health care

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The 2012 Election, A Health Care Debate?

America’s interminable election process kicks into gear once again. We are hardly over the 2010 mid-term election cycle and we are already plunging into next year’s presidential election campaign. It never ends. Which is why our governance is frayed around the edges. With everyone constantly running for election our representatives hardly have time to give thought to major issues let alone ponder creative solutions. Every action. Every appearance. Every sound bite. And every smile is geared to the next election. Getting sensible legislation enacted is entirely secondary.

Thus today’s announcement from Obama that he is running for re-election next year immediately ends any chance of getting much done and plunges us instead into the usual pablum riddled world of positioning, wriggling around, and avoidance of controversy. Apparently he is telling those of us who backed him last time around that major changes takes time to solidify. Presumably this implies he has made such changes, and now wants to protect this legacy by sitting out the next four years to abate the Republican efforts to undo it.

I am not going to waste your valuable time by expressing my evaluation of the extent of the change, or its relationship with his promises. Suffice to say I am one of those who view Obama as a timid, bland, and very ordinary president who failed to roll back the Reagan/Bush legacy in any meaningful or lasting manner.

The worldview of our elite remains free market, low tax, and pro-business domestically, coupled with a pugnacious and militarist foreign policy. We are still engaged in a variety of foreign wars. We have returned, predominantly, to pre-crisis economics. And we are actively discussing downsizing government at both the state and federal levels, despite the questionable need to do so. This is a conservative agenda. It is not a progressive agenda.

The exception, of course, is health care.

And this is now the focal point of the fight.

The health care reform passed last year is weak and riddled with inconsistencies. It leaves too much latitude for the insurance companies and fails to restrain costs as much as it ought. It elides the central issues of limiting unnecessary service, producing better outcomes, and injecting efficiency into our hopelessly inefficient system. It succeeds in broadening coverage and restraining costs. Indeed the best way to evaluate it is as a long term cost reduction program: by that token it is serviceable.

Yet it is under constant attack from the right. And its various compromises make it an easy target fro disgruntled doctors, consumers, and anyone else whose lives will be altered by its multitude of effects.

The Republican backlash has been irrational and intentionally false. There has been talk of rationing, death panels, and all sorts of other nefarious government coercion. There has been nothing by way of an alternative.

Until today.

With the unveiling of the Republican plan for Medicare, the battleground for 2012 is now clear. The details are still sketchy, which is a constant feature of all Republican plans, but the general scope is discernible. The GOP wants to abolish Medicare as a defined benefit program and replace it with a defined contribution plan. The will limit the government’s cost, but undermine service drastically.

The essence of the GOP plan is that they eliminate Medicare as an entitlement. That entitlement status implies that the government provides coverage despite costs, and thus the consumer has no worry about whether procedures fall inside or outside the plan. This is why it is analogous to the old defined benefit retirement plans that have now disappeared.

In the new GOP version, elderly people would receive vouchers they could use to purchase private insurance. The level of service they would receive would then depend on the plan they sign up with, and thus fall prey to all the usual issues related to private insurance. More to the point: the value of the vouchers would be decoupled from the rise in cost of services, so eventually the cost of plans would fall more on the ability of the consumer to pay. The clear implication is that many elderly would quickly see a deterioration in the plan they could afford, and thus the services they could purchase. The rich would be relatively immune. The poor would see their health care quality diminish rapidly. This intention is confirmed by another component of GOP plan: the elimination of Medicare, which is the health care plan for the poor. This plan would be replaced by simple transfer of annual federal grants to each state. Then each state would be responsible for providing whatever care it could from those grants. An early understanding of the size of the grants suggests the intention is to reduce, vastly, the level of service the poor receive.

As an exercise in budget outlay reduction the GOP plan seems to have validity. By gutting health care for the elderly it reduces federal costs. It does nothing to restrain health care costs in general. There are no plans to rein in the excesses of the private sector, or to reduce the trajectory of increasing cost of services. Coupled with the tight control proposed on the value of vouchers this means, inevitably, that there will be a widening gap between what the government helps pay for, and the actual market driven cost of service. Hence the diminished service prospect I mentioned above.

So the battle lines are drawn. The Republicans seem to be saying they want to eliminate Medicare and replace it with a subsidy for the private sector. That subsidy will cover some, but not all, of an elderly person’s costs. So, inevitably, their level of service will go down. This is especially true of high cost end of life procedures that the private sector will have a hard time pricing efficiently at any premium less than exorbitant.

How Obama reacts to this will play a large role in defining his campaign. The vigor with which he resists will either energize or demoralize the base of his support. His track record is very poor so far. His two major reforms have been in health care and finance. Neither were radical. Both were fudged before the fight in order to mute opposition. In neither case was the opposition calmed. So in both cases Obama managed to negotiate away principled positions before the negotiations even began. He has a depressing habit of caving in before the fight, as his current attitude towards deficit reduction, and the supposed need for budget cuts shows so vividly.

