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Health Care Non-Economics

The current Supreme Court drama over health care reform is making all sorts of headlines. One thing that is missing is sufficient criticism of the horrible economics being served up by opponents or reform.

This is simple.

People whom advocate that we ought to allow market forces to govern the health care system obviously have no clue as to how a market works. This is surprising since they tend, by and large, to be ardent market force advocates.

So, at the risk of repeating myself:

Markets are supposed to produce magical results. The magic being that they allow those involved to interact such that the outcome is agreeable to all in the sense that no one can make a change in position without reducing someone else’s position. The mechanism that brings about this magic is that of price discovery. The too and fro between people in a market eventually will establish a price at which sufficient services are provided at a price to produce the agreeable outcome where everyone gets what they need given how much they can afford. That’s long winded, but hopefully you get the drift of it.

This entire process is often wrapped up in the sentimental phrase: “market forces”. As in: we ought to allow market forces to decide the outcome. Most people seem to think such an outcome is value neutral in that no coercion takes place, no government interference is involved, and therefore, the result is not arbitrary, but ‘natural’. It’s all just the result of a bunch of free folks settling things between themselves.

Umm. No. It’s value laden throughout since the process starts with everyone’s budgets as a given. And some budgets, as we all know, are more stacked than others. Even if we accept this unequal starting point the magic doesn’t always work.

This is because the magic is only possible under very severe restrictions. In the case of health care the most salient such restriction involves the asymmetrical distribution of information.

What this means is that all the actors in a market – in the case of health care: doctors, insurance companies, and patients alike – have equal access to, and understanding of, all the information needed to make informed choices. The playing field must be level. If it is not – say when your doctor knows something about tuberculosis that you don’t – there is no way you, as an economic actor, can negotiate a proper or agreeable price. Actors also need to be able to secure competing bids for services – as you are rushed to the emergency room you would have to be able to seek different prices, doctors, treatments and so on – in order to allow the pressure of competition to eliminate undesirable side effects of cheating, rent seeking, and other anti-social behavior.

There is no way, at all, that a health care system can be run this way. It is a classic example of a circumstance where a market cannot work.

This is well known. It was the subject of a classic article by Kenneth Arrow – a Nobel prize winner – a long time ago.

Yet here we are having a discussion if none of this is known at all. And the most ignorant of the problem of market failure in health care are the very people who defend market forces.

On a broader note: the cost of health care is an issue for the economy regardless of whether the bills are paid by the government are not. Indeed in many ways the current discussion about Obamacare is a massive and unfortunate distraction from the main problem, which is to cut health care costs no matter who foots the bill. Dismantling Obamacare – which was a half-hearted reform at best – doesn’t address this key issue. It may satisfy the ideological right in our politics, but they will then be faced with a different and more embarrassing question: when the market manifestly fails, as it must, what will they do?

My guess is fudge.

They have no alternative.

Look folks: markets fail. There is no news in that. Further, any resource – like health care – that is not universally abundant has to be rationed somehow. Not everyone will get all they want. So the decision is about how we ration. Do we ration via prices in an open market? Or do we ration via some form of control over supply of service? Or in some other way? Which fairest? Which is cheapest?

In moments when they fail markets cannot be assured of delivering good results. This is already clear in our health care system which is expensive, inefficient, and produces very modest results.

It is time for a change. Even if you abhor Obamacare.

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Bernanke Cautions

Today’s speech by Ben Bernanke has caught quite a bit of attention. So it should. His basic argument is that it far too soon to declare victory in this recovery. Job growth is way too small each month. Moreover what growth there has been is more a function in the reduction of firing than in a surge in new hiring. The economy is simply not generating new jobs at anywhere near fast enough a pace for us to get to sustainable growth any time soon.

We are seeing a significant pick up in activity attributable to a release in pent up demand. That is normal and points to greater confidence on the part of consumers. But it is not enough to fuel a fully fledged recovery with GDP growth sufficient to close the gap between potential activity and our actual activity. That means there is a pool of idle resources sitting around unused, with much of that being unemployed labor.

