Tag Archives: New York Times

Controlling the Cost of Healthcare

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The New York Times is running a series of articles, “Paying Till It Hurts,” giving many examples of the very high cost of healthcare in the U.S. today.  The latest article “As Hospital Prices Soar, A Single Stitch Tops $500”, focuses on the high cost of emergency room treatment around the country.
We spend 18% of GDP on healthcare, twice as much as any other country in the world.  It is specifically the cost of healthcare entitlements, Medicare and Medicaid, which is driving our huge deficits and rapidly growing national debt.  But to limit the cost of these entitlement programs, we first have to address the more fundamental problem: how to control the overall cost of healthcare in general.
Our current healthcare system, a combination of private insurance and government programs, is very inefficient. The basic problem is that the tax treatment of employer provided health insurance takes away the incentive for individuals to control the cost of their own care.   And Obamacare does not solve this problem, because it just extends the present system to more people, rather than revamping it.
There are essentially two different ways to transform our current healthcare system to make it far more efficient.  One way is to turn it into a single payer system, like what most of the rest of the world has.  This could be accomplished by simply expanding Medicare to everyone.  Costs would then be controlled by government regulation which would, of course, include rationing.  Given the unpopularity of Obamacare, with all of its mandates and uniform coverage requirements, it is unlikely that Americans would be happy with such a highly proscribed single payer system.
The alternative is to change over to a truly consumer based, market oriented system.  This could be accomplished by limiting the present tax exemption for employer provided insurance.  For example, the current system could be replaced by a (refundable) tax credit equal to the cost of catastrophic insurance (i.e. insurance with a very high deductible).  All other healthcare costs, whether paid for directly by consumers or through insurance, would be with after tax dollars.  Subsidies could be provided to lower income people through the Obamacare exchanges.  Once such a system is set up and running smoothly, it could fairly easily be extended to encompass Medicare and Medicaid.
Insurance companies selling catastrophic coverage would negotiate with hospitals and other healthcare providers to get the lowest possible prices for their customers.  In other words, both insurance companies and providers would compete in the open market to deliver healthcare products at the lowest possible cost.
Something along this line will have to be done and the sooner we get started the better!

Should the Minimum Wage Be Raised?

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In today’s New York Times, the economist Arindrajit Dube has an Op Ed column in the Great Divide series, “The Minimum We Can Do”, pointing out that today’s minimum wage of $7.25 per hour is only 37% of today’s median hourly wage of about $20 per hour.  This compares with the 1968 minimum wage of $10.60 per hour (in today’s dollars, adjusted for inflation) which was 55% of the median wage at that time.  This is in line with the current Democratic proposal to raise the minimum wage to $10.10 per hour.
The standard argument against raising the minimum wage is that it will reduce employment because “when labor is made more costly, employers will hire less of it.”  However Mr. Dube offers empirical data which “suggest that a hypothetical 10% increase in the minimum wage affects employment in the restaurant or retail industries by much less than 1 percent” and therefore very little.
Basically Mr. Dube is arguing that raising the minimum wage won’t hurt the economy and it will help many low-paid workers.  The problem with this point of view is that it distracts attention from what we really should be doing: namely, everything we possibly can to speed up economic growth.  By far the best way to raise wages is to increase the value of labor by creating more jobs!
I may sound like a broken record, repeating the same thing over and over again, but we badly need to concentrate on the fundamentals of growing the economy: lowering tax rates, individual and corporate, to stimulate business investment and risk taking by entrepreneurs; removing onerous regulatory burdens, especially on new businesses and existing small businesses; and emphasizing career education and job training to fill the millions of high skill job openings which exist.
There are strong headwinds facing our economy: bad demographics (rapidly retiring baby boomers), pressure from technological progress and globalization which put a high premium on education and advanced skills, and massive national debt which will become a huge burden as interest rates inevitably increase.
These strong headwinds aren’t going away.  To overcome them we need national leaders who are able to rise above ideology and focus on the fundamentals.
Conclusion: we should raise the minimum wage when unemployment drops to 6% or, perhaps, tie a raise in the minimum wage to a tax reform measure which significantly lowers tax rates.

Why Is Obamacare So Unpopular? Because It’s Too Coercive!

