Tag Archives: government

An Object Lesson

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…in excessive national debt and bailouts.  Greece is an open laboratory that is demonstrating in real time the fallacy of borrowing ad lib. and then going the bailout route, coupled with pure austerity measures that ignore the mechanisms of growth.

After a number of rounds of austerity measures involving public spending cuts and tax increases, rewarded by the EU’s “lending” of billions of euros to help Greece pay off its debt by borrowing more, we have the following outcomes.

The Bank of Greece has revised downward its economic forecast for the Greeks: contraction of 5.0% for 2012, compared with a previous estimate of 4.5%, and compared with a 6.9% decline last year.  This makes the fifth straight year of recession for the country.  The cause of this steady contraction?  All that borrowing to cure an excessive debt problem (feed the addict methadone to “help” him with his heroin addiction.  As with the new lender, the methadone does nothing for the addiction, it’s just a supposedly easier means of maintaining it).  On top of the transfer of addiction from one pusher to another, retirees, public-sector workers, and most households have suffered deep cuts in their disposable income as the government cut spending and raised taxes.  Moreover, the government continued to fail to privatize nationalized enterprises or to sell off nationalized assets—€50 billion ($66 billion) of real estate and other assets such as the government’s stake in Thessaloniki’s port and water utility, the Piraeus port and the Hellenic Postbank, for instance.

The parallels of the United States’ economic policies these last three and more years, together with our own continued economic straits, is striking.

Faced with a similar economic threat some short years ago, Estonia took a different path: government thinned its bureaucracy and reduced healthcare and social services.  Businesses reduced wages by up to 40 percent, with the promise these would be increased as soon as the economy improved.  Most importantly, the government did not pump borrowed funds into the economic cycle.  These are not austerity measures—they’re a return of individual responsibility to the individual.  And the individuals and businesses cut deals to help each other survive the dislocation.  Today, Estonia has little public debt, a budget surplus for the first half of 2011, and an economy growing at an annualized 8% over that same half.

The once sick man of Europe, Germany, did much the same thing in much the same straits.  The Germans, in answer to high debt, high public spending, high taxes, and slow growth, cut welfare benefits and gave employers more flexibility in reaching agreement with their employees on hours and pay.  They also cut federal corporate income taxes to 15% from 1998’s 45%.  With state and local taxes added to the mix, and the effective corporate rate today is close to 30%, down from 50%+ in the 1990s. Today, Germany has an unemployment rate currently at 5.7%, and who’s propping up the EU in today’s debt crisis on the continent?

Government must achieve two things, and then a third, for a sound, free economy within which truly free men have an opportunity to show the best that there is in them.  Government must obtain a net positive income—that is, it must maintain its spending below its revenue intake (especially where the national debt has gotten excessive), and it must do so without raising tax rates.  The second thing it must do is commit that budget surplus to paying down the national debt until that value is at a properly low level.

After that, the surplus must be reduced by reducing the taxes yet further—after all, it isn’t the government’s money.  Money must be left in the hands of those who know best what to do with it—those who’ve earned it.

The Law

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…doesn’t apply to me; I’m special.

Eric Holder’s Justice Department is getting something right, and they’re coming in for all kinds of opprobrium from the Left for their efforts.  It seems that the government’s lawyers are haling a band of publishers into court for colluding on the prices for which they would permit eBook versions of their publications to be sold by resellers.  With great crocodile tears, for instance, Senator Charles Schumer (D, NY) bleats

I feel absolutely befuddled by the lawsuit.  For the Antitrust Division to step in as the big protector of Amazon doesn’t seem to make any sense from an antitrust point of view.  Rarely have I seen a suit that so ill serves the interests of the consumer.

Others insist that that, even if the publishers are illegally colluding, they’re acting in the best interests of the industry and, by extension, of readers.  They also insist that book publishing is special: books are the heart and soul of culture and civilization, and if publishers can’t make a decent profit, their ability to produce books is threatened (ignoring whose definition of “decent profit” should be operable here, or the legitimacy of the “heart and soul” bit in an age of virtualization).  As a result, these critics further insist that DoJ should allow the publishers to continue breaking the law.

