world has, or with a more nearly free market system than we have at the present time.
Both Switzerland and Singapore have largely free market systems with universal coverage and they operate at far less public cost, as shown above, than for other developed countries including the U.S. The Singapore model features Catastrophic Care insurance, coupled with Health Savings Accounts, for all citizens, with subsidies for those with low-income. The Swiss model employs exchanges, similar to our own Affordable Care Act, to subsidize, on a sliding scale, health insurance for the low income. In Switzerland only 20% of the people receive an insurance subsidy compared to 85% in the U.S.
The Manhattan Institute’s Avik Roy has proposed a true free market system for the U.S., “Transcending Obamacare: a patient-centered plan for near-universal coverage and permanent fiscal solvency,” which is modeled on the Swiss system. Mr. Roy’s plan sets up universal exchanges to offer insurance, subsidized if necessary, to everyone who does not receive it from their employer.
He proposes that over time Medicare and Medicaid recipients as well as Veterans would migrate into the exchange system. This means that eventually the 30% of Americans (elderly, poor and veterans) who now receive direct government (single payer) support would become part of the exchange system. Mr. Roy’s Universal Exchange Plan is projected to reduce deficit spending by $8 trillion over the 30 year period which it will take to fully phase in the exchanges. This will go a long way towards solving our serious fiscal problems.
Conclusion: both Singapore and Switzerland have high quality, cost efficient free market health care systems which proves that a free market approach is possible. Mr. Roy adapts and expands the Swiss model for the much larger and more complex American market. It isn’t necessarily the last word in healthcare reform but it takes a big step in the right direction.

Is A Free Market Possible in Health Care?

Posted on October 14, 2014 by jackheidel

With a total national debt of $17.8 trillion, of which close to $13 trillion is public debt (on which we pay interest), it is easily understood that the U.S. has a very serious fiscal problem. At the present time the public debt is 74% of GDP and this already high percentage is predicted by the Congressional Budget Office to keep growing indefinitely.
The biggest driver of spending growth going forward is the cost of healthcare. For example just the three programs, Medicare ($492 billion), Medicaid ($280 billion) and Veterans Healthcare ($54 billion), cost a total of $826 billion per year in federal dollars. And these costs are all increasing rapidly. Of course, private healthcare spending, currently about $2 trillion per year, is also growing rapidly. Overall, the U.S. spends 17.3% of GDP on healthcare spending, public and private, almost twice as much as any other developed country.
How are we going to address this enormous cost issue going forward? The Affordable Care Act (aka Obamacare) doesn’t do it. What it does do is to provide healthcare to more people under our current model of employer provided health insurance with Medicare for the elderly and Medicaid for the poor. It is this model which is broken and must be reformed. Basically we have two choices for how to do this. Either we switch over to a “single payer” system like most of the other developed countries have or we establish a far more efficient free market system.
As the above chart shows, right now we have a composite system and it is just not cost-effective. There are plenty of experts who claim that a free market cannot work in healthcare. For example, the tax lawyer, Edward Kleinbard, in a new book, “We Are Better than This: how government should spend our money” argues that what a free market gives us is: unavoidable controversy for excluded pre-existing conditions, moral hazard for risky behavior, uncertain premiums for permanent insurance, fragmented healthcare markets, monopoly provider organizations leading to price opacity, very high administrative costs, etc.
The Manhattan Institute’s Avik Roy has a different point of view. In his proposal, “Transforming Obamacare,” (http://www.manhattan-institute.org/pdf/mpr_17.pdf) he points out that there are two countries, Switzerland and Singapore, which operate highly regarded free-market healthcare systems at very low public cost. Stay tuned for further discussion!

Colorado Was “Reckless to Legalize Marijuana”

Posted on October 12, 2014 by jackheidel

So declared incumbent Colorado governor, John Hickenlooper, in a recent re-election campaign debate. Many states have relaxed marijuana laws, such as for medical use or by decriminalization, and two states, Colorado and Washington, have legalized its recreational use. Furthermore, public opinion at the national level is gradually swinging over in support of legalization (see below).
The New York Times published five lengthy editorials on this subject last summer under the heading of “High Time,” taking the position that the health risks of marijuana use are minimal (except for adolescents) and that it should be left up to the states to decide on the issue of legalization.
But now a new study has just been published by an Australian researcher, Wayne Hall, “What has research over the past two decades revealed about the adverse health effects of recreational cannabis use?” in a highly rated journal, Addiction. Its key findings are:

Driving while cannabis intoxicated doubles the risk of an accident; this risk substantially increases if users are also alcohol-intoxicated.
Cannabis use during pregnancy slightly reduces birth weight.
1 in 10 cannabis users develop a dependence syndrome; 1 in 6 for adolescents.
Regular cannabis users double the risk of experiencing psychotic disorders.
Regular adolescent cannabis users have lower educational attainment.
Regular adolescent cannabis users are more likely to use other illicit drugs.
Regular cannabis smokers have a higher risk of developing chronic bronchitis.
Cannabis smoking in middle age increases the risk of myocardial infarction.