Bernanke was firing a shot in what appears to be the early stages of a fight against the austerity crowd’s next attempt at retrenchment. The economy is simply not strong enough to carry the burden of cuts in spending. We only have to look at the damage being wrought across Europe to see that the entire notion of austerity driven growth is a complete farce. We, that is to say you and I, never thought it was possible to create growth by cutting spending. Unfortunately there are those, many in very significant jobs, who believe in such nonsense. The Euro experience of the past two years has thoroughly debunked growth austerity, but it clings on due to its ideological strength: it supports a far right economic agenda and works very well in the rarified atmosphere of orthodox economics models. But a cut in spending is a cut in spending and so shrinks the economy. The supposed offsetting surge in confidence, which, in turn, triggers a surge in investment and consumption, hasn’t turned up anywhere where true austerity has been enforced.

Still, Bernnake is concerned enough about the state of our politics that he deemed it necessary to fire this shot across the bows of those who might imagine that the economy is now recovered enough to take a battering.

He is right.

We remain far short of our goal. This is not the time for cuts. Indeed it is more a time for a another dose of medicine.

That we won’t get.

So all we can do is cling on to what we have and make sure the hawks don’t ruin it for us.

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Ruminations on The Election

This is a silly season in America. Sillier than even by our usually silly standards. We are mired in one of the most peculiar political processes ever. The Republican party is deeply divided between far right social conservatives who want to undo the entire post war era – especially women’s rights, economic conservatives who want to undo the entire social safety net and throw us all to the wolves of market magic, libertarians who simply want to undo America as we now it and re-knit what’s left into a micro-local-Randian-polis style survival of the fittest landscape, and elderly white males who are aghast that the country is becoming more diverse than they are and that even a black person can be president. This toxic brew has served up some of the least fit presidential candidates ever, and has exposed the core of the GOP as being so far to the right that even Reagan and Nixon no longer qualify to serve under its banner.

It is a party committed to obstruction – it won’t even tolerate the benign appointment of Federal judges, and is salivating at undoing all Obama’s efforts no matter how half hearted people like myself find them.

It is hard to describe to anyone not living here just how far to the right our politics have shifted. We live in an era of demonization, cultural division, and outright lunacy. Ignorance is lauded: it was not for nothing that Rick Santorum could say with a straight face that encouraging people to go to college was a bad idea. The far right sees education as its enemy. Education, after all, is likely to lift the veil on the paternalism, authoritarianism, outmoded thinking, and prejudice that haunts great swathes of America. This remains a very parochial electorate where the assertion that is America’s right to consume the world’s resources at an inordinate pace despite the wishes of the rest of the planet garners widespread support. Going to college may expose our young to views from around the globe. That may produce a tolerance for foreigners and foreign things. This in turn may dilute the American Way. And the American Way is not just perfect, it is God given and perfect. To dilute it it is to offend the Almighty as well as to be unpatriotic.

Great chunks of this country live firmly in a time warp. The dissonance is extraordinary. Modernity creeps in everywhere. It is both embraced and is the cause of unease. Technology brings the “other” into every living room where it can be accused of being the cause of all ills. The relative decline of America is overblown by a right wing media in order to stir up political opposition to Obama, but serves also to fuel a desire to reject all things modern. This section of America has not been well served by globalization. It is isolated from the world and wants to stay that way. It wants to retreat in order to recapture the hey day of American unilateral power. It wants to re-embrace Reaganite homilies and simple thinking. It wants to resort to an uncomplicated era when American power was absolute, America made and enforced the rules, and American wealth was sufficient proof that the American Way was also the best way.

This was always an illusion of course. Empires always fade under the weight of their own force. They enfeeble themselves in the name of asserting power, and then scream bloody murder when the walls cave in. It must be someone else’s fault when the end comes. And a prolonged period of internal discussion about whose fault it was inevitably leads to deep and possibly irreparable damage. America can no longer afford it enormous offensive – in every sense of that word – capability, yet is scared of retrenchment. Cutting military spending is viewed as unpatriotic. This is in a country whose longest political tradition was to avoid foreign entanglements and to keep a minimal full time military. How the delusions of empire have twisted America’s view of its own past. At the opposite end of the spectrum there are many who still revile the entire edifice of the New Deal – they see it as an imposition by a tyrannical central authority on the supposed free will of the rugged individuals who founded this place.

