Trade Offs

8 Economics Lessons #8

Economics are not inherently liberal or conservative. Sure, there are differences of opinion among economists on the left and those on the right, but they still have far more in common. I think the average liberal might be surprised to find how often they agree with Milton Friedman. I'm certain that your average conservative would be shocked to find they agree with Paul Krugman more often than not. The question of the economics of the left and of the right is rarely about the essential economic truths. Instead the question is about what each side is willing to give up to support their policies. The left will give up some economic growth while the right will give up the health and happiness of many of the people.

Conservatives tend to believe that the market knows best. Always. End of the story. Period. If the market is down, the market should be down. As for those effected ... the market has decided that you will be down. You know, sorry. What do you want us to do about it? Eventually, the market will rebound and sweep everyone up in the success. For a conservative, the free market is about the freedom of economic growth and the effects of bear markets are simply to be endured. They are only willing to make small trade offs.

Consider this point though: Taxation retards growth. No question. There's a theoretical point where taxes would be so high that it would be harmful to the economy. Still, isn't it worth it to retard growth a bit and have roads that are safe? Isn't it a good thing that by taxing the rich at higher rates it helps us to pay for the world's best military? Isn't it great that for a few percentage points of every paycheck that we can lift seniors out of poverty?

Regulations may slow down the economy but they help keep our kids safe and healthy. They can prevent giant banking crises. They ensure that many of the professionals you work with are qualified to do their job. They help prevent government employees from abusing the system. They help prevent businesses from scamming people. Isn't that worth a slightly lower growth rate?

In Charles Wheelan's Naked Economics, he keeps pointing out that reasonable people disagree. Although his viewpoints clearly tend towards the right, he's desperate to point out both sides of the economic questions and not disparage either side. It had made for a well-balanced book that teaches the subject well without resorting to the demagoguery that is so common to these discussions. Still, I'm a partisan, writing for a partisan blog. I feel no need to be "fair". I have opinions and I believe in them. To say that mass suffering is okay so that a few make even more money when times are good is inhuman to me, and I don't respect the opinion.

The beliefs at both ends of the ideological spectrum can be stated rather clearly. Conservatives believe in making the market work. A liberal makes the market work for people. Which sounds better to you?

(Less a lesson that an opinion piece, but it's my blog so I'll do as I wish! :) )

Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities, Regulation, Deflation)

Deflation

8 Economics Lessons #7

Inflation is bad; deflation, or steadily falling prices is much worse.

- Charles Wheelan in Naked Economics

Deflation begets a dangerous cycle. Falling prices cause consumers to postpone purchases, waiting for big ticket items to get even cheaper. Of course, asset prices fall as well which leaves consumers feeling poorer and makes them less willing to spend their money. (The book's example is imagine if the value of your home is falling, but your mortgage payment stays the same. Do you think this would affect your purchasing decisions?) This will lead to a deflationary spiral which will cause severe damage to the economy.

The biggest problem with deflation is that monetary policy does not appear to help. Starting in the early 1990s, Japan began a long battle with deflation. The central bank in Japan would eventually cut interest rates to zero, and yet the problem persisted. (This is the dreaded liquidity trap.) Still, the rental rates (the rates on real consumer lending) didn't fall as much. Why? Well, when prices are falling, the money you pay back in the future will have more purchasing power than the amount you pay back initially. In effect, as prices fall, the cost of borrowing increases. 

How do you fix the problem? Most economists believe that Japan needs a good, steady dose of inflation. In other words, money should be put into the economy as fast as possible. (If you choose to read that as government spending, I won't argue with you.) We had our own battle with deflation from 1929 to 1933 and an inactive Fed allowed the money supply to decrease. We should have been spending more from the start. Of course, starting with the New Deal, we would spend more and things would start to get better.

Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities, Regulation)

Regulation

8 Economics Lessons #6

Governments hand down regulations and we follow them. They set regulations for the issuing of driver licenses. They set regulations limiting the amount of pollution a factory can spew out into the air. They set regulations on how much cash a bank must keep on hand in order to remain solvent. They set regulations that specify the requirements for a business license for an entrepreneur. It is undeniably true that every regulation has a cost

As Charles Wheelan points out in Naked Economics, government regulation interferes with the operation of the free market. The market will normally allocate resources where they stand to return the most in value. Regulations act as tolls on this activity. One example from the book is on the requirements to pass the bar and become a lawyer. If the requirements were lowered, lawyers would become cheaper to use which would allow more people to make use of lawyers when necessary. Regulations raise the cost of seeing a lawyer. So, are regulations, in and of themselves more helpful or harmful to an economy? There's no easy answer to this dilema.

Now, there is no question that too much regulation can stifle innovation and raise the cost of doing business. Many third world companies are over-regulated to the point that the average individual does not have the resources to so much as start their own business. (It costs 260 times the per-capita GDP of Bolivia for a Bolivian to procure the necessary approvals to start a business.)

Still, like everything in economics, regulations require trade offs. Sometimes it is in our collective best interest to stifle the effects of the market a bit. Regulations help keep the air we breathe clean. They help keep the drugs we're prescribed safe. After the Glass-Stegall Act, they kept banks from taking too many risks and all but eliminating bank runs.

It is the Glass-Stegall Act that shows us the ultimate truth of regulation. These regulations were gutted by Congress in 1999, led by Republican Phil Gramm, and we are now suffering the consequences of that decision. Regulations are often onerous, but they are, so often, necessary. Like everything in economics, the use of regulations is a balancing act. The government has to find the right level to protect the people from the worst abuses of business, while not stifling growth to the point that the people are harmed. Republican claims that regulations are inherently bad are just ridiculous.

Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities)

Externalities

8 Economics Lessons #5

All transactions that take place in a free market are, in effect, voluntary by the parties involved in the transaction. People choose to enter a transaction and they accept the consequences of that transaction. If I go into a car dealership and purchase an automobile, it is my choice to purchase a car and it is the choice of the dealership to sell me that car. When I go to the grocery store, I choose to buy groceries and the grocery store chooses to sell them to me. This is free market economics at its most basic.

Of course, there are often effects on people who are not directly involved in a transaction. The people who are involved in the transaction consider the costs to themselves ... they don't tend to think of any external costs involved. If you purchase a huge, gas guzzling, air polluting SUV, there is an environmental cost that neither you nor the dealership have to pay. These costs, and the failure to consider them, is a failure of the free market. These costs are called externalities.

In Naked Economics, Charles Wheelan defines an externality as "the gap between the private cost and the social cost of some behavior". These effects can be positive, but there are many negative effects from externalities. These effects can threaten our safety. They can threaten our security. They can threaten the very survival of our planet. How are externalities dealt with then?

Well, the existence of negative externalities is one of the best arguments for government involvement. People choose to buy cell phones, but people who use them when driving pose a danger to other drivers. What is the only entity that can work to ensure safety when using cell phones? People choose to smoke cigarettes, but second smoke can be deadly. What is the only entity that can work to minimize an individuals exposure to second hand smoke? Many of us choose to purchase automobiles that use gas and put pollution into the air. What is the only entity that can work to force car manufacturers to create more environmentally friendly cars?

The answer is, of course, the government. The government can tax behavior that it would like to see limited. The government can issue regulations to force better behavior. The government can outlaw that which it deems dangerous. These are the necessary functions of government, and contrary to so many Republican talking points, they are in no way inconsistent with the concept of freedom in a capitalist economy.

Supply-Side Economics

8 Economics Lessons #4

It is true that taxation will discourage work and will damper investment. It is true that cutting taxes will encourage productivity within the economy. A supply-sider claims that you can actually increase tax revenue by decreasing taxes. The theory is that we will all work harder and earn so much more that we actually be paying more in dollars than we would have at the higher rate. 

In Naked Economics, Charles Wheelan acknowledges that at certain tax levels, supply-side theory will be true. (He believes that if the income tax rate is 95% and lowered to 50% it would almost certainly spur enough extra work to increase tax revenues.) So, does this mean that supply-side theory is true at all tax levels?

Well, no. We know this thanks to the empirical evidence provided by the Reagan tax cuts. Government revenue did not increase and the loss in revenue resulted in the largest deficits the country had ever seen to that point. With no real evidence to back up the theory, why do conservatives remain heavily invested in it?

I can't answer that. Either way, an economist named Arthur Laffer drew what was known as Laffer's Curve on the back of Dick Cheney's napkin in 1974. This was a theoretical graphical depiction of tax revenues increasing as tax rates decreased. It was used as the basis for Reaganomics and all that passes for conservative economic theory at this point. We have paid the price both in terms of our deficit and the poisoning of the collective consciousness.

Fiscal Policy

8 Basic Lessons in Economics #3

So, I'm a computer consultant who finds himself between clients. At the moment, I'm still receiving paychecks from my boss, but that is not something I expect to continue for long. So, because of the uncertainty in my career right now, my wife and I have cut back on our spending. Way back. We are actively worsening the recession.

There's no denying that cutting back on spending during perilous economic times is a natural reaction. For many recessions, the loss in confidence can do more harm to the economy than whatever event caused the downturn in the first place. In Naked Economics, Wheelan puts it this way ...

Indeed, if we all believe the economy will get worse, then it will get worse ... Franklin Delano Roosevelt's admonition that we have "nothing to fear but fear itself" was both excellent leadership and good economics.

So, if consumer spending is down, consumer confidence is down. If consumer confidence is down, the recession will deepen. How can we avoid this trap?

There are two tools that the government can use to smooth the business cycle and bring a recession to a close: monetary policy and fiscal policy. The current interest rate from the Fed is already near zero (known as a liquidity trap) which reduces the ability of the Fed to fix the economy using monetary policy. While most economists agree that monetary policy is the best tool to use, it is simply not available for this crisis. This leaves fiscal policy.

Fiscal policy, the key of Keynesian economic theory, is the ability for government to bring a recession to a close through the use of government spending or tax cuts or perhaps a combination of the two. For fiscal policy to work, the amount of spending or tax cuts must be appropriate and the money must enter the economy as quickly as possible. Many economists believe that government spending is preferable to tax cuts because people are more likely to save than spend until confidence has been restored. (Wheelan states no preference in Naked Economics.) World War II was the largest spending project in the nation's history and it ushered in a long period of shared economic prosperity.)

The political reality of the day is that fiscal policy will consist of both government spending and tax cuts. The Stimulus Package passed earlier this year is a combination of both approaches. Let's hope the money gets into the economy as quickly as possible and makes the current recession a fading memory as soon as possible. Don't hold your breath.

Deficits and Surpluses

8 Basic Lessons in Economics #2

It's time for one of the most basic lessons in all of economics. It is often advantageous for the government to run a deficit. Perhaps that seems counter-intuitive ... especially if you are a conservative ... but it is true. Deal with it.

Here's the rules: when the economy is going well, it is advantageous to run surpluses. When the economy is not doing well, it is better to run deficits and pump money into the economy. Do you know when we were last running surpluses? That would be when Bill Clinton was President in the late 90s.

Don't forget the following: it is not always a good thing to balance the budget. In fact, it can make a bad economy much, much worse. Is this wrong? No. It is not. As Charles Wheelan says in Naked Economics ...

Herbert Hoover's insistence on balancing the budget in the face of the Great Depression is considered to be one of the great fiscal follies of all time.

Letters

8 Short Facts About George Washington #7

Perhaps nothing has been as valuable to historians as the personal letters of our major historical figures. Historians have learned so much thanks to the preservation of personal correspondence. Consider the importance of the letters exchanged between John Adams and his wife Abagail and the letters between John Adams and Thomas Jefferson. They are among the most important historic artifacts of the period leading up to and immediately following the founding of our nation. It is a shame that we do not have a similar historical record for George Washington.

It is believed that Washington expressed his personal opinions in their fullest form in the letters to his wife Martha. For this reason, they were destroyed following his death. Imagine what we could have learned from those letters.

Source - His Excellency by Joseph J. Ellis

Globalization

8 Basic Lessons in Economics #1

I'm not a conservative which means I deal in facts. Here are a few facts about globalization:

• Trade Makes a Nation Richer - It is simply not possible for every nation to be self-sufficient. Every nation, even poor ones, have a comparable advantage that makes trade worthwhile. For us, it is technology. For the Saudis, it is oil. For poor countries, it is cheap labor. Yes, cheap labor helps the poor workers in our trading partners.
• Trade Creates Losers - In the long run, globalization helps an economy create many more jobs than will be lost. That is small consolation for those who lose their jobs in the intermediate aftermath of a free trade deal. We can, and we should, do everything we can to help those who have been harmed by globalization.
• Protectionism is Bad Long Term Policy - Refusing to trade with "sweatshop" nations is essentially the same as imposing crippling sanctions on some of the poorest people in the world. Sanctions make the poor poorer.
• Trade Lowers Costs of Goods - Cheap imports are good for our own poor. It allows their limited resources to be used for more. It expands their standard of living. Lowering prices works the same as increasing income.
• Trade is Good for Poor Countries - Without global trade, the poorest countries would not have access to consumers in the world's largest markets. Export jobs in the poor countries tend to pay more than other jobs in the same countries. Poor countries gain money, technology and skills through trade that they would not receive any other way.

If I support globalization, can I still be classified as a card carrying liberal? I think so, because I believe that globalization is a good thing. In fact, I would argue that globalization is inherently liberal policy. What else would you call economic policy that raises the standards of living of both partners? 

Yes, I'm well aware of the negative aspects of globalization. These are real problems and those who fail to deal with them cause real harm to real people. 

Here in the United States, we must do more to help those whose jobs are lost to globalization. We must do more to retrain workers for jobs in emerging industries. We must expand the safety net in order to mitigate the financial hardships brought about by globalization. We must improve our system of education to make sure that the high wage, high reward jobs remain American. We must support labor unions to protect the economic progress of those whose jobs remain. 

As for our trading partners, we have to use pressure to press for better working conditions and fair wages. We have to use pressure to force our trading partners to improve their education systems so that kids spend their childhoods learning rather than working in factories. We have to use pressure to ensure that unions are treated with respect by the law so that workers in developing nations can bargain for better treatment.

We cannot, however, make things worse for these people by withdrawing our trade. As Paul Krugman, a rather prominent liberal economist has said, "(A)nyone who thinks that the answer to world poverty is simple outrage against global trade has no head ... The anti-globalization movement already has a remarkable track record of hurting the very people and causes it claims to champion."

Globalization is not a problem ... our failure to protect the "losers" of globalization is a problem. The lesson we should learn is this: Globalization is good long term policy. As liberals, we have to think of the long term, while working to alleviate the negative effects of the short term. To not think of the future is to not think as a liberal.

Lessons Learned from Naked Economics: Undressing the Dismal Science by Charles Wheelan. The opinions expressed are mine and not necessarily those of Mr. Wheelan.

8 Problems with Our Health Care System (Recap)

8 Problems with Our Health Care System (Recap)

8 Things I Learned from Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

1. The Erosion of Employer Provided Insurance
2. The Self Employed
3. Managed Care and the HMO
4. The Elderly
5. The Medicare Drug Benefit Debacle
6. The Mental Health Hole
7. Medicaid and the Plight of the Poor
8. Diabetes

Diabetes

8 Problems with Our Health Care System #8

A person who has been afflicted with a chronic disease has a disease that will not go away. These diseases, including cancer and heart disease, account for 70% of the deaths in the United States. Care for chronic disease is the most common and costly of all our health care expenses. This makes sense when you consider that around half of all Americans have a chronic condition. One of the most common and the most costly is diabetes. 

Diabetes is a disease that affects the bodies ability to process sugar. There was a time when a diabetes diagnosis meant almost certain death. Through a combination of lifestyle changes and the right drugs, most diabetics can lead normal, mostly healthy lives. It will not, however, be cheap for those afflicted or for their insurance companies.

Out of every ten dollars spent on health care in our country, one of those dollars can be attributed to diabetes. An individual diabetic will spend thousands of dollar year on prescription drugs, medical equipment to monitor blood sugar, frequent doctors visits, and the inevitable long term medical problems that will result from the disease.

Insurance companies don't like covering diabetics. While paying the costs of insulin and the other supplies needed for maintenance of the disease will result in long term savings, most people will change jobs and insurance companies so the benefits will likely be reaped by a competitor. Insurance companies will do everything in their power to avoid paying for diabetes. Most individuals cannot afford to pay for their diabetic medical care on their own and many will be forced to seek out charity where available. Unfortunately, many other diabetics will simply go without treatment to avoid the costs. This will result in even greater long term heath costs.

We do not spend enough money teaching the proper lifestyle and nutritional choices that will help people avoid diabetes. We do not help enough diabetics get the proper care they need to control their disease. We spend far too much on the inevitable complications that arrive from untreated diabetes. Diabetic care is yet another area where our health care system is not adequate. 

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

Medicaid and the Plight of the Poor

8 Problems with Our Health Care System #7

At no point in the history of our health care system have the poor received adequate care. The common misconception is that health care is available for everyone. It's simply not true. When you consider that the poor are less likely to have a nutritious diet and more likely to face conditions hazardous to their health in the work place or at home, you see that this the fact that this is true is to our great shame.

The poor, of course, missed out on the post World War II boom in private health insurance as provided by employers. What little health care they could receive, typically only for an emergency, was available at the large public hospitals and some charitable hospitals. Today, charity hospitals are run little different from their for-profit brethren, so they are an increasingly minor option for the poor.

In the 60s, health care for the poor was improved through the creation of Medicaid by the federal government. Medicaid, an entitlement program run by the states and largely funded by the federal government, would extend health care to more people than ever before. Unfortunately, this would lead to runaway costs.

Medical spending exploded under Medicaid. Congress would take it upon themselves to limit eligibility in order to control costs. Suddenly, large groups of people were once again without health insurance. Worse yet, many of the working poor who had insurance would see their companies drop their insurance plans or reduce coverage to a level that would do little to alleviate the financial burden of sickness. In 1982, President Reagan would cut Medicaid spending forcing many more out of the system. Many states would unleash managed care on their Medicaid programs and the poor would suffer from the same problems caused by HMOs as everyone else.

Medicaid was an ambitious plan that fell far short of its goal. At this point, is a particularly unpopular government program thanks to demonization by conservatives not for its inefficiencies, but for the very idea. How can a country this vast and this rich not take care of the least among us?

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

The Mental Health Hole

8 Problems with Our Health Care System #6

Fortunately for the mentally ill, humans have become more enlightened over the years. As recently as the 17th century, the mentally ill will regularly burned at the stake. They would later be confined to almshouses or jails where they could be kept separate from the rest of society. Eventually, reform efforts would lead to the creation of publicly funded mental health institutions. Ultimately, these too would be undermined when states would begin locking up criminals and any other deviant in the same institutions. To say that mental illness carried a stigma would be an understatement.

In the 20th century, the medical profession would gain a better understanding on mental illness and things would begin to approve. The Works Progress Administration (WPA) during the New Deal would build an unprecedented number of new mental health hospitals, where the mentally ill would be treated. As doctors gained more knowledge of the illnesses, there would be a surge in the growth of outpatient facilities. The mentally ill would begin to integrate with society. Psychiatry and psychology had become accepted medical practices. At the behest of employers, insurance companies began providing benefits for treatment.

Ultimately though, the cost of mental health care was problematic. Therapy and drugs are expensive. Even though most insurance programs cover mental health treatment, they do so with higher co-payments and a lower overall limit on payment amount. It didn't help that many mental health care facilities began to game the system by recommending hospitalization for people who did not need it. Something would have to be done.

The insurance companies would take it upon themselves to reform insurance for mental health care since their customers, large employers, insisted that the benefits remain. The biggest change was the application of managed care, a dubious idea when each individual and their treatment is somewhat unique. Beneficiaries were now forced into small networks of doctors and therapists. The insurance companies began denying claims at a rate far higher than for other medical areas. Payments were further limited. The ranges of treatment options were further limited. The number of days that an insurance company would pay for hospitalization was dramatically reduced. Rather than attack those that were gaming the system, the insurance companies went after mental health in its entirety.

Now, an individual with severe mental health problems faces a high likelihood of financial ruin. They are just another group that has been let down by the current system.

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

The Medicare Drug Benefit Debacle

8 Problems with Our Health Care System #5

It was one of those rare occasions where those on the left and those on the right agreed that something needed to be done. The elderly were in desperate need of help. The cost of prescription drugs was destroying the financial well being of far too many people. The government would have to add a prescription drug plan to Medicare. What form would the program take?

Well, with the Republicans in charge of the Presidency and the Congress, it was clear that the conservatives would be designing the plan. Because of their unfailing belief in the market and in glory and greatness of private industry, the conservatives designed a plan that would ultimately make a lot of money for the insurance companies. Rather than the government providing the benefit directly, private insurance companies would offer competing plans from which seniors could choose. In 2003, President Bush signed the plan into law.

There were myriad problems.

• Different plans covered different drugs at different rates.
• Finding out which drugs were covered was not easy, and for the newer drugs, it would involve a phone call to the company.
• Insurers were given the right to drop coverage at any time, but seniors could only change their plan once per year.
• The roll out did not go smoothly and many seniors were without their drugs for a period of time.
• The government was specifically forbidden to negotiate for better prices with the pharmaceutical companies.
• To keep the insurance companies happy and to encourage them to continue providing the drug benefit plans, they were granted significant tax breaks and subsidies.

The Medicare drug benefit is the perfect example of why Republicans shouldn't be allowed to create and run government programs. They don't believe government can work, and they prove it every time they get a chance to run things. Yes, the plan has helped many seniors, but at what cost? The benefit is ridiculously expensive.

It seems that, in the long run, this is what the Republicans want. By turning the program into a budgetary nightmare, they hope they can turn people against any government provided solution. We can't allow it to work. It is within the power of government to provide a prescription drug benefit to our seniors, and it is in their power to do it more efficiently than a private company.

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

The Elderly

8 Problems with Our Health Care System #4

The elderly are a special problem within our health care system. In the early days of health care insurance, the companies wouldn't allow most retirees to keep their benefits. Because they needed more care, they had more problems buying insurance. If they could get it, it was expensive and wouldn't cover much. The problem was so bad that in 1961, only 7% of the cost of medical care for the elderly was covered by insurance.

The solution was Medicare and it was a success for seniors right from the start. The standard of living for many seniors was raised instantly. There were problems as many medical professionals and hospitals raised their rates and cashed in. Reformers would eventually implement price controls which contained the cost. In fact, Medicare would soon deliver health care more efficiently than most private insurers. Needless to say, most of the elderly were happy with the benefit.

Over the years though, Medicare would fall behind the times in the types of coverage offered. In particular, Medicare lacked outpatient care and prescription drugs. Over the years, more and more seniors began spending more out of pocket for their medical needs. Still, there was no major expansion of Medicare, excepting a brief flirtation with catastrophic coverage that was abandoned after less than a year. During this time, doctors were prescribing more and more drugs and almost every senior became dependent upon at least one prescription.

For those few seniors who were fortunate enough to get Medicare supplementary insurance thanks to their former employers (and the unions who bargained for the care), they would also get bad news. Company after company would abandon their commitment to provide insurance for their retirees. As a result, many seniors began to go without medical care. Some would even give up their homes so they could keep try and keep their medical care. Once again, there was a crisis with health care for the elderly. Would the country step up to the plate?

The first attempt at help, the Medicare Drug Benefit introduced in 2003, requires a post of its own.

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

Managed Care and the HMO

8 Problems with Our Health Care System #3

Managed Care began with the most idealistic of origins. It was seen as a way to reduce the cost of health care while simultaneously increasing the quality of the health care delivered. It was to be accomplished by the formation of the group practice. Doctors would join the practice and would be paid a salary. Rather than pay a fee for each service, the customers would pay a regular fixed fee for health care whenever they needed it. Despite the opposition of many doctors, group practices became successful where implemented. Certainly the customers loved the practices and the managed care provided.

A prominent advocate for group practices was a California doctor named Paul Ellwood. He believed that patients at a group practice received better preventive care and that when sick, they were treated more effectively. He believed that managed care was a perfect market based system that would save our health care system and mitigate calls for universal health insurance from the government. He found willing ears in the Nixon Administration and rechristened his the group practice as a Health Maintenance Organization (HMO). The HMO Act of 1973 was passed allowing for the creation of HMOs.

Unfortunately, the Republicans decided to monkey with the details and the HMOs, which would rise to prominence in the 1980s and explode in the 1990s, would have little resemblance to the group practices upon which they were based. As created by for-profit insurance companies, the HMO would not consist of true group practices with doctors under one roof. Instead, they would still practice managed care, but they would form networks of independent doctors.

Insurance companies measure something they call their "Medical Loss Ratio". It is the percentage of revenue spent on health care versus their overhead, marketing and profits. The "loss" is the health care. Under the old style group practices the ratio was between 85 and 90 percent. Under the new HMOs, the margin dropped to between 70 and 80 percent. Quality of care was no longer a focus.

Under a group practice, if a doctor ordered a procedure or a test, you knew it would be covered. The medical decisions were in the hands of the doctor. Under an HMO, a doctor often needs permission from the insurance company to perform a procedure. At a group practice, a doctor worked on salary and the only incentive was to deliver quality health care at an affordable cost. HMOs reward the doctors in their networks for keeping costs down. The emphasis is keeping costs low, not on delivering quality health care. Needless to say, many, many people hate their HMOs.

Managed care is yet another good idea that has been screwed up by greedy corporations.

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

The Self Employed

8 Problems with Our Health Care System #2

How does a country that supposedly lionizes the entrepreneur make it so difficult for him --- or ... her --- to buy health coverage?

The economics of health care worked by using an economy of scale. Insurance companies would sign up large employers and would use what is known as a community rate to determine the premiums. Essentially, everyone would pay the same rate, regardless of their medical history. In other words, those who used their insurance the least would subsidize those who needed it the most. The key to keeping the premiums low for everyone was to spread out the policy over as many people as possible.

Now, for obvious reasons, the self employed paid more for health insurance. Administrative costs for employees of a company were low because responsibilities could be shared with a company's HR department. Additionally, the insurance company only had to market to the employer. Each self employed individual has to have their insurance managed individually. Still, when the self employed were community rated, the only real difference in their premiums were in additional administrative fees. 

Now, most companies provided their employees with health insurance and even if it were optional, most employees would sign up. This kept the risk pool large. For the self employed, there is no such guarantee. The risk is certainly greater for the insurance companies. Additionally, not every self employed individual is going to try and get health insurance. In fact, those who are most likely to have a lot of medical expenses are more likely to sign up for insurance. This is known as adverse selection and it is the major issue for insurance companies.

Now, keep in mind that a commercial insurer is like any other business in a capitalist economy. They are not looking to serve the public interest; they are looking to make money. Their solution to adverse selection is experience rating. Unlike community rating, under experience rating your premium is based on your potential need for insurance. If you have a history of sickness, or you have a chronic condition like diabetes or hypertension, then you will pay a higher premium. Perhaps, even, a much higher premium. That is, if you can even get insurance. Under experience rating, an insurance company has no reason to insure anyone except the healthy.

Yes, even when the employer provided insurance system was working, the self employed were left out in the cold. They're still there today.

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

The Erosion of Employer Provided Insurance

8 Problems with Our Health Care System #1

For decades, it was a solution that was supported by employees and employers. It was a period of shared prosperity across our country, and employer provided health insurance had become the backbone of the American Health Care system. You went to work for a company and your company supplied you with health care insurance. Simple.

It was a time of tight labor markets, and employers looked for any edge they could get to attract employees. They looked for any item that would increase the loyalty of their employees. Of course, the tax incentives provided by the federal government didn't hurt. (Health benefits were essentially tax free.) Employers were happy to provide the benefit for their employees.

The employees were happy as well. Year after year their health benefits would get better and better. The National Labor Relations Board made health benefits negotiable. Naturally, this led to the unions supporting employer backed health care, and they would press for further improvements as well. Any attempt to create government supplied universal health care was met with a simple question: why? Things were fine as far as all parties were concerned, and then 1980 came, and things started to go wrong.

Globalization was causing an explosion in world wide cheap labor. The pressure was on American companies to keep costs down. At the same time, health care premiums were exploding. Employers began to look for ways to deny health insurance to their employees, including reclassifying employees as "contractors" and using more part time employees. Other companies, like Wal-Mart, simply didn't provide insurance to the majority of their employees. Additionally, the quality of the benefits provided was falling. 

The system was breaking down. Worst yet, there was nothing to step in and fill the void. The number of uninsured was increasing. I'm typing this in the past tense as if the problem has been solved, but it has not. It continues to this day.

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn

A Progressive Prescription

8 Things About The Conscience of a Liberal #8
What I Learned from Paul Krugman's The Conscience of a Liberal

We live in what is essentially, a second gilded age. How do we restore income equality in the United States? How do we create a second period of prosperity that is shared broadly among all the people of the United States? The answer is liberal. The answer is progressive. We've seen what works and doesn't work from our last period of shared prosperity. We can study the models tried in other western nations and again, examine what has worked and what hasn't. From there, we can build a plan to turn our nation around.

What would this plan entail?

• Universal Health Care - Not only is it the just and moral thing to do for our citizenry, it will eliminate the financial ruin of thousands of Americans. This will ensure that there is more money to spend in the broader economy.
• More Progressive Taxation - At this point, the percentage of total tax paid is about the same for those at the top of the income ladder as it is for those at the bottom when you include all taxes paid, not just the income tax. Sorry, but the rich can afford to pay more. This isn't about class warfare, it's about doing what is best for the country as a whole. Throughout much of the longest period of prosperity this nation has ever seen, the top income tax rate was over 90% yet many still seemed to have the incentive to work hard, start companies, create and innovate. There's no harm in bringing the filthy rich down a little to raise the standard of living of so many. This isn't communist. It isn't socialist. It is, however, democratic.
  
• Minimum Wage Increases - An absolute necessity are further minimum wage increases. They should even consider indexing the minimum wage for inflation. Don't listen to those who claim that these relatively small increases in the minimum wage result in job losses, all evidence suggests otherwise.
• Increased Unionization - It is time to bring back the union. It is time for the union to become a dominant force in service labor. Unions will protect the wages and benefits owed to the American worker. They will serve as an important check and balance against the excesses of management that have led to such ridiculous pay packages for executives. To make it easier to organize, the Employee Free Choice Act would make it easier to form an union without management intimidation.

We know these things will help. We know the policies needed. What we lack is the political will on both sides of the aisle. FDR was bold. He knew that we had to remake our society in the wake of the Great Depression. We stand on the brink of another depression. It is up to President Obama and the Democratic Congress to step up to the plate and swing. If they fail, it will be a generation before we get another chance.

Our Health Care System is Broken

8 Things About The Conscience of a Liberal #7
What I Learned from Paul Krugman's The Conscience of a Liberal

The moral case for universal health care isn't in dispute.

They tell us everything is OK. They tell us that we have the best health care system in the world. Certainly, as Americans, we love to believe we are the best at everything. With health care, the facts don't support the boast.

According to the World Health Organization (WHO), we spend more money on every individual than any country in the western world. Despite this, we have the shortest life expectancy among the same group. The WHO would only rank us as having the 37th best health care system in the world. It should be a national embarrassment.

We're off the charts in terms of what we pay for care, but only in the middle of the pack in terms of what we actually get for the money.

The essential problem with the system is this: Insurance companies make more money for not paying claims. They spend a lot of money screening everyone who applies for insurance to weed out those that are health risks. For those that make it through the screening, they do everything they possibly can (like searching for any preexisting conditions) to avoid paying claims. The problem isn't necessarily the companies themselves; any company that didn't screen this way wouldn't survive. The problem is the system which necessitates it.

(The insurance companies) aren't evil, however, the consequences are.

The system we have is simply too inefficient to function. Doctors and insurance companies spend millions battling over whether a claim should be paid. Every individual insurance company has to bargain on their own with the pharmaceutical companies so they don't get economy of scale on their drugs. (We prescribe fewer drugs than anyone in the US, yet we pay more.) There is no incentive for insurance companies to provide preventive care. Is it any wonder that 31% of all our spending on health care are for administrative costs? (In Canada, the number is just 17%.)

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We are in crisis. Not only is our system inefficient, fewer and fewer companies are insuring their employees because of the rising cost of providing insurance. Paying out of pocket isn't a reasonable option for the vast majority of American workers. (An employee working at the median annual wage would need to devote 25% of their earnings towards purchasing a family health care policy.) There is a solution. That solution is government supplied universal health care insurance. Not only would it be cheaper and more efficient than the current system, it would be the moral solution that makes sure that no one in this country is left without access to a doctor.