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The individual mandate for health insurance, upheld by the Supreme Court a year and a half ago, is now leading to millions of policy cancellations in the individual insurance market.  The mandate overrides any existing policy which does not provide minimum coverage.  The employer mandate, stipulating that any business with 50 or more employees must provide health insurance for all fulltime employees, has caused many businesses to replace fulltime employees with part-timers.
But these are not the only forms of coercion under Obamacare.  As reported in yesterday’s New York Times, “Court Confronts Religious Rights of Corporations”, the Supreme Court is expected to accept a case involving the Hobby Lobby’s refusal, on religious grounds, to pay for insurance coverage for the contraceptive coverage which is required to meet minimum standards.
It would be much better to replace all of these coercive mandates with economic incentives.  This could actually be done in such a way that would also make healthcare less expensive, thereby giving a big boost to our economy.  Here is one way to do this, as I discussed in my November 14, 2013 post:

  • Provide a flat and universal tax credit for health insurance coverage which applies to everyone and not just for employer provided healthcare.  The (refundable) credit would be roughly the amount necessary for catastrophic insurance coverage.
  • Convert Medicare and Medicaid into a means-based addition to this tax credit.
  • Everyone with continuous coverage (paid for by the tax credit) would be protected from price spikes or cancellations if they get sick.  This provides a strong incentive for everyone to buy and retain coverage.

It is entitlement spending which is driving our country’s fiscal crisis.  And healthcare programs such as Medicare and Medicaid make up a big part of entitlements.  In order to get these costs under control, we need to first get the cost of private healthcare under control.  The best way to do this is with economic incentives rather than coercive mandates.
Obamacare doesn’t need to be repealed.  It could just as well be modified and improved as described above.

Where Are the Jobs? III. The Real Inequality Gap

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Today’s Wall Street Journal has a story “Job Gap Widens in Uneven Recovery”, which shows how unbalanced the economic recovery is.  For workers aged 25 and older, unemployment is only 6%, compared to the overall unemployment rate of 7.3%.  But for the young, ages 16 – 24, unemployment is 15%.  Since the end of the recession in June 2009, wages have risen by 12% for the highest paid 25% of all workers.  For the lowest paid 25%, wages have only risen by 6% over this time period.
“Households earning $50,000 or more have become steadily more confident over the past year and a half.  Among lower income households, confidence has stagnated.  The gap in confidence between the two groups is near its widest ever.  That isn’t only bad for those being left behind.  It’s also hurting the broader recovery, because it means families are able to spend only on essential items.  Consumer spending rose just .1% in September 2013, after adjusting for inflation.”
Unfortunately, this data is entirely consistent with other gloomy economic trends which I have been reporting on recently such as the threat of technology to the middle class, the increased competition from globalization, and the shrinking size of the labor pool because of baby boomer retirements.
The New York Times has a running series of articles on “The Great Divide” and how to address it.   Here is a clear cut example of this divide: how older, better trained and more affluent Americans are recovering from the recent recession more quickly than the less well off.  This evident unfairness is damaging to the health of our society.  The question is how do we address it in an effective manner?
The basic problem is the overall slow growth of the economy, about 2% of GDP per year, since the recession ended in June 2009.  There are many things that policy makers can do to speed up this growth if they were only able to set aside ideological differences.  The best single action by far is tax reform, for both individuals and corporations, lowering overall rates in exchange for reducing deductions and loopholes which primarily benefit the wealthy.
Here is yet another reason why it is so important to speed up the growth of our economy.  How exasperating that our national leaders cannot figure out a way to come to together and get this done!

Does Our Economy Need More Inflation?

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The lead story in this week’s Economist, “The Perils of Falling Inflation” and a recent article in the New York Times, “In Fed and Out, Many Now Think Inflation Helps“, both make the case that the U.S. core inflation rate of 1.2%, excluding food and energy prices, is dangerously low, risking deflation.  “Rising prices help companies increase profits; rising wages help borrowers repay debts.  Inflation also encourages people and businesses to borrow money and spend it more quickly.”
But there is another distinctly different point of view.  In a Barron’s column last week “Deflating the Inflation Myth”, Gene Epstein points out that “business activity is motivated by profit, not prices.”  He shows with a chart that profits decreased during the highly inflationary 1970’s and 1980’s but they have been increasing since the end of the recession in 2009, even with very low inflation.  The key to boosting the economy is more business investment and risk taking but a higher rate of inflation is not the way to accomplish this.
In a speech at the Economic Club of New York in June of this year, former Fed Chair Paul Volcker said that “the implicit assumption behind that siren call (to let inflation increase) must be that the inflation rate can be manipulated to reach economic objectives – up today, maybe a little bit more tomorrow, and then pulled back on command.  All experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.”
As soon as interest rates go up as they surely will in the not too distant future, interest payments on our now enormous national debt will skyrocket and become a huge drag on the economy.  If and when inflation goes up, it will pull interest rates up along with it.  Let’s not push inflation, and therefore interest rates, up any faster or higher than necessary!

