Archive for the ‘Economics Thoughts’ Category

Europe made the Cowardly “Courageous Decision”

May 10th, 2010 No comments

Markets are happy about the European bailout of Greece’s bad debt, and they should be for two reasons. First, Greece will not be allowed to default on its debt, injecting some certainty into the market, and secondly, the Europeans have finally done something together politically.

However, in the long-term, they did the wrong something.

In the long-term, Europe has created a worse moral-hazard than the bank bailouts in the United States caused with its financial bailouts: a clear signal has been sent that politicians can bargain their way to political power by writing blank checks to public unions and other rent-seeking interests, and there will be no day of reckoning. Worse, the signal has been sent that, if you are a responsible, Prussian government that controls wage inflation, you will be forced to pay for the spend-thrift irresponsibility of your over-mortgaged southern neighbors. The lesson is clear: savers are suckers.

Europe should have looked at how the United States handles bad local governments…let them go bankrupt. By letting bad local governments go under, local governments in the United States can get out from under the bad decisions of previous governments and restart under firmer footing. Indeed, as Alabama has shown in recent years at the county-level, the threat of a bankruptcy by a local government is usually enough to bring creditors to debt restructuring, saving the county from needing to file.

By contrast, Greece’s government now lacks the power to force its creditors, particularly its government unions, to renegotiate its debts, since Germany and France stand ready with an open checkbook to bail them out.

The responsible course of action would be to let Greece default, or partially default, while protecting the somewhat more tenable positions of Portugal and Italy. Germany could have credibly said, “Greece lied; Portugal did not; we will protect honest governments.” Given the fungibility of the term, “honest government”, this would have been a position that would have made an example out of Greece while preventing a, “spread of the debt contagion”.

Europe has traded the long-term future of the Euro for short-term financial stability, and punted a much-greater day of reckoning some five to ten years down the road. Proponents will (mis)quote Keynes and say, “In the long-run, we are all dead.” I once heard Prof. Garrison quote another economist, “Keynes is dead, and we are stuck in his long-run.”

Categories: Economics Thoughts, Policy, Politics Tags:

If you Must do Universal Health Care, How to Do It

July 21st, 2009 No comments

I do not think Government should be running health-care, but they already are, so those carrots are cooked.  Given that the government is going to get more involved, and given that most Americans want everyone to have some level of coverage, I have a suggestion.

Let us assume the following policy goals:

  • Everyone has coverage
  • Lowering costs

Now, given those goals, let us design a system with the following additional goals in mind:

  • Preserve the information embedded in market prices, as much as possible
  • Have the fewest perverse incentives possible
  • Make all costs explicit instead of hidden
  • Make the system sustainable politically

In order to do this, I propose we create a health-care “baseline” for people that are uninsurable at their risk-level and income-level, and then have everyone else purchase health care.  This is what I propose:

  1. Pass a law requiring everyone have some form of health coverage that meets some minimal standard – I would favor a formula that takes a several baskets of common diseases and say that the total cost of treating each of these baskets cannot exceed some dollar amount ($15K with ongoing CPI adjusters), but what the standard is a “less important” issue that can be debated forever.
  2. Eliminate all of the government incentives (tax or otherwise) that encourages employers to provide health insurance for employees as a “benefit” – if employers still provide insurance for employees, than it is because of a market judgment, not a political one.  Regulation that needs to be eliminated includes:
    • Eliminate laws prohibiting employers from passing higher costs for health-related issues to employees – if you choose to smoke or be overweight, the employer should be able to charge you more (or pay you less) for your health insurance.
  3. Set up a government-run health insurance scheme as an insurer of last resort, that has a premium of 10% of a participant’s income, plus an extra 5% per dependent.
    • People that have private insurance don’t pay the premium.
    • This insurer has all of the things you expect from a government health insurance scheme: long lines, bureaucratic gate-keepers, group of gray-beards deciding what to cover, etc.
    • Subsidize the government-run health-care system explicitly from general revenues.
    • Allow the government to regulate the personal lives of people on the system as it wants to (make them pay extra for smoking, or coerce them to stop; forbid them from eating a fast food, stop them from using recreational drugs, etc.), but only allow these regulations on people in the federal system.
  4. Fold Medicaid into the new federal program, consolidating state and federal bureaucracy into the new system.
    • Relieve the states of that burden.
  5. Fold Medicare into the new federal program.
    • Eliminate the Medicare payroll tax.
    • Allow those that are 65 or older to still purchase private insurance if that is less expensive than the 10% tax.
    • Allow those that are 65 or older, with no dependents, to opt-out of insurance altogether (by signing some form at the court house), and let them spend their money (or pass it on) as they wish instead of spending it on health care. The kicker is, they make an explicit choice, and we don’t care if they die early because of no access to health care.
  6. Fold the VA hospital system into the new program, giving veterans without war injuries a defined monthly monetary health benefit (say $100 for retirees) that they can spend on private insurance, or deduct from their public plan premiums.
    • For veterans with war injuries, you can leave the VA hospitals open, give them some additional defined benefit, give them a reduced-cost or no-cost public plan, pay for private or army treatment, or have some other scheme to have them treated at public expense.
  7. Force the states to pay for any of their regulatory tomfoolery that affects the cost of the public program.
    • For example, if the State of California passes a regulation forbidding insurance companies from treating HIV as a pre-existing condition, raising the cost of private insurance, causing people to choose the public program over private insurance, the additional cost will be paid by the state to the Federal Government.
    • Alternatively, if California chooses instead to subsidize people with HIV that purchase private insurance, and that reduces the burden of the Federal program, then the Federal Government would make a transfer payment to the State of California.

The proposed system is not perfect, but it preserves most of the pricing signals for medicine.  However, it would destroy incentives to reduce costs for “catastrophic care”, since the patient never bears those costs directly (but at least the insurance companies have some incentives to lower costs).

Categories: Economics Thoughts, Policy Tags: