Real economics of quality health care

Paul McBride, VP at Wellpoint (and my brother!), speaks here about health care at the Milken Instistute Global Conference (he's third from the left on the panel).  He says the core problem is that as a society we've been too concerned about the incentives of producers while we largely absolve consumers of their responsibility.  I couldn't agree more.  

I would also add that medicine is probably doomed to inefficiency in this country and around the world.  The main problem is that cost-benefit analysis has very real limits when applied to life and death issues.  What's the price of life?  This is a moral question more than an economic question.  Hence, we have the hippocratic oath, the inability to let go of granny, the need to show that we care and that our care does not depend on price, and a good deal of religious belief in the power of medicine.  Yes, we can make progress on certain margins, such as breaking up the AMA's monopoly of labor supply, but overall it's a tough row to hoe.  Good luck, brother.

Addendum: The LA Times wrote a piece about it, particularly discussing how health care tourism is going mainstream.  A bunch of commenters think this is somehow unjust.  These are my comments:

It's called competition. It highlights how non-competitive the medical industry in the US has become. Blame the AMA, and their government enablers, for limiting the supply of doctors. Blame the FDA for limiting the supply of drugs. Don't blame capitalism, or competition.

UK once again the poor man of Europe?

It is looking that way:

Britain's budget deficit will soar to a record 175 billion pounds as the economy shrinks at its fastest pace since World War Two this year, British finance minister Alistair Darling said on Wednesday.

To help bridge the yawning gap, Darling will slap a new 50 percent tax rate on the highest earners but the government will still have to issue a record 220 billion pounds of government bonds, way above even the highest forecasts.

But Spain is also a strong contender:

Nowhere is this cycle more evident than in Spain. Last month, it became the first of the 16 nations that use the euro to record a negative inflation rate. The drop, though just 0.1 percent, had not happened since the government began tracking inflation in 1961, and Spanish officials have said prices could keep dropping through the summer.

Some of the decline came as volatile food prices sank; the cost of fish fell 6.2 percent, and sugar was down 5.7 percent. But even prices in normally stable sectors like drugs and medical treatments fell 0.7 percent in March, and there were slight declines in footwear, clothing and prices for household electronics.

...

While unemployment traditionally is higher in Spain than in much of Europe, the sharp increase has many here nervous. The jobless rate for those under 25 is at a Depression-like level of 31.8 percent, the highest among the 27 nations of the European Union.

I can remember someone telling me about 10 years ago that real estate would be cheap in Europe in 15 years (5 years from now).  I think he relied on demographics for that prediction.

Addendum: IMF predictions.

Vernon Smith explains Austrian Business Cycle Theory, without using the word Austrian

Don't know how I missed his article in the WSJ two weeks ago, but as always it's right on the money, so to speak:

Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!

By the time the Federal Reserve began to slowly raise the fed-funds rate in May 2004, the Case-Shiller 20-city composite index had increased 15.4% during the previous 12 months. Yet the housing portion of the CPI for those same 12 months rose only 2.4%.

How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

The graphs comparing the last three real estate bubbles and the fed funds rate are compelling evidence that the Fed cannot escape blame.  

While I've always been a little skeptical of Austrian Business Cycle Theory, i.e. bubbles are created by the Fed's easy money policies, I've never been able to make much sense of the critiques.  Tullock, Cowen, and Krugman start and end with, what to me are absurd, neo-classical rationalist assumptions, namely that a) investors but not consumers are effected by interest rates, b) these two types are easily distinguished and do not effect each other, and c) investors are but a small minority of the economy.  They believe too much in the models.  Here's Tullock:

The end result of all of this is that we would anticipate that in an Austrian-style depression, there would be a good deal of unemployment in the capital goods industries, but this is, after all, a small part of the total industrial picture. Of course, such industries would not be able to buy as much in the way of consumer goods as they would otherwise, and this would add to the fall in prices which would have to be absorbed by other industries. Indeed, it would increase the bankruptcy rate. Because of the size of the capital goods industries compared to the rest of the economy, however, the forcing down of prices in other industries made necessary by this unemployment would once again cause bankruptcies but not unemployment. 

You're telling me the capital goods industries do not to some significant degree include or effect home owners or stock owners, or that either group constitutes a minority in the US?

Here is additional support for the Austrians. 

FDIC or Louis Sullivan

This is the tradeoff, according to Scott Sumner:

Just imagine how fortunate the residents of Owatonna, Minnesota are, as they get to walk by this pre-FDIC bank building everyday (also see here.)  I’m not saying that modestly reducing the FDIC coverage will revive the architectural fashions of the early 1900s, but if it produces buildings even 1/10th as beautiful as Sullivan’s masterpiece, then it will have been worthwhile.

