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.

Paul Krugman: government eliminates opportunity cost

Ever since the Progressive Era, Americans have been bombarded with the notion that all goods really are collective in nature. Thus, we hear about "our food supply" and "our oil," and "our healthcare."

If goods truly are collective, then it ultimately is up to that most collective entity, government, to "distribute" them. Pay no attention to the real problems that arise out of the notion of collective things, which is nothing but socialism using different terms. And even Paul Krugman cannot "solve" the central problem of socialism: economic calculation.

In his column on Medicare, Krugman manages to wrap a falsehood around a central kernel of truth, that being that on paper, Medicare costs less than private insurance. He writes:

...here’s what you need to know: Medicare actually saves money — a lot of money — compared with relying on private insurance companies. And this in turn means that pushing people out of Medicare, in addition to depriving many Americans of needed care, would almost surely end up increasing total health care costs.

The idea of Medicare as a money-saving program may seem hard to grasp. After all, hasn’t Medicare spending risen dramatically over time? Yes, it has: adjusting for overall inflation, Medicare spending per beneficiary rose more than 400 percent from 1969 to 2009.

But inflation-adjusted premiums on private health insurance rose more than 700 percent over the same period. So while it’s true that Medicare has done an inadequate job of controlling costs, the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare.

And what causes this problem? Private enterprise, of course:

And then there’s the international evidence. The United States has the most privatized health care system in the advanced world; it also has, by far, the most expensive care, without gaining any clear advantage in quality for all that spending. Health is one area in which the public sector consistently does a better job than the private sector at controlling costs.

I will give Krugman his argument as far as it goes, but I think that a few points just might be in order, points that Krugman conveniently ignores.

The first is that Medicare is NOT subject to state mandates, and that is a huge factor, as mandates drive up the cost of insurance. (I won't ask why Krugman ignores this point except to say that it does not fit with his narrative that socialism is morally and economically superior to private enterprise.)

Second, Medicare sets the payment schedule and doctors that treat Medicare patients have no other choice. Patients can sue insurance companies and the media generally will side with patients and doctors in having the courts order insurers to spend lots of extra money. However, that does not happen (to my knowledge) with Medicare.

Third, there is no way that the advent of third-party payments will NOT result in higher costs, as decisions for care are made by people who do not have a direct interest in the outcomes. Keep in mind that if we had third-party payments for buying other things, like food, then food prices would be higher than they are now.

Fourth, Krugman falls for the silly doctrine that medical care is "different" and not really subject to the laws of economics. Now, keep in mind that when we say that something is subject to economic laws, what we are saying is that it is a scarce good. If economic laws don't apply, then the good cannot be scarce.

I cannot believe for a second that Krugman would claim that medical care is a non scarce item, yet, he writes about medical care as though it is not scarce. For example, take his long-held view that medical capital drives up costs. If that were true, then it would be the first time in economic history that the presence of capital (at least developed in a free market) forced real costs to be higher than they would be in the absence of capital.

Would Krugman ever write that the development of the assembly line made automobile costs higher? If that were true, then the story of how Henry Ford was able to bring down the price of a new car from about $1,000 to less than $300 simply would be non-existent.

If, indeed, capital were to be responsible for higher real medical costs, then one would have to look at other factors to see why this would be so, for it makes no economic sense by itself. Unfortunately, Krugman is not willing to go outside the narrative that medical care is "different."

Moreover, if government by taking over payments can eliminate opportunity cost (or make it substantially lower), then why does not government involve itself in everything else and lower costs? For that matter, if government by simple fiat can create such miracles, then why has socialism failed in places like Cuba, North Korea and the U.S.S.R.?

Medicare, Mediscare, and the reality of the future of administrative medical care

Did the Democrats win the special election for Congress this past week because of a fear of what the Republicans might do to Medicare? Paul Krugman thinks so, and he very well might be correct. However, there is something that Krugman does not want to admit, and that is the simple fact that Medicare as we have known it is not sustainable, and not even if we raise taxes on upper-income Americans.

