Another Reason Why Third Party Payer Health Care Must End

With the demise of the GOP “repeal and replace” effort, I thought it would be a good time to (finally) post something on this blog and chime in on the health care dilemma.

Free market economists and commentators have long held that the third party payment system of our health care market is the primary reason health care is prohibitively expensive for many Americans. Procedures that are paid for out of pocket, for example, have become cheaper over time. Abortion, for example, is not covered by insurance. It is paid for directly by the consumer. Prices have stayed the same over time, and in some cases has fallen. Cosmetic surgeries and elective lazer eye surgeries have also become cheaper over time.

The typical explanation for this is that, when someone else is doing the paying — in this case, a private insurance company or a government agency — there is no incentive to shop around for a better price. When someone else is paying, it is easiest to just opt for convenience, or simply go for the best care possible. There is no balancing act between cost and quality; there is, in essence, no true competition because prices are not transparent.

An interesting study on taxi drivers could potentially have some influence on the health care debate. An interesting new study sent researchers on 400 different taxi rides in Athens, Greece. The passenger would always tell the driver that they were unfamiliar with the city, but half the time, they would tell the driver they were the ones paying. The other half told the drivers that it was their bosses that were paying. For the second group, they were charged 7 percent more than their self-paying counterparts. Why? Because the drivers knew they could overcharge their business account without the passenger noticing, all because prices are not transparent when a third party is paying for the expense.

The taxicab market is similar to the health care market in that, in situations where a third party picks up the tab, prices are higher. The GOP’s replace plan was destined to lose, even if it passed, in the long term because it did little to tackle the actual problem with the health care system. It catered towards moderates who won’t vote to repeal the ACA anyway. The GOP needs to begin advocating for market-based solutions that drastically reduce the amount third party payers pay for health care, and they need to keep pushing for that until it becomes a mainstream idea. Until they do that, the health care system will continue to be as broken as ever.

As for political advice (and not just policy), it might be best for them to just let Obamacare fail, as Trump suggested (before again pushing for a repeal and replace reform), because Obamacare failing might be the best shot the GOP has to implement real free market reforms. Hopefully, the moderate would support such a plan if the system they have been shielding from reform ceases to exist under its own weight.

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New Study REKS The “Gender Pay Gap”

This new(ish) study demolishes the gender pay gap myth. Liberals and other left-of-center activists frequently point to data from the Bureau of Labor Statistics to prove that “Women, on average, earn less than men.”

Well, as many of us have suspected for a while now, that statistic is basically useless. The numbers come when you lump all of the salaries of women and compare the salaries to that of men. The problem, of course, is that women often work fewer hours than men, work vastly different jobs, and, frankly, care less about money than men. Not only that, but men are 92.2% of work-related deaths. The more dangerous the job, the higher the pay.

So, at least theoretically, there are many reasons the gender pay gap is not caused by discrimination. New academic research backs up this theory.

According to the Washington Post, the new study, published by Cornell University economists, the study finds: “after adjusting for differences in gender employment patterns, is closer to 92 percent. Even the remaining gap of 8 percentage points may not stem fully from discrimination.”

So the 79 cents on the dollar statistic is wrong, and the pay gap, when adjusted for what jobs males and females have, shrinks to 92%. And the remaining 8%?

As noted, the number of hours worked, work experience (women often leave the labor force to raise children, which reduces their work experience. Thomas Sowell explains this here), and the differences between how much men and women care about money all explain the gap.

The gender pay gap has nothing to do with discrimination; instead, it has a lot to do with how productive different workers are and what occupations they have chosen to pursue.

Can Investment Saving Save The Economy?

A real and disturbing trend has emerged: Economic growth is slowing down, and we don’t know why–or for how long. That is the topic of discussion in Harvard economist Greg Mankiw’s newest New York Times column.

Mankiw offers multiple reasons why growth is slowing down, but before we get to those–and their supposed solutions–let’s first diagnose the problem. As Mankiw writes, “the growth rate of real G.D.P. per person has averaged just 0.44 percent per year, compared with the historical norm of 2.0 percent. At a rate of 2.0 percent, incomes double every 35 years. At a rate of 0.44 percent, it takes about 160 years to double.” In other words, had growth during the recent “recovery” met historical averages–the growth didn’t even have to be spectacular, just normal–we would be much wealthier today than we are.

In fact, if the growth trend continues, we will be much, much poorer. The recent drop in median income is nothing like what we will face in the future.

So, what is causing this?