Many Skilled Jobs Are Going Begging in the U.S.

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A few days ago the Omaha World Herald ran a story, ”Manufacturers Want More Young People to Consider a Job on the Factory Floor”, pointing out that there are almost 100,000 manufacturing jobs in Nebraska paying an average salary of $55,000 per year, many of which are unfilled because of a lack of qualified applicants.  Says Dwayne Probyn, Executive Director of the Nebraska Advanced Manufacturing Coalition, “Science, technology, engineering and math, that’s what we need.”
This is in fact a nationwide problem.  A few weeks ago the New York Times had an article, “Stubborn Skills Gap In America’s Work Force” reporting on a recent study by the Organization for Economic Cooperation and Development assessing literacy, math skills and problem solving using information technology, for people aged 16 – 65, in the 22 advanced nations of the O.E.C.D..  Eduardo Porter reports that while the U.S. is about average in literacy skills, it lags way behind in both math and problem solving skills.
One question addressed by Mr. Porter is the much larger wage premium for highly skilled U.S. workers over unskilled workers, than in most other O.E.C.D. countries.  Another question is “how can the U.S. remain such an innovative, comparatively agile economy if the supply of skilled workers is so poor?”  The suggested answer is troubling.  “The American economy rewards skill very well but the supply hasn’t responded.”
This situation is first of all an indictment of K-12 education in the U.S. which has a high school graduation rate of only 80% and also focuses too much on college preparation rather than career education.  These two problems are likely interrelated and at least partially explain the skills gap.
Another factor is immigration.  Right now the U.S. is still attracting more talented foreigners than other countries.  But it is risky to our economy to depend on foreign talent which can stay home as well as choosing to go elsewhere.  Immigration reform will help with this problem but improved K-12 education will help even more.

Is Expanding The Social Safety Net Compatible With Fiscal Restraint?

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Yesterday’s New York Times addresses this issue with an article “Ohio Governor Defies G.O.P. With Defense of Social Safety Net”.  It describes how Republican Governor John Kasich has maneuvered to expand Medicaid coverage in Ohio to 275,000 low income Ohioans under the new healthcare law, over the objections of his own Republican dominated state legislature.
Mr. Kasich is a former congressional deficit hawk and there is little doubt about his fiscal conservatism.  He recently balanced his state budget by cutting revenues to local government by $720 million.  But he has also expanded state aid for the mentally ill and supported efforts to raise local taxes for improving education.  He says “for those who live in the shadows of life, for those who are the least among us, I will not accept the fact that the most vulnerable in our state should be ignored.”
Especially after the disastrous debt ceiling debate, with Tea Party Republicans willing to default on our national debt in order to defund Obama Care, it is critical for fiscal conservatives to publicly demonstrate that they are not opposed to helping the poor in a reasonable manner, as long as it is cost effective.
To be in favor of controlling entitlement spending is not the same thing as wanting to abolish entitlement programs.  In fact, it is just the opposite.  We must control their costs so that the government will have the means to continue to support them.  It is just plain ordinary common sense.  If our national debt continues to grow unchecked, we risk not only entitlement programs but our entire way of life.
Take Medicaid as a concrete example.  Right now the federal government pays a percentage of the costs incurred by state governments in running the program.  The more a state spends for Medicaid, the greater the reimbursement from the federal government. This increases spending for both the states and the federal government.  A more cost effective approach is to give each state a block grant from the federal government and enough leeway to operate its own program as efficiently as it can.  Exactly this approach is being used in Rhode Island and is working very well at a much lower overall cost.
Being a fiscal conservative is not the same thing as being mean spirited!  The future of our country depends on getting this crucial message out far and wide!

