26 August 2009

Healthcare Reform: The Public Option

The Objectivist
Public Option: Higher Cost, Lower Quality
Dunkirk-Fredonia Observer
August 24, 2009

The Democrats in Congress and the Whitehouse are pushing a public option. It is a centerpiece of the Affordable Health Choices Act. The public option is a Medicare-like, government-run health insurance program.

The White House has signaled that they might be willing to pass a healthcare-reform bill without a public option. This caused many Democrats to get their panties in a twist. As reported in Medical News Today, Sen. Jay Rockefeller (D-WV) asserted that the public option is “a must.” Sen. Russ Feingold (D-WI) stated that “without a public option, I don’t see how we will bring real change to a system that has made good health care a privilege for those who can afford it.” House Speaker Nancy Pelosi (D-CA) said, “There is strong support in the House for a public option.” Rep. Anthony Weiner (D-NY) threatened that without a public option, the legislation could lose up to 100 Democratic votes in the House.

Concerns about cost and quality of care supposedly motivate the attempt to reform healthcare. The U.S. spends more on health care than any other nation. According to the New York Times, this amounts to more than $7,500 per person and roughly $15,000 per household. Using 2004 figures, this is 92.7% more than any other G7 country (France, Germany, Italy, Britain, Japan, and Canada). The U.S. also spends a higher percentage of the economy than all but one other member of the United Nations (in 2007 this was $2.26 trillion or 16% of Gross Domestic Product). These costs wreck havoc on personal finances. One study by David Himmelstein of Harvard University found that medical expenditures caused 60% of all personal bankruptcies in the U.S.

U.S. healthcare gets bad grades. A 2008 report by the Commonwealth Fund found that despite all this spending, the quality of health care in the U.S. was worse than 19 other developed industrial countries with which it was compared. The World Health Organization also ranked the U.S. 37th in overall performance and 72nd in overall health level in comparison to the 191 member organizations it included in its study.

The public option will not fix either problem. Consider cost. A public option is designed to cover many of the uninsured. The U.S. Census Bureau asserts that there are 47 million people who are uninsured at some point in the year. Economist Katherine Baicker and others point out that people who are insured generate more healthcare spending than uninsured individuals. Hence, insuring the 47 million would increase total healthcare costs. If our concern is to lower overall spending, the public option is a loser.

It might be argued that public option would reduce costs (or more specifically, reduce the increase in medical costs) by providing more competition. Some proponents argue that the government can provide services more cheaply. They often cite Medicaid, Medicare, and Veteran’s Health Administration as evidence for their claim. This is wishful thinking.

Medicaid charges less because it pays a fraction of what Medicare, private-insurance companies, and out-of-pocket consumers pay. The latter groups end up subsidizing Medicaid. Merely encouraging more subsidization will not reduce total costs, merely shift them around.

Medicare (or a Medicare-like program) will not reduce costs. First, Medicare is a mess. The program involves 140 million Americans paying 2.9% of their income to pay for healthcare for 42 million mostly elderly Americans. It costs roughly $400 billion a year and is running a massive deficit ($179 billion in 2007). It will go broke roughly 8 years from now. In its shaky status, Medicare resembles Social Security. The latter is another Ponzi scheme that will start running deficits as early as this year. It works via a 12.4.% tax on working Americans (in part via their employers) that is also transferred to the elderly, disabled, and others.

Second, as Steven Pearlstein of the Washington Post points out, if Medicare (or a similar program) offered insurance that competed against private plans, it would have to start doing a number of costly things. It would have to collect premiums, market its programs, maintain a reserve, and manage payouts in way that lowers costs and increases quality. There is no reason to believe that it would do so more efficiently than the private sector. Public sector employees get roughly 44% more in compensation (wages and benefits) than do private sector employees and are usually much harder to fire. Government waste and mismanagement is legendary. Government-protected businesses like Amtrak and the Post Office are forever running deficits and needing protection against competition. History simply provides no reason to think that a government-run insurance company would be more efficient.