Leaving aside the cynicism of the meme that holds that illegal behavior is acceptable so long as it serves favored interests, such objections stem from a distortion of what the anti-trust law actually is.  American antitrust law is concerned with protecting competition, not competitors.

Law professor Herbert Hovenkamp, of the University of Iowa, notes that

The goal of antitrust policy is to protect consumer prices….  It’s not to protect inefficient firms from having to exit the market.

Professor Hovenkamp points out further that

Price fixing [the particular beef of the DoJ’s action] is kind of the first-degree murder of antitrust violations.  [DoJ doesn’t] have discretion to just walk away from what appears to be a strong set of facts that, if true, are one of the most central of antitrust violations.

Senator Schumer, et al., know better.  This is a demonstration of their morality.

More Big Government

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Now we have a big government feedback loop between the EU and the EU wanna-bes.  The Wall Street Journal reported over the weekend that our Treasury Secretary is urging the EU and its European Central Bank to “take stronger action” to get control over Europe’s potentially deteriorating debt crisis.

The success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets[.]

Not, apply themselves to get out of the way of the markets and give them room to right themselves.  No, the big government policies that created the economic disasters of the PIIGS and of the EU generally need to be applied even more so to stem the tide.

Hmm….

Indeed, as the WSJ went on,

Washington has long pressed Europe to bolster its emergency bailout funds and use them to backstop government debt. It has also urged the ECB to use all the weapons in its arsenal to calm financial markets.

How’s that working out for us, exactly?

The IMF is in on this tragicomedy, also.  Its steering committee Issued a Communiqué with this sage advice for the euro zone:

[C]ontinued progress on ensuring debt sustainability, securing financial stability, and undertaking bold structural reforms will be crucial to boosting confidence and productivity, facilitating rebalancing within the monetary union, and promoting strong and balanced growth.

Most of this is pap, intended solely to give the impression of advisement.  However, with apologies to Inigo Montoya, you keep using that phrase “undertaking bold structural reforms.”  I do not think it means what you think it means.

Another Object Lesson

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…if we’re only willing to listen to it.  The Wall Street Journal‘s sub-headline says it all:

Borrowing Fueled Chongqing’s Infrastructure Projects, Highlighting National Problem of Reliance on Government Spending

“…10 major investment vehicles the city used to fuel its growth accumulated more than 346 billion yuan ($54 billion) in liabilities,” the WSJ reports.  Moreover, this is just the publicly acknowledged debts of the city.  The various national government-owned enterprises in Chongqing likely have their own debts, and these are not obligated to discuss them.  Northwestern University Associate Professor of Political Science and an expert on local government debt in the People’s Republic of China, Victor Shih, adds

I don’t think it would be a stretch to say that Chongqing local government, state-owned enterprises and state-owned developers collectively owed 1 trillion yuan [$156 billion] at the end of 2011[.]

What has Chongqing to show for this?  High risk, for one: a significant per centage of that debt is secured by land the city owns or controls.  To pick on Chongqing Yufu Assets Management Co., a city-owned investment vehicle established in 2004 as an example: the city loaded Yufu with land that then was used as collateral.  Now its 63% debt-to-asset ratio makes it one of the most heavily indebted financing vehicles sponsored by the Chongqing government.  Its 2010 profit of 1 billion yuan sounds good, however, asset sales now are likely to be necessary in order to service that debt—but Yufu’s assets are that land that’s bound up as collateral.  Moreover, that 2010 profit is down, sharply, from the prior year’s profit of 1.7 billion yuan, due to just as sharply falling revenue from its land holdings.

What happened the last time vast debt was secured by a land or housing market in a country near you and I?  At least in the US, our government can just print up all the money it needs….

Some Thoughts on “Health” Insurance

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Dr Alan Blinder demonstrates an amazing lack of understanding of insurance and of welfare for a Princeton professor and erstwhile vice-chairman of the Fed.  “Health-care reform,” he writes, “the impossible dream that seemed to become a reality in 2010, is now in mortal danger.”

As he acknowledges, this is no small matter, impacting as it impacts one-sixth of our nation’s economy.  He also correctly recalls a bit of history: “our country was founded on the idea that the rights to life, liberty and the pursuit of happiness are inalienable.”

Then he demonstrates his lack of understanding of any of this by adding this false premise to his argument:

Access to affordable health care is surely essential to two of these three rights, maybe to all three.

Then he conflates the Patient Protection and Affordable Care Act—a mandated health “insurance” program that’s much broader in its sweep than just the Individual Mandate—with affordable health care itself.

As John Adams so rightly put it, Happiness is this:

All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.

There’s nothing in there that puts government at the forefront of doing for us—we’re responsible for our own outcomes.  Of course there’s also nothing in there that prevents government from helping, either, and there is a proper role for government in this arena.

Let’s look at Blinder’s view of that role.

We are…the only rich country that fails to insure all its citizens.  The Patient Protection and Affordable Care Act of 2010 seeks to end that.

Aside from the fact that it isn’t government’s role to inure us from the exigencies of life, this position confuses insurance with welfare.  Insurance is a voluntary contract between two parties: one with a risk he wishes to mitigate and the other willing to accept some or all of that risk for a fee.  But the exchange doesn’t work unless the fee charged actually is commensurate with the risk—that is, the insurer must be able at least to break even over time and across many such contracts for the exchanges to be feasible.  To make a business of this, the insurer must be able to make an actual profit.  This applies even to governments as “insurer.”  Adam Smith understood this.

…the tax code incents employer…. For another, we have somehow decided that the state should provide anyone age 65 or older with health insurance, while everyone younger should fend for themselves. I’d hate to have to explain either of those choices to the proverbial man from Mars.

So the right answer to this is to increase taxes and other costs in order to force us all into a program that not all of us want.  Interesting, that.  Another answer would be simply to flatten the tax code and to remove the incentives, health-related subsidies, deductions, et al., from the code for both employer and employee.  Of course, to best work, this also would require government to get out of  the way of the health insurance and health care providing industries (mind, these are separate industries), and place them into actually competitive environments, for instance, allowing health insurance policies to be sold across state boundaries.  There are other pro-competitive moves needed, also, but they’re outside the scope of  this post.

The “everyone younger fending for themselves” bit is a distortion of the actual situation.  I’ll come back to that.  We may have thought it a good idea for government to provide seniors with health insurance 50 years ago, when there were 5, 6, and 7 workers for each senior/retiree, but as we’re learning today, we cannot afford it any longer (if we ever should have tried to) either economically or demographically.  That’s because, like Social Security, the senior health insurance programs—Medicare and Medicaid—are not programs where those seniors’ Federal Medicare (and Medicaid) taxes were sequestered against their eventual attainment of senior-ness for their own use, but were paid out to current seniors in a pay-as-you-go manner.

Which brings me back to “everyone younger.”  Today’s far fewer younger (there are only a bit over 3 workers per retiree today) are not allowed to fend for themselves—they’d be better off if they were.  Instead, their take-home pay is reduced by those medical payroll taxes, which are immediately transferred to others; these younger are not allowed to put that money into their own retirement health program.  Indeed, the government limits who is allowed to have their own Health Savings Accounts to those wealthy enough to afford Very High Deductibles in their insurance policies, and this same government caps how much “everyone younger” is allowed to put into one of those accounts in any given year.  Blinder’s precious health care reform does nothing to redress this.

Finally, metaphor aside, I care not a farthing for what the man from Mars might wonder—my business is mine, not his.  Nor is it the business of any earthly government.

Why does the law require people to purchase health insurance?