A vapid president running for re-election against one of a bunch of extreme right wingers intent on trashing America’s already threadbare safety net is not an appetizing prospect. It does, however, highlight the extent of the rot in our discourse, and the impoverished nature of our policy thinking. Never could our lack of leadership be more evident. I hope I have missed something. Otherwise, whoever wins, our economy is not in good hands.

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Debt Panic Watch

I am busy today, so I have no time to write at length. Please dampen the applause.

But.

How can I pass this by?

For all you debt panic types: today’s auction of US Treasury bonds went off without a hitch. Those cagey be-all and know-all types in those cut throat credit markets, you know, the ones who are about to leave us high and dry because we are “broke”, bid in droves for our soon-to-be worthless paper.

The Treasury sold $32 billion of three year debt at a yield of 1.298%. The auction attracted bidders with 3.22 times the amount actually sold – this is up in the recent average of 3.06 times. And that yield is nominal not inflation adjusted. You do the math to see where it would be in real terms.

So.

Where’s the imminent panic over our debt?

Not in the credit markets that’s for sure. And since that’s the only place that actually counts, why do we still hear rubbish about our debt levels?

Yes they are high. We just went through a mother of all recessions. Duh. But the credit markets seem to think we are just fine.

So the ghosts of our implosion haunt only the minds of those who seek to exploit the situation for short term ideological gain.

Yes we have a short term debt problem. But it will go away – sort of – once the economy is humming and tax revenues return to their previous levels. What we should concern ourselves with is the long term, or structural debt problem, which is the result of the deliberate attempt to suffocate the government by reducing tax revenues without cutting costs – this is the Reagan/Bush legacy; and our current inability to rein in health care costs which are running at unsustainable rates of growth.

So the plan should be: get the economy up and running at full speed by stoking demand. Then limit the rate of growth in health care spending by getting some form of rationing in place – either by price or control. Oh, and we should raise revenues back to a level consistent with the services we all demand. Sorry, that means higher taxes for some of us.

And along the way we should be leery of politicians who claim the end of the world is nigh and who want to apply leeches to bleed dry the very services that will undergird a healthy economy down the road. Cutting education funding and demonizing teachers is just plain stupid. If you like that idea, please never, ever, complain about our lack of competitiveness with China. They pour money into education. Some people think we cannot afford to any more. That’s more than stupid – it is self destructive.

By the way: much to the chagrin of the negative folks, Social Security is in ruddy health compared with Medicare. A tweak here and there and it will roll on forever. Why? Because the outgoing cash is a very predictable stream. All we need to do is to rebalance the input and output to keep the program ticking along nicely. Medicare is not at all the same. Its problem stems from the complete uncertainty surrounding the outgoing cash. The costs of health care are both rising and unknown: we cannot predict with any precision what services will be consumed at any point in the future. Thus we cannot calibrate income easily to cover those expenses. This is why rationing is inevitable. Get used to it. The only way to control consumption is either to make it so expensive we limit access to a smaller group of affluent users; or to make it scarce by limiting availability some other way, like banning the public funding of certain procedures, especially end of life care. That’s rationing under either scenario. Either the rich get whatever they want and the rest of us don’t. Or we all get somewhat less than what we want. Tough, but true.

Meanwhile back to panic watch: put away those “end of the world” placards. It’s not here yet.

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Fact Based Thoughts

For all you worriers out there, and I know there’s quite a few, calm down. It helps to keep the facts in front of you and push those more vivid opinions to one side.

Take, for example, our debt. If you listen only to the opinions, you’d think we lived in a version of the Weimar Republic replete with wheelbarrows needed to move around the useless hyper-inflated currency that we all now own. Or, as Speaker John Boehner in Washington, and Governor Walker of Wisconsin put it: “we are broke”. Really? I wonder why the rates on US bonds are going down? Could it be that those hard headed folks out there who buy and sell our debt, and who stand to lose their shirts if they are wrong, don’t see something that Boehner and Walker do?

No it isn’t possible.

The fact is that the cost of US debt is going down at the moment because world uncertainty is driving investors towards US bonds. The rise in demand for our paper is driving down rates. No one, except for some rabid Republicans with an axe to grind, thinks we face an imminent debt crisis. No one.

Our debt problem is strictly a medium term issue and is caused by the deliberate reduction in government revenues resulting from the infamous Bush tax cuts that are now so hard to undo, and from our awful health care system that is on a trajectory to destroy us whether it is publicly or privately financed. The current crisis is cyclical and so any addition to our debt stemming from it will be contained as we start to grow again. Which is why getting people back to work, and thus paying taxes again, is so important. There is no advantage in getting corporate profits pumped up: big business avoids taxes like the plague. We need honest tax paying citizens back at work. Then our deficit will start to drop.

Muddling the two problems, short term and medium term, will inevitably mean we screw up the former and forget the latter. Unfortunately that’s where our opinion leaders are headed.

Likewise the banks. The fact is that they are not fixed. We are headed back into bubble land. The opinion leaders mostly voted against any hard-nosed fixes for the banks. Now they are all for debt reduction and austerity. Yet the need for austerity is a result of the bank’s foolhardy attempt to destroy themselves by engaging in anti-social and juvenile activities they didn’t understand. The facts tell us that we should never again allow Jamie Dimon and his confreres to play with matches. They are likely to blow us all up. The poor dears cannot help themselves. The taxpayer bail out of the banks may not end up costing us a lot directly, and the opinion makers like Tim Geithner keep harping on that as evidence we should all be pleased. But the facts say something else: the crisis and its enormous social cost is an indirect result of banker lunacy, greed, and regulatory capture. So the fact that we did not fix the banking system is the result of wrong opinions holding sway.

Similarly inflation. The more dramatic of our opinion leaders are almost apoplectic about an imminent burst of inflation. This, they say, is the inevitable result of the Fed’s easy money policy. But look at the facts. Core inflation, which is our best guide for the trend in inflation, is moving down, not up. Short term factors have masked that. Some problems are no doubt out there as worldwide demand rises rapidly to squeeze raw material and commodity prices. But nowhere is that a result of US monetary policy. And, besides, food prices are being driven by shortages due to weather. That’s not a medium term policy issue. It is a short term meteorological issue. But our opinion leaders want us to think we need to tighten and possibly risk our recovery, based on their opinion. No thank you. The facts support continued easy money until we get the economy beyond its current jobless phase. When wages start to jump, that’s when we tighten.

Judging by recent history, another awkward fact, that may be never.

Of course this all just my opinion.

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A Mixed Bag

The economic news this week has been a mixed bag. There is no news in the report that the National Association of Realtors is going to adjust its data – they have been giving us what appear to be wildly optimistic reports throughout the crisis. Neither should we be surprised about the slide in durable goods orders. Typically those orders lead the recovery and tend to taper off a bit once the economy is out of recession. But enough of that, here are the bits and pieces so far:

Housing

  • According to the Case-Shiller index home prices dipped slightly in December. The drop, 1.0%, was slight but significant because it tells us that there is no sign of a resurgence in housing. The more amusing news is that Karl Case and Robert Shiller interpret the news in different ways. Case is less pessimistic and suggests there is a “chance” we are at the bottom of prices. Shiller, however, is now talking of the “substantial possibility” that prices could drop another 15% or so. So which is it? Are we at the bottom? Or will prices drop some more? Who knows? Certainly not economists trained in the orthodox school. They are the ones who argue we cannot tell whether there is a bubble to begin with. I remain unconvinced that real estate has reached a true bottom.
  • Take, for instance, the low level of new home sales, which fell 12.6% in January and thus wiped out almost all the 15.7% gain in December. Most of us thought the December number was inflated by a last minute rush by buyers to take advantage of various tax breaks that expired at the end of the year. But the size of the drop in January is still quite disturbing. And how do we make sense of the last two months in the West where sales rocketed 62.5% in December only to collapse 36.5% in January? Yes there was a California tax break, but what is the trend? Is there a trend? Meanwhile January sales were up 54.5% in the Northeast, where the weather is often used to explain away odd winter dips in data, but surely cannot explain such a surge. Further: the inventory of unsold new homes is now down to 188,000 its lowest level since 1967. That hardly speaks to an optimistic view on the part of home builders.
  • In contrast, the sales of existing homes has edged up steadily in five of the last six months. Unfortunately it is this data series that is most untrustworthy since it is produced by the realtors themselves who, obviously, have an incentive to goose the numbers. This week’s report was accompanied by an explanation that sounds too good to be true: job growth, improving economic news, higher stock prices, and rising rents – everything but the kitchen sink – were given as reasons January’s 2.7% increase in sales. All of which may be true, but we should also note that prices dropped as well, by 3.7% to their lowest since 2002. Perhaps sales are up because prices are still weak?

