Friday, January 22, 2010

Is the Senate Bill the "Right" Thing?

In his column today, Paul Krugman implores the House to pass the Senate's "health care" bill because it is the "right thing." With the improbable victory of Republican Scott Brown in last Tuesday's Massachusetts special election, the Senate Democrats no longer have the 60 votes to ram anything they want down the legislative channel, which endangers the entirety of ObamaCare.

Krugman understands that point, and I don't disagree with his political analysis. Yet, the guy is so partisan that he does not pick up on the obvious issue, and that is why the Democrats, with overwhelming numbers in both the House and Senate, have not been able to do whatever they wanted. Instead, we get the "Goldstein is responsible for our ills" nonsense, the Republicans playing the role of the alleged villain of Oceania.

Where the guy is clueless is in economics. Krugman belongs to that school of though that says that government can make anything happen, provided there is enough coercion. Thus, we get to the main point of the Senate plan, which is an attempt to create a product that lots of people do not want at all, and never would buy if they were not put at the point of a gun. He writes:

Think of health care reform as being like a three-legged stool. You would, rightly, ridicule anyone who proposed saving money by leaving off one or two of the legs. Well, those who propose doing only the popular pieces of health care reform deserve the same kind of ridicule. Reform won’t work unless all the essential pieces are in place.

Suppose, for example, that Congress took the advice of those who want to ban insurance discrimination on the basis of medical history, and stopped there. What would happen next? The answer, as any health care economist will tell you, is that if Congress didn’t simultaneously require that healthy people buy insurance, there would be a “death spiral”: healthier Americans would choose not to buy insurance, leading to high premiums for those who remain, driving out more people, and so on.

And if Congress tried to avoid the death spiral by requiring that healthy Americans buy insurance, it would have to offer financial aid to lower-income families to make that insurance affordable — aid at least as generous as that in the Senate bill. There just isn’t any way to do reform on a smaller scale.

In other words, all paths lead back to the Senate's bill. However, there are some things that Krugman ignores here, and they are worth mentioning. First, despite Krugman's contention in his book (which I am having my MBA students read) The Return of Depression Economics, that governments can find an economic "free lunch," in reality opportunity cost rules. (It is hardly unusual to see Krugman ignore opportunity cost, given he is a True-Believing Keynesian, but, as I have written elsewhere, the guy is not an economist; he is a political operative.)

Krugman ignores the opportunity cost issues here or only pays lip service to the fundamental precepts of economic analysis, which is like a doctor claiming that one can cure a fever by bleeding someone. Regarding the Senate bill, we have a body of government creating a "good" that most people never would purchase in a free market, given their own choices.

Now, to Krugman, that is irrelevant. This is another version of scene in an old "Our Gang" episode in which Spanky's father tells his complaining son at the breakfast table, "You will eat your mush, and you will like it." Krugman is telling us, in effect, that the government must "break eggs" in order "to make an omelet," and we are supposed to think that the government's omelet is a good thing.

In fact, the Senate version, with its tax on the "cadillac plans" is telling a lot of Americans that they are going to have to do with inferior care in order to make this whole boondoggle work, as the government tries to force those people to take plans they don't want. Thus, Obama's promise not to raise taxes on families making less than $250K a year goes up in smoke.

Second, the idea that this whole mess will "lower costs" is a joke, a very sick joke. What Krugman means is that the government is going to try to do the impossible: increase the overall demand for medical care but hold down costs by, well, ordering those costs to be lower. If the reader thinks this is reminiscent of King Canute sitting on the shore and ordering the tide not to rise, well, go to the head of the class.

To a Keynesian, costs are nothing more than numbers to be manipulated through coercion. To an economist, however, costs reflect real conditions of scarcity and opportunities elsewhere. For Krugman, higher costs are reflective of "greed" in the system; force doctors and other professionals to receive less compensation (or tax away their "excess" pay) and that takes care of everything.

This, of course, is like saying that the wall facing the band at the end of "Animal House" really was an imaginary barrier. Just keep marching, and eventually the band would break through. In the case of medical care, at some point people are going to stop providing the services, especially when government creates the perverse conditions in which it orders fees that do not even cover what physicians have to pay in order to make sure the procedures occur at all. (That already is the case in many medical cases, and doctors are responding by cutting back.)

What the Senate bill really does is to turn private insurance carriers into something akin to regulated utilities. Even Krugman understands that the actions taken by the Senate are going to place upward pressures on premiums, but the Keynesian True Believer thinks that if the government orders prices not to rise (enforced by prison terms, of course), that will be the end of it.

So, you have the scenario in which insurance companies are forbidden to deny coverage to anyone for health reasons, but somehow, this will result in lower costs. Economist Walter Williams of George Mason University (Walter is a real economist, infinitely better than Krugman) likens this to someone walking into an insurance agent's office wanting to buy fire insurance because his house currently is burning down.

No, I think that Krugman -- even Krugman -- understands this basic issue. He understands that this will result in all sorts of economic dislocations which ultimately will lead Congress to implement the plan he has wanted all along: the government "single-payer" system. That is no solution, economically or medically speaking, but it does empower the state, and for a statist like Krugman, that is nirvana.

1 comment:

Nick C said...

Excellent! I typically read Krugman's articles to prepare myself for debates with my big government friends. But, the articles start to make me sick to my stomach almost immediately. I can at least come to this blog afterward for a breath of fresh air to calm the nausea.