Why be modest?

Obama takes on immigration

Opponents of legalization legislation were incredulous at the idea that Mr. Obama would take on immigration when economic pain for Americans is so widespread.

“It just doesn’t seem rational that any political leader would say, let’s give millions of foreign workers permanent access to U.S. jobs when we have millions of Americans looking for jobs,” said Roy Beck, executive director of NumbersUSA, a group that favors reduced immigration. Mr. Beck predicted that Mr. Obama would face “an explosion” if he proceeded this year.

“It’s going to be, ‘You’re letting them keep that job, when I could have that job,’ ” he said.

This is the problem with focusing on full employment exclusively.  We should also be focusing on how we are going to fill all those empty suburban houses.  And on whether or not you like tacos and cheap labor.

Read the rest here.

Move the voting age to 30?

Or maybe we just need to better teach better economics:

Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided. Thirty-somethings are a bit more supportive of the free-enterprise approach with 49% for capitalism and 26% for socialism. Adults over 40 strongly favor capitalism, and just 13% of those older Americans believe socialism is better.

Read  the rest here.

The revolution is here

Class War, an anarchist newspaper, has produced a special edition to promote the protest with an image of former Royal Bank of Scotland Group Plc CEO Fred Goodwin, whose house was vandalized this week, on a guillotine under the headline “Ready to Riot.” Another shows people dancing around a fire with the slogan “How to keep warm in the credit crunch -- Burn a Banker!” Public anger erupted at Goodwin’s 703,000 pounds annual pension after RBS was bailed out by the government.

The English Revolution culminated with the beheading of Charles I in 1649, ending the so-called divine right of kings in England. Today’s protesters say they draw inspiration from 17th century radicalism.

Four marches will converge on the Bank of England at midday on April 1 for a protest the organizers call “Financial Fools Day.” At the same time, there are plans for a blockade of the European Climate Exchange, in Bishopsgate, to protest against the market in carbon emissions.

It is appropriate that it begin at the birthplace of central banking: 

The Bank of England, founded in 1694, has been the target of demonstrators before, according to the Bank’s Web site. In 1780 the bank, known as the Old Lady of Threadneedle Street, was provided with a military guard after it was threatened by a mob during anti-government riots. This was only discontinued in 1973.

Read the rest here.

Gee, I hope Tim Geithner is a nice guy...

Because he just threw out the rule of law:

It would give the Treasury the power to restructure troubled companies to avoid economy-wide risks that would fall from either a bankruptcy or taxpayer-funded bailout. The government would either seize the company in a conservatorship, which would keep the company going while it is restructured, or in a receivership, which would break up the company and sell its assets.

Unlike in a bankruptcy that gives precedence to creditors, the Treasury plan would allow the government to unwind the company in the best interests of the economy as a whole.

If the government took control of a financial company, existing shareholders, management and creditors could lose everything. Existing contracts could be renegotiated or repudiated.

"Had the government possessed the authorities contained in the proposed legislation, it could have resolved AIG in an orderly manner that shared losses among equity and debt holders in a way that maintained confidence in the institution's ability to fulfill its obligations to insurance policyholders and other systemically important customers [my emphasis]," the Treasury said.

Who needs the courts when Tim Geithner and his pals can figure it out. Right. I'm afraid "systemically important customers" will mean those who lobby and bribe the most, which actually isn't too far from the way it was.

Read the rest here.

This is why I love Hungarians

Even though they are socialists, they are not assholes:

Hungarian Prime Minister Ferenc Gyurcsany says he will stand down, as his government's popularity plummets amid the global financial crisis.

The Socialist leader, in power since 2004, told his party congress that he considered himself a hindrance to further economic and social reforms.

He is to officially notify parliament of his decision on Monday.

Badly hit by the global credit crisis, Hungary received a $25.1bn (£17bn) IMF-led loan last October.

"I hear that I am the obstacle to the co-operation required for changes, for a stable governing majority and the responsible behaviour of the opposition," he was quoted as saying on Saturday by Reuters news agency.

"I hope it is this way, that it is only me that is the obstacle, because if so, then I am eliminating this obstacle now.

"I propose that we form a new government under a new prime minister."

Something to remember.

AIG, when does it stop?

From Reuters:

The payments to AIG counterparties include the provision of collateral to back up credit default swaps, a form of financial insurance that AIG's London office was writing; the purchase of the collateralized default obligations, a type of complex debt security that underlay that insurance; and payments to counterparties of a securities lending program.