(Krugman, you know, always claims that if we can just "tax the rich," that most federal budget problems will be solved. In other words, if we raise the top tax rate from 35 percent to 39.6 percent, the fiscal planets will align and prosperity will return. I'm not sure how his causality chain works for this blissful scenario, but there it is.)

First, Krugman rightly points out that the Republican plans would cut Medicare, and I am in full agreement with him that this would be the case. However, while I don't agree with the Republicans on what might happen if their plan is enacted, nonetheless I believe that Medicare is going down, anyway, and all of the rhetoric from Krugman cannot change the simple fact that the American economy cannot produce enough to keep ALL of the current programs, from military spending to transfer payments, going at their current rate.

Krugman writes:

The new program might still be called Medicare — hey, we could replace government coverage of major expenses with an allowance of two free aspirins a day, and still call it “Medicare” — but it wouldn’t be the same program. And if the cost estimates of the Congressional Budget Office are at all right, the inadequate size of the vouchers — which by 2030 would cover only about a third of seniors’ health costs — would leave many if not most older Americans unable to afford essential care.

If anyone is lying here, it’s Mr. Ryan himself, who has claimed that his plan would give seniors the same kind of coverage that members of Congress receive — an assertion that is completely false.

And, by the way, the claim that the plan would keep Medicare as we know it intact for Americans currently 55 or older is highly dubious. True, that’s what the plan promises, but if you think about the political dynamics that would emerge once Americans born a year or two too late realize how much better a deal slightly older Americans are getting, you realize that this is a promise unlikely to be fulfilled.

Now, I hate to tell this to Krugman, but Medicare already has been cutting its payments to doctors, and many of them tell me that what Medicare pays is well below their own costs.

Thus, the "cuts" in Medicare have been going on for a while, but no politician is going to admit as such, and neither is Krugman.

Second, Krugman is disingeneous about the Democrats' own plans for cost-cutting. He writes:

Still, are Democrats doing a bad thing by telling the truth about the Ryan plan? “If you demagogue entitlement reform,” says Mr. Ryan, “you’re hastening a debt crisis; you’re bringing about Medicare’s collapse.” Maybe he should have a word with his colleagues who greeted the modest, realistic cost control efforts in the Affordable Care Act with cries of “death panels.”

Hmmm. I believe it was Krugman himself who used the term "death panels," and was quite enthusiastic about the term. Only when his comments went viral did he change his tune.

Still, for all of the political rhetoric out there, we have to face the fact that unless the U.S. economy produces more and becomes one in which firms can pursue profits in a market setting (not profits like they get at Archer-Daniels-Midland courtesy of American taxpayers), this welfare-warfare state is in for a very rude awakening.

Americans have not faced the hard fact that this economy with government burdens cannot be sustained. One can understand when politicians or English professors claim that the only problem is that there is a lack of taxation and spending, but when academic economists -- and especially academic economists representing the most elite institutions of higher education -- want to continue the fiction that all it will take is an injection of borrowed money to bring back prosperity, something is wrong in the profession.

In a recent article on the Great Society and the programs it spawned, Robert Higgs notes:

Galbraithianism, Marxism, and other varieties of critical socioeconomic analysis also helped to justify the displacement of antiwar and pro-civil-rights enthusiasms onto a diverse set of antimarket causes, giving rise to heightened support for environmental, consumer, and zero-risk regulations. No perceived social or economic problem seemed out of bounds in this cacophonous new political environment.

Indeed, the reality is that this cannot continue, and Higgs warns:

Almost everyone now acknowledges that federal entitlement programs, crowned by the enormously costly healthcare systems the Great Society spawned, have promised much greater benefits than the government can fund, and hence that many of these benefits will have to be cut, notwithstanding the political fury such cuts surely will elicit. This impending sociopolitical tumult represents one of the Great Society's bitterest fruits.