Everyone seems to be looking backward. The only question is how far back they want to go.

To have an election in the midst of this brooding self-regarding petulant outburst is never a good idea. The far right always comes out ahead. The progressive wing in our politics has been unable to articulate a globally connected version of the American Way capable of countering the urge to plunge backwards. The Democrats have, by and large, looked weak and divided even whilst holding total control of Congress. The American political system was never established to accommodate deeply divided parliamentary style politics. It assumed a banal centralist consensus held together by common cause – a few white male landowners with similar interests if different views was all we needed to take into account. So watering down central power and preventing the emergence of a bloc capable of dominating politics was essential. Then we could all revert back to the more important business of running our plantations and farmsteads safe in the knowledge that no tyrant would interrupt our sober paternalistic way of life.

The system we have is unsuited to the politics we have. There is no loyal opposition. There is simply obstruction and venom. There is no alternative policy preparation. There is only destructive denial and nihilistic argument. There is no common set of facts subject to different interpretation – there are different facts created to support pre-existing ideas. Most of all there is no common vision of America. Modern and pre-modern are in calamitous conflict. Obama’s election was not a decisive moment of racial healing and social construction. It was a moment of crisis for pre-modern America. It was the moment at which all the sundry aspects of American modernization came together in opposition to America’s darkest past. That it came at a moment of great economic crisis also heightened the threat it represented. A fevered backlash was inevitable. We have lived through almost four years of ugly resurfacing of prejudice, repressed anger, fear, and hatred of advancement.

The result is that the Republican party is now the party of the white working class and the Democrats, by and large, represent those who have benefitted from progress – women, minorities, and the more educated.

It is this decoupling of the mass working class from the progressive cause that is the most disturbing. They are the ones most hurt by the global connection of the economy, their skills, or lack thereof, are the least required. And they are the least easily adapted. Their standard of living has declined relative to those propelled forward by the progressive movement of the 1960’s and then again by the deregulatory impulse of the 1980’s and 1990’s.

This is why, in many ways, the old world division of society – and economics – into classes aligned along labor versus capital versus landownership are ever less relevant or explanatory. Knowledge, education, information flows, and access to a global community are much more explanatory of the way in which American politics has morphed in the last thirty years. Unfortunately our theoretical constructs are still stuck in an industrial world circa mid 1800’s.

There is nothing in our debate this year that suggests we will resolve any of this. Indeed it is almost certain that whoever is elected president in November will face an intractable political system bent on continued obstruction, delay, and regressive argument. Neither major party seems able to modernize sufficiently to develop a global message. Retreat is still the order of the day. The economy is still stuck as a result – we cannot arrive at a consensus on what to do until we have agreed what ails us. The malaise will linger. At the current rate of inadequate progress, and given our mediocre policy responses, our economy will only arrive at a full recovery – defined as full employment – after many more years. That is a hopeless response. Hopeless. It will make politics more acidic and hate filled. It will open up more avenues for extremism. We can expect more Santorum like figures not fewer.

This is not bleak but real. It requires leadership. It requires those currently invested in the success of a globally connected economy to spread the wealth and to understand the pain connection has caused. It requires and acceptance of responsibility rather than a absentee rent seeking on the part of the intelligentsia – in politics, in business, and in academia. It requires continuation towards and not away from modernity. It requires the articulation of a vision of what the new American Way might offer to those currently disenfranchised by progress. For such progress is no progress at all. And that realization is the biggest threat to America.

This is a country founded on progressive ideals. For it to become persistently regressive is not only dangerous to its own historical trajectory, but to people everywhere. For if America can deny its own past and turn on itself, who else could progress? And where else could a similar liberal project succeed?

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Inequality, Rationality, and Other Annoying Things

Forgive me. My ‘grandmother quotient’ is running at danger levels.

Frequent readers will know the special place my grandmother has in my development. In just a few sharp phrases she influenced me far more than anyone else. One of those phrases grates on me: “Remember, Peter” she said one day “They can always take it away from you.”

Quite why a young boy needed to know this, and who the “they” or the “them” was I never have figured out. But somehow her words resonated and I have been on the side of equal opportunity and other progressive causes ever since. She meant something. She had lived through the fight to level, at least somewhat, the gross inequalities that mar nineteenth century British development, and she emerged a hardened warrior for the underprivileged everywhere. In her own way of course. Always in her own way.

I mention this because I find myself reflecting on her words more frequently nowadays. That’s what I mean by my grandmother quotient. There is a direct relationship between my such reflection and my perception of the state of the economy. I don’t really care how well the economy is doing, so much as I am concerned by how well people are doing.

And therein lies the tale.

Economists are notorious for trying to eliminate people from their theories. That way they can pretend to be scientific in the grand manner of physics and mathematics, rather than in the manner of biology, history, and other subjects rooted firmly in evolution, and, especially, time. Economists use jarring words like ‘agents’ and ‘units’ to strip away humanity and to avoid having to face the consequences of their allocative mechanisms. They make things impersonal so they don’t have to look unemployed people in the eye and explain to them that unemployment is always voluntary – in theory. I imagine they fear they might be punched by the voluntarily unemployed. Sometimes I want to punch them myself. Especially those who are tenured whilst explaining the evils of tampering with free labor markets.

Inequality seems to fall into this same category.

Hey, the economists say, that’s just tough. Stuff happens. But our theories tell us exactly what the right answer is if we all want the most efficient allocation of resources. Right? Those hifalutin equations give us such exact answers. Just look at the decimal points. Such precision is hard won. And worthy of many, many, Nobel prizes. That some folk win, while some folk lose, is just not important. Not at all. What’s important is the efficient of the outcome, and the elegance of the reasoning. Elegance is particularly important in the rarified world of economic theorizing. The fine tuning is nicely balanced. Elegance makes it ever more so.

Perhaps it’s the astonishing capacity of orthodox economists to conduct a conversation with themselves as if they were engaging something else that mystifies me most. They really don’t get out much. Anyone intruding is laughed at as being an amateur. And we all know how simple and naive amateurs can be. After all they never paid their dues to join the club. Within the professional cloisters jargon hangs heavy and the total irrelevance of the conversation to the real economy is itself irrelevant. Economists, as I have shouted out many times, don’t talk about the real economy. They discuss their own imaginary one.

In there, agents patrol endlessly, tirelessly digesting infinite streams of data, calculating at universally unattainable speeds, knowing all, and arriving instantaneously at perfect answers. All in the name of efficiency and allocative maximization. This parallel universe actually parallels nothing. It vectored off a long time ago. There is probably a non-Euclidean geometry to describe the warp into which economics has ventured, but I am unaware of which it is.

Consider this: you are one of those agents.

Think about that. You and your fellow 6.8 billion humans are the stuff of economic theorizing. Or at least the outcomes of what we do every day are. How many economic transactions do we all make a day? Fifty? One hundred? More? Apparently there is a giant hidden hand ensuring that all those transactions – 6.8 billion to the nth power – mesh seamlessly into one gigantic computation that ends up establishing the correct order we know as an equilibrium. Amazing. Death defying. Indifferent to time. Indifferent to uncertainty. Indifferent to any gritty nonsense at all. The miracle of the price mechanism ensures, with unnerving accuracy, that those equations so elegant bring us to the nirvana so longed for by us all. That is the happy place where none of us, not one of those 6.8 billion souls, can change a single thing without setting someone else back.

Wow. That’s quite some trick. I need to meet this price mechanism one day.

Because the one I come across on my daily walks around New York City seems to produce something a little different. Like homelessness. Like inequality. Like a whole lot of things that someone – one of our fellow agents – would like to change, and which probably wouldn’t wreck anything at all for anyone else anywhere.

Meanwhile I have a favor to ask: I am trying to do my best by this rational expectations thing. It’s very difficult. I am worrying endlessly nowadays about the enormous increases in taxes that are inevitable to pay off the needless and thoroughly useless stimulus. Since the stimulus was financed with debt, I am aware of the trajectory of future taxes and need to plan accordingly. I need, in order to maintain my status as a true denizen of orthodox theory’s world, to adjust my current spending. But I have run into some embarrassing issues. Like I have no idea of what those future tax rates might be. And like that fact that my spending bumps along the boundaries of sufficiency, so to reduce it seems likely to inflict quite a bit of near term pain. Then there’s the problem faced by my grandson. He, taking the long view, needs to know crop prices – he lives on a farm – in 2053. After all he is rational. His expectations need to be brought into line. I realize he’s a bit young, but he doesn’t want to tamper with elegance.

Anyway any help you can all provide will be most welcome. We would hate that it were our family to ruin the machinery of equilibrium.

My grandmother would probably look at orthodox economists as being part of the reviled “them”. In their zeal to defend markets from the presumed tampering of the central authorities they managed to provide ideological cover for those who are strong enough to tip the balance in their own favor. Orthodox theory is not neutral. It is biased. Even its axiomatic base is carefully established to ensure the proper outcome. I call it a GIPO system of thought in honor of Milton Friedman who notoriously fended off criticism of orthodoxy’s bizarre assumptions by arguing that those assumptions can be as crazy as all heck as long as the outcome of the theory that rests on them is “correct”. Where correct means that markets are good and governments are bad. Friedman was a libertarian and it was merely coincidence that his scientific enquiries ended up this way. It could have been the other way round. Honestly. By the way: GIPO stands for Garbage In, Perfection Out.

Orthodox economics is GIPO economics.

My grandmother would probably have a few choice words for Thomas Sargent too. He won the Nobel prize recently for his work on rational expectations. Which is why it’s a little odd that he would co-author, with William Silber, an op-ed piece in the Financial Times talking about the problems with the Federal Reserve Board’s attempt to be transparent in its rate setting policies. What’s to discuss? It doesn’t matter what the Fed does. In a rational world we all know, and have taken those policies into account. Indeed we all know exactly what’s going on inside Bernanke’s head. So why discuss? Why comment? Is he disavowing his own Nobel worthy work? Or is he just talking out of both … no surely not.

Oh. Wait. The entire comment was about monetary policy and the evils of quantitative easing, the hyperinflation it will inevitably unleash, and all the other detritus of orthodox theory. It’s that whole “democracy tampers with efficient capitalistic outcomes” thing.

That naughty government. It always manages to muck up sensible, scientific, economies.

I wonder whether my grandmother included the government as part of “them”.

No. Of course not. She quite liked democracy. More than capitalism any day.

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Odds and Ends

The economy has hit one of those dull patches where all we can say is that it appears to be growing, that growth is steady rather than spectacular, and that we all should go about our business and check back later to see if it has been blown off course.

In view of this I think we ought to reflect on some other things.

Like Martin Feldstein’s evident confusion.

He, in true economic guru style, muddles ideology with economic analysis. In today’s Financial Times he sets out to disparage Obama’s impending tax increase. This, it turns out, is the Bush tax increase that has been kicked down the road a couple of years because we all know that such a thing would be hugely counter-productive in the midst of a recession. Only now we are supposed to be recovering so further delay is beginning to look less problematic. Right wingers like Feldstein love to pin the problem on Obama and neatly forget that the issue of whether to implement the planned reversion to Clinton era tax rates was embedded in the 2011 and 2003 tax cuts. Back then the trickery was that in order to avoid the tax cuts looking like they blew up the Federal budget – which they did and were intended to – they had top appear “temporary”. Permanent cuts would have triggered a debate about how to re-balance the budget by slashing spending, and since the Republicans, then in power, wanted to avoid such a conversation, they hid behind the fiction that the cuts were not permanent. The other neat trick was to ensure that any debate took place after George Bush left office. presumably he didn’t want to have to deal with the mess he was making.

So here we are, predictably, with a right winger pinning the blame for an imminent tax increase on Obama, when the entire problem stems from a flawed piece of Republican legislation.

Anyway. According to Feldstein implementing the Bush law would destroy our recovery and thus we ought to avoid, at all costs, re-electing Obama. This is the intent of his article. There is no analysis. There is no justification of keeping taxes at these low levels on the basis of some new economic insight. It is simply Feldstein shilling for Romney. Perhaps he is tired of teaching at Harvard and wants another go at being a policy maker in Washington.