The Intergenerational Financial Obligations Reform (INFORM) Act

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On page nine of today’s New York Times is published a full page letter to Congress and President Obama, “Enact The Inform Act”, signed by over one thousand economists as well as former government officials.  It would require “the Congressional Budget Office, the Government Accountability Office and the Office of Management and Budget to do fiscal gap and generational accounting on an annual basis to assess the sustainability of fiscal policy and measure, on a comprehensive basis, the fiscal obligations facing our children and future generations.
“Unlike the measurement of the official federal debt, fiscal gap and generational accounting are comprehensive.  They leave nothing off the books, be it defense spending, Medicare expenditures, or the profits of the Federal Reserve, in assessing the sustainability of fiscal policy and the size of the fiscal bills being left to our own children.”
The INFORM Act is sponsored by a nonpartisan and millennial driven organization which goes by the name, The Can Kicks Back . This is very significant because it is precisely the younger generation of Americans who should be most concerned about the fiscal irresponsibility of so many of our national leaders.  They are the ones who will be stuck with the huge national debt which is being generated by the profligacy of federal spending and also the ones who may have their own retirement benefits greatly curtailed because of it.
Young people should be especially incensed by such irresponsible behavior which will affect them so greatly.  We should support their efforts to turn around this ugly situation!

Who Won and Who Lost in the Fiscal Stalemate?

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The mainstream media are uniformly agreed that the Democrats and President Obama “won” the latest debt ceiling and shutdown standoff and that the Republicans “lost”.  For example, New York Times, reporter Jeremy Peters gives the GOP a rebuke in “Losing a Lot to Get Little”. “For the Republicans who despise President Obama’s health care law, the last few weeks should have been a singular moment to turn its botched rollout into an argument against it.  Instead, in a futile campaign to strip the law of federal money, the party focused harsh scrutiny on its own divisions, hurt its national standing, and undermined its ability to win concessions from Democrats.”
This is all true and, in addition, the twenty or twenty-five Tea Party stalwarts made fools of themselves by being so intransigent.  And 145 House Republicans ran away by voting against the final deal.
But look at the broader picture.  The federal government has been reopened for just three months, until January 15, 2014, and at current funding levels which include the 2013 sequester spending cuts.  On January 1, the more stringent 2014 sequester cuts take effect.  In other words the pressure is growing on the big spenders in Congress to deal seriously with our ongoing debt and deficit crises.
The big spenders have two options.  They can continue to kick the can down the road (i.e. refuse to bargain and force additional continuing resolutions to keep the government open) as discretionary spending continues to shrink more each year.  Or they can agree to make significant adjustments to entitlements to slow down their rate of growth, in return for easing the sequester cuts.
In a more rational world, the big spenders would understand that cutbacks must be made and the two sides would bargain in good faith and reach agreement.  But fiscal conservatives continue to have the necessary leverage to force compromise, and are unlikely to give it up.
Conclusion: the Tea Party “lost” and fiscal conservatives broke even.  The big spenders didn’t “win” but they got a temporary pass because the Tea Party overreacted and was shot down.

A Pessimistic View of America’s Future V. When Wealth Disappears

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Several of my recent posts have been pretty gloomy.  “Average is Over,” “What, Me Worry?” and “The Age of Oversupply,” for example.  Here’s another gloomy one.  The British economist, Stephen King, has an Op Ed column in last Monday’s New York Times, “When Wealth Disappears.”, based on his new book, “When the Money Runs Out.”
Our GDP grew at 3.4% per year in the 1980s and 1990s, then dropped to a growth rate of 2.4% from 2000 – 2007.  Since the Great Recession ended it has averaged barely 2% per year.  The Democrats say we just need more fiscal stimulus and monetary easing to boost the growth rate.  The Republicans say deficit reduction including entitlement reform, slashing regulations and tax reform is what is needed to revive the economy.
“Both sides are wrong,” says Mr. King.  “The underlying reason for the stagnation is that a half-century of one-off developments in the industrialized world will not be repeated.”  These one-off developments are: the unleashing of global trade after World War II, financial innovation such as consumer credit, expansion of social safety nets which reduces the need for household savings, reduced discrimination which has flooded the labor market with women and, finally, the great increase in the number of educated citizens.
What Mr. King recommends is “economic honesty, to recognize that promises made during good times can no longer be easily kept.  What this means is a higher retirement age, more immigration to increase the working age population, less borrowing from abroad (by holding down deficit spending), less reliance on monetary policy that creates unsustainable financial bubbles, a new social compact which doesn’t cannibalize the young to feed the boomers, and a further opening of world trade.”
“Policy makers simply pray for a strong recovery.  They opt for the illusion because the reality is too bleak to bear.  But as the current fiscal crisis demonstrates, facing the pain will not be easy.  And the waking up from our collective illusions has just begun.”
It is obviously time to bite the bullet, lower our expectations, and start doing the hard work needed for even incremental economic progress.