These adverse effects of marijuana use are serious. My own opinion is that Colorado and Washington probably made a mistake by legalizing the recreational use of marijuana. At any rate, an experiment is now being conducted in these two states and in a few years we will know how it works out. Other states should be reluctant to follow suit until then. In the meantime, I support national legislation to decriminalize marijuana use but not to legalize it.
Drug use and misuse has huge economic ramifications and so it is very important to have a sensible and rational national policy on this issue.

“Nebraska Is Not a Tea Party State”

Posted on October 9, 2014 by jackheidel

So declares Jim Jenkins, an independent candidate for the U.S. Senate from Callaway in western Nebraska. Several weeks ago I endorsed Jim based on his common-sense centrist views on many important issues such as fixing the debt, tax reform, Obamacare, and immigration reform. Check out his campaign website for the details.
Now Jim has come out with additional common-sense reform ideas:

My 5-Point Bipartisan Reform Agenda

Nebraska doesn’t belong to a political party; Nebraska belongs to our people. Unless you can develop a framework in Congress by which you actually debate, discuss and negotiate, we’re not going to be able to move forward. Here’s my 5-point, bipartisan reform agenda to end gridlock in Washington.

Fix the Debt. Debate recommendations from the bipartisan National Commission on Fiscal Responsibility and Reform, more commonly known as the Simpson-Bowles Commission that presented Congress and the President with a comprehensive plan to reduce the deficit.
Biennial Budget. Congress should adopt a biennial budget process, an approach to budgeting utilized by many states, including Nebraska that allows for a more thorough evaluation of budget proposals in year one and a review of budget effectiveness in year two.
No Budget, No Pay. Unless Congress passes a budget by the end of its fiscal year members of Congress will not receive pay. I also support legislation that suspends Congressional recesses until it has passed a budget. Failure to pass budgets undermines the greater economy and undermines the credibility of Congress with its citizens.
Immigration Reform. President George W. Bush presented a bipartisan plan on immigration that had the backing of a significant number of Democrats. The passage of immigration reform will require a meeting in the messy middle. Both Democrats and Republicans are going to have to yield.
Leadership Council. Congress should adopt a bipartisan leadership group each session that would identify the top legislative priorities.

We need leaders in Washington who will work together to find common-sense solutions to our very challenging national problems. Jim Jenkins is such a person and I hope you will consider voting for him on November 4!

Income Inequality and Rising Health-Care Costs

Posted on October 7, 2014 by jackheidel

There seems to be a general consensus on the reality of increasing income inequality in the U.S. and even some agreement on its two main causes: globalization and the rapid spread of technology. The slow growth of the economy since the end of the recession has made the inequality problem that much worse.
Not surprisingly, slow economic growth in the past five years has led to stagnant wages for many workers. My last post addressed this problem. The above chart from the New York Times shows that incomes for top wage earners have been rising in recent years while they have been stagnant for middle- and lower-income workers.
But there is more to it than this. In yesterday’s Wall Street Journal, Mark Warshawsky and Andrew Biggs point out that, “Income Inequality and Rising Health-Care Costs,” in the years 1999 – 2006, total pay and benefits for low income workers rose by 41% while wages rose by only 28%, barely outpacing inflation. For workers making $250,000 or more total compensation rose by a lesser 36% while wages grew by a greater 35%. This apparent anomaly is explained by the fact that health insurance costs are relatively flat across all income categories, thus comprising a much larger percentage of the total pay package of low-income workers than for high-income workers.
In fact, the Kaiser Foundation has shown that low-wage workers tend to pay higher health insurance premiums, as well as receiving lower insurance benefits, than higher paid workers (see the above chart).
Overall, what this means is that employer provided healthcare is taking a huge chunk out of the earnings of low-income workers which makes income inequality much worse than it would be otherwise. Of course, the cost of healthcare is a huge burden for the entire U.S. economy, currently eating up 17.3% of GDP, twice as much as for any other developed country.
For both of these reasons it is an urgent matter for the U.S. to get healthcare costs under control. Avik Roy of the Manhattan Institute has an excellent plan to do just this as I have discussed in several recent posts.

How Bad Is Income Inequality and How Do We Fix It?

Posted on October 5, 2014 by jackheidel

The latest news on the American economy is mixed. The unemployment rate fell to 5.9% in September but the labor force also fell by 97,000 last month. The labor participation is now down to 62.7%, a level last seen in 1978. On the plus side 248,000 new jobs were created but the share of the population employed stayed at 59%, less than its 59.4% level at the end of the recession in June 2009. In other words, job growth is definitely picking up but not fast enough.
How about income inequality? One simple way of describing and understanding the degree of income inequality in the U.S. is to look at median household income and how it changes over time. The above chart from the WSJ shows how the median U.S. household income fell from an all-time high of $56,895 in 1999 to $51,939 in 2013. However it also climbed back up to $56,436 in 2007 before dropping precipitously until 2012.
The Global Strategy Group discovered in a recent survey that registered voters overwhelmingly rate economic growth as a higher priority than economic fairness. This means that any policy designed to speed up economic growth is likely to receive favorable support by the electorate.
In a recent post I describe a plan for broad-based tax reform specifically designed to speed up economic growth. It would involve an across-the-board cut in tax rates totaling about $500 billion per year, but completely paid for by closing loopholes and deductions which primarily benefit the wealthy. The 64% of taxpayers who do not itemize deductions would receive a tax cut. And they would likely spend this extra money in their pockets because they are precisely the middle- and lower-income wage earners with falling incomes.
An income tax redistribution like this would greatly reduce inequality but in a way which is designed to give the economy a big boost!

The Government’s Mishandling of the Financial Crisis

Posted on October 2, 2014 by jackheidel

“If stupidity got us into this mess, why can’t stupidity get us out?”
Will Rogers, 1879 – 1935

The Financial Crisis of 2008 and the subsequent Great Recession, from which we are still slowly emerging, is the greatest shock to our fiscal and economic health since the Great Depression of the 1930s. There are many explanations available for what happened, the most believable ones being written by the major participants themselves. My favorite reference for these events is the book, “Bull by the Horns,” written by the former Chair of the Federal Deposit Insurance Corporation, Sheila Bair, who held this post from 2006 – 2011. Ms. Bair could see the crisis coming. She interacted with all of the prime players but was too late on the scene, and with too little clout, to have a major effect on the outcome.
Another persuasive account is provided by Richard Kovacevich, Chairman Emeritus of Wells Fargo, in a recent speech, “The Financial Crisis: Why the Conventional Wisdom Has It All Wrong.” According to Mr. Kovacevich:

Forcing all large banks to take TARP funds, in October 2008, even if they didn’t want or need the funds, was one of the worst economic decisions in the history of the U.S.
If Bear Stearns had been allowed to go bankrupt in March 2008, Lehman Brothers would have been sold and the subsequent financial crisis greatly reduced. A total of just 20 financial institutions caused the crisis, half investment banks and half savings and loans, yet 6000 commercial banks are being punished by Dodd-Frank.
Dodd-Frank does not address the major causes of the recent crisis and offers few approaches to prevent the next one.
Since regulatory agencies are not capable of using the authority they already have to prevent failures, we need a regulatory system which limits the damage of failures. In case of failure, all creditors, other than insured depositors, should take a “haircut”.
Requiring excessive levels of capital will only cause financial institutions to take on greater risks. If equity and long term debt, at both the bank and bank holding company levels, is required to be maintained at 30% of assets, it is unlikely that the FDIC will ever incur losses.
The quasi-private/public agencies Fannie Mae and Freddie Mac need to be abolished.
The Glass-Steagall Act, passed in 1933 and repealed in 1999, should not be reinstated because investment banking is far less risky than commercial banking, and therefore the two forms of banking need not be separated.
There are three warning signs when a financial institution is approaching the danger zone: concentration of risk, inadequate liquidity and significant exposure to capital markets. Competent regulators, not Dodd-Frank, are needed to address these risks.

Recoveries from past recessions have been much more vigorous than our anemic 2.2% rate of GDP growth for the past five years. Mr. Kovacevich believes that because of the Dodd-Frank legislation, and the current monetary policies of the Federal Reserve, the bottom 25% of Americans on the economic ladder have restricted access to mortgages and personal loans. This is inhibiting economic growth and contributing significantly to the inequality gap.