In any case his article is not economics. It is politics.

I find it interesting that the few statistics he gives us in his ideological argument are those of the total revenues of the Federal government. He tells us that, were taxes raise according to the Bush plan, government revenues would rise from 15.8% of GDP all the way to 18.7% in 2013, to 19.8% in 1014, and then stay around 20% for a decade or so. What he avoids telling us that this is comparable to the levels during the Reagan administration when Feldstein was a key policy advisor. Apparently government revenues of around 18% – 19% are deeply threatening to the American way of life in 2013, whereas back in 1987, when they were 18.4% they were no such threat.

Oh. And nor does he mention that revenues hovered at those levels all through the Clinton era – peaking at just over 20% – even while the economy boomed.

Some facts are just too inconvenient to mention.

The problem with an economist being a political shill is that they tend to use facts very selectively and to deploy only those aspects of theory useful to their argument. Other bits, and lost of history, are left out.

Feldsetin is adding nothing to our debate over fiscal policy other than to give color to Republican extremism and its attempt to defund entitlement programs – he comments very briefly that we need a serious debate about how to rein in entitlement spending but glosses over what that might mean. No. His thrust is simply to fire off a salvo about the putative Bush Obama tax increase, and how awful it would be.

If only we were all sensible and elected Republicans, just like Professor Feldstein, academic and impartial as ever, suggests is best given the science of economics upon which he bases his utterly neutral comments.

Sure.

Then there’s the Economist.

I feel sorry for the people there. They want to stay close to economic orthodoxy and preach the gospel of free markets, but every so often it gets in the way of making a sensible comment.

This week they are focused on the returns on equity. In particular they point out the the so-called traditional premium due to equity investment, over safer investments like government bonds, is an illusion. Stocks have underperformed bonds for a decade. This has all sorts of nasty ramifications.

For one ting it helps explain why businesses are slow to invest the mountains of cash they have. The return is there. They’d be giving up on a nice steady income from their investments in bonds. Shareholders who base their long term plans around receiving an equity premium are deluding themselves. This probably is not a great issue to any of us, were it not for the fact that most pension funds base their contributions and pay-outs exactly on earning such a premium. If the equity premium isn’t there, pension funds are left scrambling to earn a return from other sources in order to meet their pension obligations.

So it does matter.

And the Economist chose this week to talk about it.

The real nugget though is hidden from view. What they don’t want to mention too clearly is that this lack of equity premium is a major reason why privatizing Social Security was such a rotten and toxic idea.

Recall that a major plank upon which privatization is based is that the current return on the Social Security fund is tethered to US bonds. It thus doesn’t get that elusive equity premium. So advocates of privatization wave the supposed higher return someone could get from equities and argue that they are forgoing riches untold. Were someone, the story goes, able to untether themselves and play the market, they could dive into that stream that the equity premium provides and retire a whole lot better off than the way the stuffy Social Security system allows. The equity premium is a vein of gold denied to retirees by the government. So: we ought to privatize.

The argument sounds good.

It ignores all the risks associated with equity investment. And it ignores all the fees associated with running a private portfolio. I fact it pretty much ignores all financial theory. But it sounds good.

Until we realize that there is no equity premium. And that we are deluded when we refer to it because it may have been an aberration rather than the norm.

Worse: another thing the Economist touches upon lightly so as not to embarrass the privatization folks is the old supply and emend problem. Were we to privatize and pour more money into the stock market in search of the equity premium chimera, we would assure it’s nonexistence. All that money would drive returns down.

Lastly, we are told that because the premium doesn’t really exist we all should plan to save more in order to beef up our retirement. This would drain spending out of the economy in the short term, drive down returns to business, and make them yearn for the safety of their bond portfolios even more.

And, as Professor Feldstein argues, uncertainty over those returns stops our loyal businesses from investing even though they are flush with cash. So he would probably want a tax cut for business to give them an incentive. But that would imply we need steep cuts in entitlements. Menaing we all would have to save more. Which means that returns would fall more. Which means …

That it must be the government’s fault. Just like erstwhile scientists like Feldstein wanted it to be all along.

Phew.

Ain’t economics grand?

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