Like most forms of insurance, health insurance is plagued by potential adverse selection.  Pick any price, and riskier customers—the people more likely to file claims—will find the insurance policy more attractive than less-risky customers.  So in health insurance, in particular, insurance companies expend huge resources trying to screen the bad risks out and the good risks in.  One obvious way is to exclude people with pre-existing conditions, but there are others.  All this effort adds to national health expenditures, improves insurers’ profits, and hurts the bad risks (e.g., sick people).

The essential bargain made in 2010 starts by using the individual mandate to create a huge pool consisting of (almost) all Americans under age 65—just as Medicare now does for the 65-and-over population.  With that pool created, the law can then require private insurers to cover (almost) everyone, including those with pre-existing conditions.  In return, insurers get a lot more customers and a lot less adverse selection. They also save a ton of money on screening.

Here is Blinder’s misunderstanding of insurance made manifest.  I’ll leave aside the sophistry in his claim of a bargain in 2010, unique in its utter rejection by the American people.  It’s certainly true that customers with risks will seek to lay them off, for a fee, onto an entity willing to accept that fee for assuming that risk.  But as I said above, for the exchange to work, the fee must be commensurate with the risk.  Moreover, both the customers and the insurers must be able to enter freely into their own agreements, without government mandates of premiums or coverages.  Both parties must be free to exercise their own pursuits.  This necessarily pushes the risks into homogeneous groups—like risks are accepted for like fees.  This is not “adverse selection,” but economically sound segregation of the risks and the fees that are economically sound for transferring those risks.

The effort about which Binder worries is driven by the need to find ways to fund risk assumptions when those risks are mixed, which means the insurers must find ways to get low risk customers to pay higher fees than warranted in order to pay for the losses to higher risks that are getting too-small fees.  A properly free market will inevitably result in higher fees for higher risks, but then coverage will exist for those higher risks.  Moreover, were consumers able to buy their own health insurance policies in the interstate commerce of a free market, so that they could take their policies with them from job to job, the incidence of Binder’s pre-existing conditions would be greatly mitigated.  And the ability of an insurer to claim a fee commensurate with the realized risk of a real pre-existing condition would produce policies for these conditions, rather than a blanket effort not to cover at all.

But this demands that customers be allowed to exercise their own choices under their inalienable rights, not those choices convenient to government.  See below.

Thus, the answer to Blinder’s question of “Why does the law require…?” is, “Because the law requires it.  There is no economic reason.”

“Rights are nice, but…,” he wrote early on in his op-ed.  This is the key; this is the truth behind Blinder’s argument.  Individual rights are nice to have, but when they become inconvenient to government, he says, it’s entirely appropriate for government to limit—even abrogate—them.  It’s entirely permissible, too, Blinder holds, because rights flow from government; they are not inherent in our being.  Our rights to life, liberty and the pursuit of happiness are conveniences of government, inalienable only for so long as government permits it.  This is how government is able to arrogate to itself what is inextricably bound up in those rights—our obligations to be the primary source of our own welfare so as not to present ourselves as burdens on others’ rights to their lives, liberties, and pursuit of their happinesses.

The result is that, under the present “reform,” under PPACA, people with low risk—those young and healthy, who also have other uses for their money and so do not want health coverage—are forced, in a loss of their individual freedom, to subsidize the insurance of those with high risk.  PPACA in essence, by forcing an inherently uneconomic mixing of risk pools, converts what should be a free market risk transfer industry into a privately funded, Federally mandated welfare program.  This is another aspect of the erosion of our individual liberties.

No.  Our rights are not “nice;” that’s a non sequitur.  Our rights simply are.  They are as bound up in our existence as are our very lives.

There is a legitimate argument to be made for improving our nation’s health care industry as it stood ante 2010.  It is cynical, if not outright dishonest, to insist that PPACA is the only way to achieve this.  This is particularly so with the empirically demonstrated destructiveness of the program these last couple of years as it starts to come on line—even before its taxes start to come on line.

In the meantime, the proper role for government is to create an environment within which we are free to pursue our own ends, our own happiness.  This requires a free market, not a centrally managed one.