Through three separate types of transactions, Goldman received an aggregate $12.9 billion. Among European banks, SocGen was the biggest recipient at $11.9 billion, Deutsche got $11.8 billion and Barclays was paid $8.5 billion.

The AIG disclosures are still incomplete in that they do not include payments to the banks since December 31.

The list of counterparties was made public by AIG amid growing pressure on the insurer to come clean about the true beneficiaries of the bailout ahead of a congressional hearing on Wednesday at which AIG chief executive Edward Liddy is slated to testify.

Democratic Congressman Paul Kanjorski, whose committee will quiz Liddy, said the counterparties and bonuses would both be topics for investigation at the hearing.

Summers -- speaking before the payments to banks were made public -- called the AIG bonuses "outrageous" but said contracts must be honored, even though Treasury Secretary Timothy Geithner had "negotiated very forcefully" with AIG and done all that was "legally permissible" to limit the payments.

"We're not a country where contacts just get abrogated willy nilly," Summers, a former treasury secretary, said on CBS's "Face the Nation" program. "What the lesson is, is this: We don't really have a satisfactory regulatory regime in place."

Yes we do, it's called bankruptcy.  Yes, it would be calamitous.  How else do you propose ending this gross corporate welfare?

Addendum: James Hamilton agrees.

Crisis brings common sense to California

Could marijuana be the answer to the economic misery facing California? Democratic State Assembly member Tom Ammiano thinks so. Ammiano introduced legislation last month that would legalize pot and allow the state to regulate and tax its sale — a move that could mean billions for the cash-strapped state. Pot is, after all, California's biggest cash crop, responsible for $14 billion in annual sales, dwarfing the state's second largest agricultural commodity — milk and cream — which brings in $7.3 billion annually, according to the most recent USDA statistics. The state's tax collectors estimate the bill would bring in about $1.3 billion in much-needed revenue a year, offsetting some of the billions in service cuts and spending reductions outlined in the recently approved state budget.

Read the rest in Time.

Challenge of the day

Name one aspect or spending item of the federal government that doesn't infuriate a lot of people.  I can only think of one: the National Science Foundation.  And that's probably because it's so small that few people even know about it.

Compare that to what Chick-fil-A does for people (OK, they are annoying, but not infuriating).

I suggest that the "stimulus" should be directed towards the NSF and Chick-fil-A.

Party's over

Chinese Premier Wen Jiabao said Friday that he is "worried" about the country's vast $1 trillion holdings in U.S. Treasuries and that China will pursue a policy of diversification when comes to its future foreign exchange holdings.

From the WaPo.  And get this, the party started suckin' last summer.  I wonder when they'll kick everyone out:

Starting last summer, China's big state-owned banks -- including Bank of China and Bank of Communications -- began dramatically reducing their holdings in Fannie Mae and Freddie Mac debt. In September, as what began as a U.S. problem began to spread around the globe, Ha Jiming, chief economist for the China International Capital Corp., warned in a report that Chinese government officials have realized that it's a "bad idea to put all their eggs in one basket." At that time, China had held a fifth of its currency reserves in Fannie and Freddie debt.

Time for a world currency?

KAZAKH President Nursultan Nazarbayev has won backing for his plan for a single world currency from an intellectual architect of the euro currency, Nobel-prize winner Professor Robert Mundell.

That's from The Australian.  As Mundell has argued, little countries stand to benefit most from a world currency.  Consider this:

In a world of big international banks and multinational corporations, there is not much scope in practice for the monetary independence of any except a few large countries.

Mundell's argument hinges on economies of scale in convenience, information, policy, and insulation from international monetary shocks.  Ultimately, he seems most concerned about inflation, and he believes inflation can be minimized by minimizing the number of currency issuers.  I don't believe that.  As he says, from 1949 to 1973 there was a de facto world currency, the US dollar, since nearly everyone was pegged to it.  That ended when we went off the gold standard, and then engaged in double digit inflation throughout the 1970s.  So what is to prevent a world central bank from doing the same?  Say the UN institutes a world central bank.  Can we really trust the UN to produce a steady money supply, transparently and without corruption, avoiding the temptation to abscond with the dough, aka seignorage?  How transparent are central banks now? (try this link)

I believe money is like all goods in that quality matters, and thus reputation for quality matters.  Hence, we need competition, and lots of it.  Free banks did that for us, and they can do it again.

What took Iceland down?

I blame mainly incompetent politicians and central bankers.  Read the whole article in Vanity Fair:

There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart central bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.

Runner up goes to certain beliefs in "hidden people":

Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called “hidden people”—or, to put it more plainly, elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people.”

(Hat tip to Tyler)