Mankiw offers a few theories. The theory I like to side with is the one where the government is the problem (see here). That may be my conservatism speaking, but it makes the most sense. Median income, for example, is falling because we are working less, exemplified by record low labor participation rates.

Many have argued this is simply a symptom of demographic changes; Americans are getting older, and older people are less likely to work. But this can’t explain falling teenage labor force participation rates.

Both of these trends began around 2000, when regulations began to increase at an even faster pace, and they accelerated during Obama’s presidency, when both tax increases and regulatory increases were underway. Not to mention skyrocketing spending, among other things.

One other theory–the secular stagnation theory–holds that there isn’t enough demand to provide sufficient amount of employment to our economy. The solution? Government investment spending.

But there’s a problem with this: A new report by the CBO has concluded the effect of government investment is, when all is said and done, essentially zero.

The short-term effects of a billion dollars in spending is only $50 million. The effect on productivity is long-term, with the effects only being fully hashed out 20 years later. But even these long-run effects aren’t very large. Putting all of the effects together, a $500 billion investment spending package would shrink the economy by $9 billion but grow it by $15 billion, leading to a $6 billion increase in GDP. But, as our economy is worth in excess of $18 trillion, these effects are minuscule.

So the real solutions aren’t more government intrusion; the solution is less. We need to undo the bad policies of today and implement better policies tomorrow. We need health care reform, tort reform, immigration reform, tax reform, entitlement reform, and most of all, regulatory reform. Even Michael Mandel of the Progressive Policy Institute believes we need to drastically reform the regulatory bureaucracy in this country.

Even if those policies don’t bring us to the historical level, I suspect they will bring us up a few points. And that means a lot in the long run.

The more mudslinging that enters the political realm, the less positive change can be done. Leftists need to stop calling conservatives idiots, bigots, and crazies; conservatives need to stop calling liberals idiots, bigots, and crazies. We need to stop. Because if we don’t, we’ll all be a lot worse off.

R is Likely Not Greater than G

Thomas Pikkety, the famous economist who broke international headlines when his economic treatise, Capital In The 21st Century, became a global best seller, has some things to say about wealth inequality. Pikkety’s argument is simple: The rich are already rich, and will continue to get richer until they have everything that’s left. His thesis is also simple: R, or the rate of return on capital, exceeds G, the growth rate of the economy. In other words, r > g. An important assumption he makes, however–that families will continue to become wealthier and become the modern day equivalent of oligarchs–is just plain wrong.

As a study published in the Cato Journal notes, “this logic holds true only if the wealthy never dissipate their wealth through spending, charitable giving, taxation, ill-advised investments, and splitting bequests among multiple heirs.”

The Cato study looks at the Forbes list of the top 400 hyper-wealthy individuals in the world. Their research suggests at least half–and oftentimes more–of the people in the top 400 list are wealthy because of earned income, not inheritance. In fact, according to Forbes itself, the number of earned billionaires on the list has increased over time, and is at an all time high. The wealthy are getting rich because they produce things other people want. As transactions in a market economy are voluntary, any interaction between a producer–say, someone on the top 400 list–and a consumer, like you and me, is mutually beneficial. In other words, their wealth has made them better off, but as no one forces us to consume their products (and we only consume when we feel as though it will make us better off), their wealth has made us better off, too. Greg Mankiw makes a similar argument in his interesting paper, “Defending the One Percent.

The Washington Post also has an intriguing article on this, which states that, in 1992, inherited wealth made up 27% of the wealth the 1% had. Over time, this percentage fell; in 2007, that number was a mere 14.7%. Not only that, but the percentage of households reporting an inheritance transfer fell by 2.7% over the time period between 1989 and 2007.

What is also interesting is that inheritance may have a dampening effect on inequality. As a large percentage of wealth transfers are among middle class households, if we were to eliminate inheritance, inequality would increase. As a study by the BLS notes, “Our simulations show that eliminating inheritances … actually increases overall wealth inequality and, in particular, sharply reduces the share of the bottom 40 percent of the wealth distribution.”

So, in sum, most wealthy families do not inherit their wealth–they earn it, which benefits everyone; inheritance mainly benefits the middle class; and the number of people who earn their wealth as opposed to inherit it has increased over time, which poses a problem for Pikkety’s argument. And one last point: If r > g, and if that means, over time, the rich get richer and the poor get poorer, why is poverty at record lows when inequality has skyrocketed?

Regulation Buildup and Economic Preformance

The American Enterprise Institute (AEI) has an interesting blog post written by economist Mark J. Perry and policy analyst Thomas Hemphill. They analyze the important, but often ignored, impact regulatory buildup has had on economic growth over the past few years. As they noted, “the U.S. economy grew at an annual rate of only 0.5% during the first quarter of 2016…  economic growth has averaged only 1.4% annually over the last seven years.” This is far below the 3% historical average–a benchmark Obama has not hit (he is the first president to do so. Even FDR hit 3% economic growth during the depression).

So, how big of an impact have regulations had? Perry and Hemphill write:

In a 22-industry study released in April by the Mercatus Center at George Mason University, a group of researchers found that federal regulations created an economic drag on the U.S. economy amounting to an average annual reduction in GDP growth of 0.8%. … What would have happened if federal regulations had been “frozen” at the levels that prevailed in 1980?…

The Mercatus research team calculated that the 0.8% annual drag on real GDP growth since 1980 due to the cumulative effects of regulation can be extrapolated into a 25% reduction in the size of the U.S. economy in 2012, or an economy that was $4 trillion smaller (nearly $13,000 per American) than it would have been in the absence of regulatory growth.

An economy smaller by $4 trillion, or $13,000 per family, due to increasing regulatory burdens since 1980 is a staggeringly high number. Mercatus has an older study, published in 2013, that calculates how much regulatory burdens have cost the U.S. economy since 1949.

In 2011, nominal GDP was $15.1 trillion.  Had regulation remained at its 1949 level, current GDP would have been about $53.9 trillion, an increase of $38.8 trillion.  With about 140 million households and 300 million people, an annual loss of $38.8 trillion converts to about $277,100 per household and $129,300 per person.

I can only dream of a world where every household was $277,000 wealthier than it is today and government smaller–and it looks like it could have been possible had regulatory burdens not exploded since the end of WWII.

Now, some of the regulations since 1949 (and 1980, for that matter) had to have been good. I am also not an anarcho-capitalist: I agree that some regulations are needed. But these studies demonstrate the trade-offs we have with regulation. Regulations may (though usually not) provide consumer protections and stability, but they come at a high economic cost. At what  point do the costs outweigh the benefits? My answer is “almost always”; generally speaking, the costs of any new regulation outweigh the benefits. Even if you disagree with that conclusion, these studies should be eye opening.

Liberal Economist Paul Krugman (and others) DESTROY Bernie Sanders

I will post a few excerpts from Paul Krugman’s fairly recent anti-Sanders article.

From the beginning, many and probably most liberal policy wonks were skeptical about Bernie Sanders. On many major issues — including the signature issues of his campaign, especially financial reform — he seemed to go for easy slogans over hard thinking. And his political theory of change, his waving away of limits, seemed utterly unrealistic.

Just this first paragraph attacks Sanders’s policies for being “utterly unrealistic.” It gets worse.

The easy slogan here is “Break up the big banks.” It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises?

Many analysts concluded years ago that the answers to both questions were no. Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big. And the financial reform that President Obama signed in 2010 made a real effort to address these problems. It could and should be made stronger, but pounding the table about big banks misses the point.

Sanders “misses the point” and goes against what “many analysts concluded years ago.” Pretty harsh criticism. Oh, and it gets worse (or better, I suppose):

But in any case, the way Mr. Sanders is now campaigning raises serious character and values issues.

It’s one thing for the Sanders campaign to point to Hillary Clinton’s Wall Street connections, which are real, although the question should be whether they have distorted her positions, a case the campaign has never even tried to make. But recent attacks on Mrs. Clinton as a tool of the fossil fuel industry are just plain dishonest, and speak of a campaign that has lost its ethical moorings.

And then there was Wednesday’s rant about how Mrs. Clinton is not “qualified”to be president.

What probably set that off was a recent interview of Mr. Sanders by The Daily News, in which he repeatedly seemed unable to respond when pressed to go beyond his usual slogans.

Not only is Sanders wrong, but Krugman makes the argument that Sanders isn’t even the nice old man the media is portraying him as! Coming from Krugman, a leftist, Sanders supporters should think twice.

More economists have destroyed Sanders; it isn’t just Krugman. Libertarians like Scott Sumner and Steve Horwitz to centre-rightists like Glen Hubbard and Stephen Moore to centre-leftists like Christina Romer and Alan Golsbee have all eviscerated Sanders’s proposals. Sanders is truly an economic illiterate. So illiterate,  in fact, that Sumner and Krugman agree. Interesting how shared enemies lead to unthinkable alliances!