An Alternative Way to Boost the Wages of Low Income Workers

Posted on September 30, 2014 by jackheidel

Several days ago I had a post entitled “A Rational Approach to a National Minimum Wage,” in which I expressed support for a national minimum wage level of somewhere between $8.00 and $9.00/hour combined with an expansion of the Earner Income Tax Credit program to single, childless workers, paid for by tightening up on the EITC payment methods.
There is an interesting alternative to this combined minimum wage/EITC approach. It is the so-called wage subsidy program described in the book, “Rewarding Work: how to restore participation and self-support to free enterprise” by the economist Edmund Phelps. Click here for a short summary.
The idea is that low wage work would be directly subsidized by the government to the employer. A firm employing low-wage workers, let’s say from $7.25 up to $10.00/hour, just to be specific, is paid a subsidy for each such employee on a sliding scale. The higher the wage is, the lower is the subsidy, until it has tapered off to zero. The subsidy is paid to the firm once a year as a nonrefundable credit against taxes. Competitive forces would ensure that most of the subsidy would be paid out to the low-income workers as higher wages. Mr. Phelps gives a persuasive argument that his program is a much more efficient way to increase low-income employment than either a minimum wage or the EITC.
It is unrealistic to expect a rollback of our current minimum wage of $7.25/hour. However, a wage subsidy could take the place of an increase in the minimum wage. Raising the minimum wage, even to $9.00/hour, is predicted by the CBO to lead to a loss of 100,000 jobs.
Likewise, as Mr. Phelps says, the EITC “program is not really a tool to reward and stimulate the unemployment of low-wage workers so much as a program of credits for those who, for whatever reason, have low wage incomes.”
Conclusion: a wage subsidy creates low-income jobs and boosts their pay by making it profitable for businesses to hire low wage workers and pay them well. Such a program, a la Phelps, would need to be carefully melded with our current EITC program to achieve maximum cost efficiency.

Economic Expansion Is Not Enough

Posted on September 28, 2014 by jackheidel

The Washington Post reporter Robert Samuelson gives our economy today a B-, because the unemployment rate has inched down to 6.1%, fulltime employment is up to 105.8 million in 2013 from 99.5 million in 2010, and full-time women’s pay reached a high of 78% of men’s pay in 2013. The big negative, of course, is that median household income was $51,939 in 2013, down from $56,436 in 2007, just before the financial crisis.
The Bard College economist Pavlina Tcherneva, as summarized by the reporter Neil Irwin in yesterday’s New York Times, shows what has gone wrong with economic and monetary policy since the end of the Great Recession in June 2009. The American Recovery and Reinvestment Act of 2009 (an $850 billion stimulus package) did boost the economy but it primarily aided “the skilled, employable, highly educated, and relatively highly-paid wage and salary workers.”
On the other hand the Federal Reserve’s quantitative easing policies have kept interest rates remarkably low and have thereby caused investors to buy stocks rather than bonds in order to get higher returns. This has artificially boosted stock prices and has been especially advantageous to the top 10% and, even more so, the top 1%.
What is needed, according to Ms. Tcherneva, is a targeted, bottom-up approach to fiscal policy, which provides more and better paying jobs directly to middle- and lower-income wage earners. Her suggestion is for public works jobs, public service employment, green jobs, etc., all of which would require large infusions of federal money thereby worsening the federal deficit.
A much better approach would be broad based tax reform, lowering tax rates across the board, paid for by closing the loopholes and deductions which primarily benefit the rich. Since the 64% of taxpayers who do not itemize deductions would receive an effective pay boost, this would amount to a tax reform program targeted to exactly the middle- and low-income wage earners who have not yet recovered from the recession. These folks would most likely spend their extra income, thus further boosting the economy (see my previous post).

What Happens When We All Live to 100?

Posted on September 25, 2014 by jackheidel

This is the title of an article in the current issue of Atlantic. Of course, it is a rhetorical question, but it raises a very serious issue. There are 43 million Americans age 65 or older today and this number is expected to reach 108 million by 2050. How will society cope with so many more senior citizens?
This blog is concerned with the most critical fiscal and economic problems facing our country. The biggest fiscal problem we have is how to pay for the three major entitlement programs: Social Security, Medicare and Medicaid. Social Security can be shored up with small adjustments to either the benefits formula or by raising taxes a little bit. Medicaid can be kept under control by block-granting the program to the states. But Medicare is a much bigger problem.
The cost of healthcare, both public and private, is rising rapidly as shown in the above chart from the New York Times. We badly need a new approach to control costs and Avik Roy from the Manhattan Institute has given us such a plan “Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency.”
The problem is that, as Mr. Roy explains, “by creating a universal, single-payer health care program for every American over 65, regardless of financial or medical need, the drafters of Medicare made the program extremely difficult to reform.” But now we have to reform it because the costs are becoming so huge. How do we do it?
First of all, Mr. Roy’s plan keeps the exchanges created by the Affordable Care Act and turns them all into state-based exchanges. It also eliminates both the individual and employer mandates, replacing these mandates with financial incentives.
Mr. Roy’s core Medicare reform is very simple. The plan increases the Medicare eligibility age by four months each year. The result is to preserve Medicare for current retirees, and to maintain future retirees – in the early years of their retirement – on their exchange-based or employer-sponsored health plans. In other words, retirees will gradually be migrated to the same system, with the same level of subsidy, as for working people.
Everyone, workers and retirees alike, will be treated the same. Not only is this an eminently fair system, it insures that Medicare remains affordable, for both retirees and the whole country.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility