Friday, August 31, 2012

The Economics Killers

Before I look at some aspects of Paul Krugman's column today, I need to tell readers that, no, I did not watch any of the Republican National Convention, and I don't support Mitt Romney or the Republican Party, which officially has set itself up as nothing more than the political faction of the Neoconservatives. If Romney is elected, he still won't be president; no, Bill Kristol and Dick Cheney still will be the men behind the curtain.

It always is amazing to me to see how certain narratives continue to exist, even after real-live experience has debunked them time and again. Krugman always is claiming that the Republicans (including Romney and Paul Ryan) really are Radical Free Marketeers in action and if elected, will work to make government so small it "can be drowned in a bathtub." We have had six Republican presidents in my lifetime, and I cannot recall one time that government was smaller in spending and in scope than it was when that person took office. When writing of Keynesian economics, Krugman claims that the critics are blind to the facts, but when he writes about politics, he is as blind as anyone from the Washington Times or Fox News regarding the rhetoric and the facts.

Nonetheless, in today's column, he goes off on Republicans and Medicare, claiming:
But back to the big lie. The Republican Party is now firmly committed to replacing Medicare with what we might call Vouchercare. The government would no longer pay your major medical bills; instead, it would give you a voucher that could be applied to the purchase of private insurance. And, if the voucher proved insufficient to buy decent coverage, hey, that would be your problem.
I have no idea if the Republicans can impose the Next Wonkish Measure or not, or if they would give a real-live effort. I just don't know, but given the rhetoric and reality of the past, I cannot imagine that they will do what Krugman breathlessly claims they will do. But, hey, the guy is a master of regurgitating Democratic Party Talking Points, and that is the perspective that I take. After all, he is first and foremost a political operative.

What does interest me is what he says next, for it reflects his "knowledge," or lack thereof, about markets and how they work. Take his following points regarding insurance and Medicare:
Why would anyone think that this was a good idea? The G.O.P. platform says that it “will empower millions of seniors to control their personal health care decisions.” Indeed. Because those of us too young for Medicare just feel so personally empowered, you know, when dealing with insurance companies. Still, wouldn’t private insurers reduce costs through the magic of the marketplace? No. All, and I mean all, the evidence says that public systems like Medicare and Medicaid, which have less bureaucracy than private insurers (if you can’t believe this, you’ve never had to deal with an insurance company) and greater bargaining power, are better than the private sector at controlling costs. 
I know this flies in the face of free-market dogma, but it’s just a fact. You can see this fact in the history of Medicare Advantage, which is run through private insurers and has consistently had higher costs than traditional Medicare. (Emphasis mine) You can see it from comparisons between Medicaid and private insurance: Medicaid costs much less. And you can see it in international comparisons: The United States has the most privatized health system in the advanced world and, by far, the highest health costs.
Since I don't have the cost numbers in front of me, I won't dispute what he has said, and furthermore, I will answer using the assumption that his numbers are correct. Instead, I ask this simple question: Why would a private firm create a bureaucracy and then voluntarily engage in practices that force up its costs? After all, as economists since 1871 will note, the value of the final product is not determined from the value of the factors of production, but the other way around.

In other words, firms would gain nothing from engaging in activities that are more costly than necessary to provide a final product. When we do see something as Krugman describes, we need to know why private insurance costs would be higher than government bureaucracy costs.

Krugman does not give an answer, except to claim that what we are seeing is a free market in action. To me,  this is a non-explanation, given that I never have seen an economist -- including Krugman -- claim that firms can be more profitable by imposing higher costs upon themselves. So why would the insurance companies do it, especially since they operate in what Krugman seems to claim is a near-unregulated free market?

I think anyone who has worked for an insurance firm or for any regulated industry can tell you that government "oversight" is costly. Furthermore, what Krugman does NOT say is that Medicare and Medicaid officials are not subject to many of the same regulations that are laid down on private firms. Certainly no firm would create a bureaucracy that is unnecessarily costly as in free markets, higher costs do not lead to higher profits. I also would like to add that the regulatory process also serves as a domestic protectionist device that keeps out competition -- and leads to higher prices for consumers.

Now, if Krugman really wants to claim that the pre-1871 theories -- that the cost of production is what determines the cost of the final product -- he is free to do so. However, he just might be rejecting the price theory that has been taught for more than a century. If he wishes to turn back the clock to David Ricardo's theory of value, so be it.


CPBrown said...

I'll admit that I may be mistaken. But isn't the idea of premium support for Medicare that Ryan is proposing, the essence of Obamacare that Krugman, etc. extol ?

I also am surprised that the Bush Medicare Rx plan that is right up Krugman's, etc. alley (and from what I understand is not only providing coverage but also doing reasonably well in not only controlling costs) is said to be a terrible budget buster by those who want more coverage at whatever cost.

Robbie said...

You ask the question why an insurance company would create a bureaucracy. What you fail to mention, however, is that in order for an insurance company to be profitable a certain percentage of consumers must pay more into the system than what they receive in services. A patient could go a lifetime without paying for insurance and upon the diagnosis of an illness sign up for insurance. Therefore, the insurance company must create a bureaucracy in order to protect itself from moral hazard. Furthermore, you fail to mention that the purpose of insurance is to protect the consumer against financial ruin in the event of an emergency. If car insurance covered every oil change, brake replacement, and tire rotation, the cost of car insurance would be outrageous. It seems to me that Ryan's Medicare reforms bring us closer to this reality and ultimately will encourage healthier lifestyles. Regardless, what you and the politicians fail to recognize is that Americans are the unhealthiest people in the world. No long standing civilization can survive with epidemic levels of heart disease, cancer, and diabetes. Until the underlying causes of rising healthcare costs are addressed, any arguments about who pays for healthcare is moot.

Zachriel said...

William L. Anderson: In other words, firms would gain nothing from engaging in activities that are more costly than necessary to provide a final product.

That's where you are confused. The product is the pool of subscribers. So the most profitable business model is to attract those who are healthy, while purging those who are not.

Mike said...


Tour comment reflects a superficial understanding of the business of insurance

Zachriel said...

Mike Tour comment reflects a superficial understanding of the business of insurance

Tour comment reflects a superficial understanding of what constitutes a valid argument.

Mike said...


I had no interest in making an arguement as you have demonstrated consistently being impervious to logic and reason.

Just a statement that you appear to have expressed an opinion on a subject matter you have a superficial understanding of.

Nice smartass response on the typo. Very mature.

What do/did you do for a living?

Zachriel said...

Mike: I had no interest in making an arguement ...

You succeeded. Let us know when you change your stance.

Mike said...


As soon as you become educated on the subject matter and demonstrate critical thinking, I will.

You didn't answer my question

ALima said...

I love price controls!

Andrew Sheneman said...

What amazes me is how people are claiming that Ryans plan is being taker seriously by the party when Romney(you know the actual presidential nominee) not only criticized Ryan's plan when it was first proposed, but has repeatedly stated(even after bringing Ryan on the ticket) that he is not going to change or cut Medicare.

So yea, no need to worry Krugman, even Ryan's relatively modest proposal wont happen under a Romney administration.