Durable Goods:

  • Orders finally showed some life in January after being relatively weak the previous three months. Unfortunately the growth was almost entirely due to the sales of aircraft which is a wildly erratic sector because of the inherent ‘chunkiness’ of its order book. Take away the 27.6% increase in aircraft sales and the overall increase of 2.7% in January turns into a 3.6% drop. The year on year numbers are still quite strong: we are about 9.0% up in the last twelve months, but there are now signs that the initial post recession surge in capital goods sales is now giving way to a less robust trend. All of which is entirely normal, but which suggests that the economy has not much room for more above trend growth. By which I mean that the recovery, which looks as if it is producing GDP growth above the 3.0% trend line at the moment, is more likely to settle back than accelerate further. Again, this is normal, but we needed a much longer period of above trend growth to get unemployment down quickly. The durable goods data does not support the view of strong GDP growth continuing much beyond 2011.

Jobs

  • Today’s weekly report on new claims for unemployment assistance, tell us very little. Claims dropped to 391,000, which is 22,000 down from last week, but may still be unreliable because of weather and holiday reporting problems. That we are below 400,000 is a good sign. That we remain a way off the 350,00o upper boundary threshold used, as a rule of thumb, to designate a healthy job market is disappointing this far into a recovery. The numbers of people getting some form of unemployment benefit fell by over 89,000 last week, but this is an ambiguous figure. It might mean improvement as people no longer need aid. It might equally mean that people have simply exhausted their aid and are now exposed to the harsh realities of survival without it. My guess is that both factors are at play. The economy is adding a very low 83,000 jobs a month at the moment, which is way short of the numbers needed just to stay even with workforce growth. There is no need to keep repeating: our job generation record is just awful at the moment. There are signs of life and by mid-year things should be better, but I doubt we will reach the levels of growth needed to get us back to normal levels of unemployment any time soon.

One Last Thing:

I attended a Foreign Policy Association dinner last night and heard comments from a variety of what appear to be well entrenched establishment folks. All well meaning no doubt. The most interesting came from a leading figure from Singapore. He runs a huge sovereign investment fund and so pays a great deal of attention to the US economy, both short and long term. He saw good GDP growth this year and then some risks on the horizon. Amongst them he identified the risk of the US becoming less open. By which he meant less amenable to immigration which he sees as a demographic strength of the US and as a source of talent to drive the economy forward. He also expressed concern over our decaying infrastructure and the cost needed to catch up with worldwide standards of investment. Such a catch up will require funds to be diverted from other uses, one of which, health care, he also identified as a long term risk to growth. Lastly he also warned us about the state of our education system which is becoming enormously bifurcated. The best of our system is world class. The rest is well below average. Since it is the average education that forms the basis of the economy by providing the necessary talents in the workforce for us to compete, he sees our system as a net liability and not an asset.

This is an interesting point and slips over into the debate over health care as well. Americans are justifiably proud of their world class institutions, and their performance, in both academia and health care. They always refer to the outstanding results in those places as somehow justifying the entire system. But it doesn’t. The most important results are those the average American experiences. That is where the bulk of the population lives, and that is where the country falls short. Increasingly so. It is all well and good that a rich person can get world class health care and ensure a great education for their family. But if the rest of the nation cannot match that ability, the system is not doing its job. When judged by the average, and not simply the best, America is losing ground in both health care and education despite outspending everyone else by large amounts. In other words we waste a lot of money on an underperforming system. Fixing that is, of course, not easy. And it will be wrenching because it requires us to confront the failure of what we do now. The hard part is getting that failure articulated such that Americans can accept it. Unfortunately the only acceptance so far seems to be relentless attacks on our teachers, whom, by and large, are underpaid. I have heard very clever people argue we can solve the problem in education by firing the “bad” teachers, without offering an explanation as to how we identify such teachers, and how we replace them with better and presumably more motivated ones. I fear that all the current bad mouthing will simply drive out the good teachers who are tired of carrying the burden of the systemic failure, while leave us with the less able – those who have no alternative but to teach. We will certainly drive out the good once we start cutting benefits, pensions, and salaries.

Perhaps we all ought to rethink what we are doing before we add to the system’s problems by making it difficult to attract the talent we need to teach our children.

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Quick Comment: Health Care and The Budget

OK. As we all slide into the silly season of budget fudging and name calling, can we all just agree that we will not arrive at a successful solution to our fiscal problems without recognizing the biggest long term cause of the mess. Health care costs. Yes, tax cuts created big holes in the budget. Yes, the crisis made that hole bigger. Military expenditure is way out of line with our ability to sustain it. But they can be contained or resolved realtievly easily. Health care is another matter all together. We have no current mechanism, other than the recent reform, to bend the trajectory of health care costs back from the danger zone. Compared with health care, Social Security is a small and easily fixed problem. Obama has, at last, said so. Meanwhile, as the debate last year clearly showed, ideological fault lines threaten to freeze discussion about controlling health care costs. This cannot continue.

Health care costs and fiscal soundness are inextricably linked.

Now carry on.

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