Even if the government could run an insurance system more efficiently, massive taxes would be necessary to support the public option. Under the current House plan the public option would be available for individuals making up to 400% of the poverty level (or up to $43,320). The Congressional Budget Office estimates that the latest version of Affordable Health Choices Act at will cost $597 billion over ten years and reduce the number of uninsured by 20 million. This surely underestimates the cost.

Consider the estimate of 47 million uninsured people. Somewhere around 9 million of the uninsured (19%) make more than $75,000 a year and hence choose not to purchase health insurance. Let us subtract them from the number of uninsured, thereby reducing the number to 38 million. If we insured all 38 million, the total cost would be would be $285 billion per year ($7,500/person x 38 million people). If we also screen out immigrants and those currently eligible for employer-sponsored insurance or current government programs, this still leaves 12 million uninsured. Covering them would cost $90 billion per year ($7,500/person x 12 million people). In addition, the public option would suck millions of people out of the private sector because for many employers it would be cheaper for the employer to pay the tax (8%) for not insuring its workers than to pay for private insurance.

The current House plan leaves 27 million uninsured. The program would quickly expand to cover many of these people. To see this, merely consider how Social Security and Medicaid (and the State Children’s Health Insurance Program or S-Chip) were expanded. If President Obama and Congress provide amnesty for the 12-20 million illegal aliens, and they’ll try, even more people will need to be covered. None of this is affordable, especially when we consider that Obama has already run up huge deficits and that Medicare and Social Security will soon be in the red.

There is even less reason to think that the government will increase the quality of healthcare. Is there an area where government-provided services are better and cheaper than the private sector? Like the medical system, the public-school system provides a poor product. The U.S. spends more on education (in per pupil terms) and gets middling to bad results. In the inner cities, the schools are horrible despite being awash in money. The burden here is on the proponents of the public option to establish that the government would provide higher-quality medical services. They can’t carry this burden because there is no area where the government has done so, at least when its costs are competitive with the private sector.

Several states, specifically Maine, Massachusetts, and Tennessee, introduced programs to cover the uninsured. An article in the Wall Street Journal on Maine’s program pointed out that in 2003 Maine attempted to cover all of its uninsured citizens. Its proponents claimed that it would be paid for by savings in the healthcare system. Instead, the program is operating a deficit and had to be supported by a tax on private health insurance. Despite substantial tax subsidies, the Maine’s program produced only a small reduction in the uninsured. Massachusetts’s program did reduce the uninsured. However in doing so, it likely caused healthcare costs to rise faster there than in the rest of the nation. Also, predictably, the cost to Massachusetts taxpayers skyrocketed. Tennessee’s program is another failure. Proponents of the public option might claim that the federal government will do so much better than state governments. Yeah right.

The case for the public option is that it will decrease costs or will increase quality. Neither is plausible. The public option would increase medical costs, jack up taxes, and produce inferior healthcare. Anyone who votes for it should be thrown out of office.

12 August 2009

Environmentalism: Cash for Clunkers

The Objectivist
Cash for Clunkers: Kindergarten Legislators
Dunkirk-Fredonia Observer
August 10, 2009

The Cash for Clunkers program (Car Allowance Rebate System) is incredibly stupid. It is economically inefficient and an incredibly wasteful way to help the environment, if it helps it at all. The program speaks volumes that our President and Congress would spit out such a childlike program.

The Cash for Clunkers program initially set aside $1 billion for U.S. residents to trade in less fuel efficient vehicles for new, more fuel efficient ones. Congress and President Obama then later spent another $2 billion to keep the program going. Purchasers were given either $3,500 or $4,500 depending on the trade-in. The program was designed to stimulate the economy by boosting auto production and sales and help the environment by replacing gas-guzzlers. After the first week of the program, the Department of Transportation asserted that 250,000 vehicles were sold under this program in less than a week. In addition, the clunkers were less fuel efficient (average 15.8 miles per gallon) compared with the newly purchased vehicles (average 25.4 mpg), thereby producing a 61% increase in fuel efficiency. Oddly, the car experts at Edmunds.com noted that a Ford SUV was the most widely purchased new vehicle.

Consider the economic effects. First, Edmunds.com points out that in any given month 60,000-70,000 clunker-like-deals happen without any government program in place. Because the program was to last for 4 months (July 1st to November 1st), 240,000 such trade-ins would have occurred anyway. The superfluous nature of this program can be seen in that, as Edmunds.com reported, 100,000 buyers put their purchases on hold waiting for the program to begin. Using a low-end estimate that 150,000 such trade-ins would have occurred anyway, and this surely underestimates the number, the government spent $1 billion to cause an additional 100,000 cars to be traded in. That is, the government spent $10,000 per additional car sale. It could have used to this same amount of money to give Kias to 90-100,000 people. Clearly, this would have better for the American people.

Second, the program required that dealers destroy the power train components (engine and parts by which power is sent to the axles). This is unbelievably wasteful. Consider the following variant on an example from 19th Century economist Frederic Bastiat and more recently from the Cato Institute’s Richard Rahn and journalist Adam Maji. Town thugs decide they want to promote economic growth by creating business for people in the window business. They smash other people’s windows, thereby creating more business for window-makers and –installers. This diverts money from where it would otherwise have been spent (for example, new houses and clothes) to windows. This makes the people poorer because it diverts money from more preferred to less preferred goods. Nothing in this example changes if the thugs use government money to pay people to smash their own windows. The destruction of cars with significant economic value makes us poorer just as would the destruction of windows.

Third, the program is a money loser. The average American car travels 12,000 miles per year. The increase in fuel efficiency means that because of the trade-in the owner will buy 287 less gallons of gas per year, thereby saving him $861 per year (287 gallons x $3 per gallon). Even if the program on average gets owners to trade in their car two years early, the government will be spending at least $3,500 to save roughly $1,700. This is idiotic.

Consider next the effects on the environment. Assume that there is a problem with global warming from CO2 emissions.

First, the 61% increase in fuel efficiency does not mean that we will burn that much less gas. This will occur only if drivers with more efficient cars won’t drive more. However, Declan McCullagh from CBSNews.com and others argue that with more efficient cars people drive more. This also is in line with common sense. You’re less likely to drive to see a friend in another state if you are driving a large gas-guzzling truck than if you are driving a Prius. If this is correct, then the trade-ins will produce less saving in gas than the mpg difference suggests.

Second, it takes a significant amount of energy to build a new car. It takes an average of 6.7 tons of CO2 to build a new car. Assuming you save around 2.8 tons of CO2 per year by burning less fuel (287 gallons x 19.4 lbs. CO2/gallon). Hence, if on average the program only gets people to trade in their car two years early, the program actually increases CO2 and is thus bad for the environment.

The government disagrees and estimates the program will save 365,000 metric tons of CO2. Even if this is correct, and I doubt it, this is a tiny sum. It is .05% of how much China increases its CO2 emissions each year. It is .006% of the total U.S. CO2 output. That is, it is a drop in an ocean of emissions.

Third, even if the program does save CO2, the estimate by Nina Rastogi of www.slate.com is that it will cost the government$175.53 per ton of CO2. This is incredibly wasteful in that a ton of CO2 currently sells for $17.50 on the European Climate Exchange. Note Rastogi is using data from William Chameides, dean of Duke University’s Nicholas School for the Environment.

Why would Congress and the President adopt a program which is bad for the economy and probably bad for the environment? One reason is that the program is very popular. How could it not be? If a program gave me $4,500 of other people’s money to do what I was going to do anyway, I would like that program too. A cash-for-furniture program and cash-for-clothes program would be popular for the same reason. A second reason these guys adopted the program is that the government is promoting its own business and that of a benefactor, the United Auto Workers. The government owns 61% of GM and the UAW owns 18% of it and the latter also owns 55% of Chrysler. They are helping themselves out using taxpayer-funded inducements. A third reason is that with the government now borrowing $1 out of every $2 that it spends ($1.8 trillion out of $3.9 trillion), all spending discipline has been lost. When the bill comes due, the current Congressional delegation will be long gone.

The Cash-for-Clunkers program provides clear evidence that the President and Congress have a childlike view of the world.