Friday, February 26, 2010

Krugman's Healthcare Howlers

There are times when Paul Krugman lets himself go, and then there are times when the inner political hack really takes over, and his column today represents one of those times. Keep in mind that the editorial page of the New York Times has long been a place where hackdom reigns (just as it does at the Washington Times or any other newspaper where the leadership aligns itself with a political party).

However, one must understand that when a political operative or a member of Congress or a party official makes a hardcore partisan statement, one always considers the source. In fact, we are willing to accept some of the flackdom that accompanies politics and even consider it to be a form of perverse entertainment.

When Krugman makes a statement, however, he is not simply a hired gun by the Democratic Party. No, he is making that statement by the authority of being Paul Krugman, Ph.D. from MIT, faculty member at prestigious Princeton, and, of course, the 2008 winner of the Nobel award in economics. Yet, his column today, for all its supposed appeal to the "authority" of the Congressional Budget Office, is nothing but hackdom that demonstrates not only his outright partisanship, but demonstrates a woeful lack of simple economic knowledge. In other words, I am saying the guy is a fraud. A fraud.

With that out of the way, let us go to the column. Here are his opening jabs:
...what was nonetheless revealing about the meeting was the fact that Republicans — who had weeks to prepare for this particular event, and have been campaigning against reform for a year — didn’t bother making a case that could withstand even minimal fact-checking.

It was obvious how things would go as soon as the first Republican speaker, Senator Lamar Alexander, delivered his remarks. He was presumably chosen because he’s folksy and likable and could make his party’s position sound reasonable. But right off the bat he delivered a whopper, asserting that under the Democratic plan, “for millions of Americans, premiums will go up.”

Wow. I guess you could say that he wasn’t technically lying, since the Congressional Budget Office analysis of the Senate Democrats’ plan does say that average payments for insurance would go up. But it also makes it clear that this would happen only because people would buy more and better coverage. The “price of a given amount of insurance coverage” would fall, not rise — and the actual cost to many Americans would fall sharply thanks to federal aid.
Before dealing with the particulars of this one, let me say that Krugman conveniently forgot to deal with the ultimate howler said at the meeting, a statement by Nancy Pelosi that does not even need fact-checking because it is idiotic on its face. Pelosi claimed that if the Democrats ram through this bill, that it will ultimately "create four millions jobs" and will "create 400,000 jobs" almost immediate.

Don't take my word for it. Click on the link and you will see Pelosi making the declaration. If anything, this bill will destroy wealth and ultimately the jobs that are needed to create wealth.

Now that Pelosi's rant is out of the way, let us go back to Krugman's statements. Indeed, let me zero in on this one: The “price of a given amount of insurance coverage” would fall, not rise — and the actual cost to many Americans would fall sharply thanks to federal aid.

You see, in Paul Krugman's world there exists no opportunity cost. That is right. Krugman is saying that if government subsidizes the payment for health insurance premiums, opportunity cost disappears! Given that in his book, The Return of Depression Economics, he claims that printing money during a recession creates what he calls a "free lunch," which is a way of saying that printing money actually creates new wealth.

I'm sorry, folks. When an economist denies the presence of opportunity cost, it is time to fold the tents and leave. Opportunity cost is the central building block of economic analysis. In fact, if there is no scarcity and no opportunity cost, there is no economics. So, to have an economist -- and a highly-decorated one at that -- declare that subsidies lower real costs it absolutely shocking. Krugman basically is telling readers that government -- or at least government run by the Democratic Party -- can perform magic by creating wealth out of nothing but printed money. This ain't econ, people, it is metaphysics.

Unfortunately, we have to keep in mind that there is no way that we can have the following things and STILL cut real medical costs:

1. Mandates for insurers,
2. Prohibitions on denying insurance for people with pre-existing conditions,
3. Massive subsidies to pay the premiums.

That is a prescription for forcing up real costs, and for those who really believe otherwise, I give you another American institution for which we have seen the same pattern in which third-party payments have forced up costs: higher education.

We have seen tuition and fees for U.S. colleges and universities, both public and private, rise faster than the Consumer Price Index for many years. Why? Much of the payment for college and graduate school is made either through debt (and many people today graduate from all levels of higher education with massive amounts of personal debt) or through direct government payments. Furthermore, government imposes a large number of expensive administrative mandates (Sound familiar?) on colleges and universities. And then we are shocked, SHOCKED that tuition and fees are soaring?

Assume that the government (1) required colleges and universities to admit all applicants, regardless of their academic records (and no place could discriminate, including Krugman's own Princeton University); (2) if someone could not afford the tuition and fees, the government would pay the balance or pay for all of it, and (3) all Americans would be required to go to college.

Does any reader think we would have anything but chaos? Yet, there is qualitatively no difference between my "modest proposal" above and what Krugman and the Democrats are pushing. None.

Now it is one thing to say that the Republicans, intellectually speaking, are running on empty. That is nothing new, and they have been low on gas for more than a decade. It is another things, however, then a Republican brings up an issue of opportunity cost and is called a liar by a Nobel-Prize-winning economist. At that point, Paul Krugman no longer is an economist; he is just another political operative.


ToddO said...

Professor A:

I myself have wondered for years why so many liberals (like Professor Krugman) overlook opportunity cost in public works. I have reached the conclusion that they are blinded by good intentions. In other words, they think government is the primary embodiment of social benevolence. Since the ends always justify the means to them, opportunity cost does not matter, as long as the benevolent government is the one converting those tax revenues into public good.

In other words, there is no opportunity cost because government revenue has to be spent anyway. They never consider the source of the government's revenue in their assessment. If we disregard the taxpayer, there is no opportunity cost. See how easy that is?

In order for one in that camp to realign their thinking, they have to accept the fact that taxation on income or property is in fact legalized theft. Of course they do not call it theft, because benevolent government is "entitled" to revenue for the good of all!

William L. Anderson said...

To these people, government run by the "right people" is an entity that automatically does good. Krugman is in that camp, and that means he has to jettison the foundations of economic analysis.

If he wishes to be a partisan hack, he is free to do that, but he cannot be a hack AND then call his analysis "economics."

Unknown said...

"All this passionate praise of the supereminence of government action is but a poor disguise for the individual interventionist's self-deification." - Ludwig von Mises, Human Action

William L. Anderson said...

Mises was good! He really understood interventionism. I used to think that his view that "middle of the road leads to socialism" was overstated, but no more.

Unknown said...

Indeed, Professor.

"Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps." - Ludwig von Mises, Planning for Freedom

sb101 said...

If subsidies are the problem then why is it every other developed country has figured out healthcare with a combination of subsidies and regulation at lower costs than what we spend today? Probably because subsidies are not the problem, it's the tax code (and silly paranoia that government anything is evil, but that's a different topic). Once again Bruce Bartlett seems to be one of the few that has looked at the numbers and not only understands what's broken, but has sensible fixes.

Unknown said...

"If subsidies are the problem then why is it every other developed country has figured out healthcare..."

Say what!?

sb101 said...

Uh, pretty much every developed country has near universal coverage and spends less than us. And service is equivalent or better than the US. Not sure where the question is? Anyhow, my point was too much emphasis is placed on the subsidies for the poor, and not enough on the real problem.

Unknown said...

Government has been increasingly subsidizing education for decades and we're surprised that costs go through the roof while there is virtually no increase in the quality of the education provided?

Likewise, the government massively subsidizes a healthcare industry that is running rampant with cartels, special privileges and zero market incentives to perform efficiently. Should we be surprised costs go through the roof when fascism is applied?

I agree that socializing the industry will lower real costs in the short-run. But in the long-run quality and availability will decline and the entire system will need to be supported by massive amounts of government debt in any case... Just as the modern industrial examples of today.

Socialism is always inevitably unsustainable. I recall a Frenchman speaking of his country's welfare state: "Of course we can live in prosperity. We have already spent the incomes of the next two generations".

Ludwig von Mises showed this, too, in his 1922 epitome.

sb101 said...

“Government has been increasingly subsidizing education for decades and we're surprised that costs go through the roof while there is virtually no increase in the quality of the education provided?”

My response whenever folks try and compare healthcare to another good or service is, in all likelihood, you don’t understand the business model of the insurance industry. Insurance is the only industry where profits increase when you deny your customers service. Comparing it to education is like comparing apples to oranges.

William L. Anderson said...

Then I suppose that a successful insurance agency never pays claims, even if they are legitimate. Interesting how these guys stay in business.

Keep in mind that Medicare and Medicaid ALSO deny claims, and they are run by "compassionate" bureaucrats who "believe in government." There are people out there who believe that once government takes over medical care completely, all of us will have unlimited care. Sorry. Government does not do away with the Law of Scarcity.

sb101 said...

Wait, are you saying Wendell Potter is a liar? That this entire op-ed is a lie?

Sorry, but this is the reality of the world we live in. This is what the insurance model has evolved in to. We can debate why this is reality, and that’s fine, but to imply that insurance companies do not regularly deny claims is na├»ve. When the largest portion of your cost structure is paying out claims, and you need to cut costs to meet earnings estimates, then of course you deny claims. It’s a simple fact of life. These guys stay in business because there is little to no competition, the required scale prevents new entrants, and the tax code doesn’t give consumers much choice.

“Keep in mind that Medicare and Medicaid ALSO deny claims”

Yes, for fraud. They do not award bonuses to employees for denying old people care.

“There are people out there who believe that once government takes over medical care completely, all of us will have unlimited care. “

First, if anything, the current bill is a handout to the insurance industry, not a government takeover. The government takeover line is getting tiring. There is not even a public option in the current bill, and there will not be a public option in the final bill.

Second, we have plenty of examples from Western Europe and Canada that proves some level of government involvement, either with regulation or a public option, has worked. Even Hawaii has figured it out. Even states like Maryland do a better job than most of controlling cost and have broad coverage. All have some level of government involvement. Do you have any real world examples that show a better way of doing things? Any research? You may have missed the link to a Bruce Bartlett post above. The numbers clearly show what is working in certain countries. He is one of the few economists that seems to make any sense these days.

Zombie Slayer said...

I consider myself an Austrian. I believe that health care is a good/service, and people should bear their own costs of health care. And like other goods/services, the forces of competition and incentives help keep costs down.

However, steve B is right. The insurance companies profit by denying services, which is contrary to honest business practices everywhere. A huge amount of their costs are a result of paying off lawyers to fight their own customers. Competition in such a perverse system (such as across state lines) will only make things worse.

I have no problem with insurers not selling policies to people with pre-existing conditions. But the line has to be drawn where you can't just cut someone away when he gets sick. When insurers do this, it's like breaking a contract.

I don't know what the right solution is. I'm ideologically opposed to single payer, and have doubts as to its long term health as well (like Social Security/Medicare). I'd probably settle for a law that makes policies more like contracts, so that the insurance company can't just cut a loyal customer off when they actually do get sick.