Thursday, August 6, 2009

More on the Healthcare Debate

We discussed healthcare reforms in some of our most recent blogs. Last week Dan Aronoff's "Why Government Can't Cure Healthcare", which I also posted on a few Linked-in groups, got us a record number of visits and comments. We also explained the difficulties the Administration is facing in implementing it's reforms in "Washington Trip: Logjam Only a Few Weeks Later". Not much has changed since. The deadlock has not been resolved and the discussions still center around the same basic issues, including costs and philosophy about who should provide the services.

The voting August deadline has passed and Congress will only be back at it in a month. Yet, in the meantime, the debate rages on in the media. Not a day goes by without big names weighting in the conversation. Yesterday was no exception. Both Arthur Laffer and Richard Posner had interesting comments that were published in the Wall Street Journal yesterday. The comment written last week by Posner "Liberal Forgetting Keynes" was taken from his blog "A Failure of Capitalism" and emphasizes the uncertainty that the healthcare reforms are creating at this crucial juncture in the economic recovery. Here are some excerpts:

"Liberal economists like Paul Krugman quickly embraced Keynes.

"But Krugman's passionate support for the Administration's health-care program suggests that he has not absorbed one of the central elements of Keynes's theory, which is the role of uncertainty in depressing investment spending and, both by depressing investment and by increasing passive savings, in depressing consumption spending as well. ... When uncertainty in the sense of risk that cannot be calculated rises, it tends to make businessmen and consumers alike freeze--they hoard money rather than spend it, whether spending on investment in the case of businessmen or sending on consumption in the case of consumers. That is the prudent response to increased uncertainty, because by holding off on spending the businessman or the consumer buys time to gather information about his options, or simply wait for the situation to clarify itself, and also accumulates cash with which to deal with emergencies to which an uncertain economic environment can give rise. We see these tendencies at work today, in the huge excess reserves accumulated by the banks, the decline in new bank loans, the massive layoffs by employers uncertain about the demand for the goods and services they produce, the decline in business deals, and the sharp increase in the personal savings rate.

"But by taking these precautionary actions (or inactions), businessmen and consumers are deepening the economic downturn and retarding recovery. The government's aim should be to reduce uncertainty and increase confidence in the future of the economy. Poorly designed as it was, the $787 billion stimulus package enacted in February was a justifiable anti-depression measure because, long before any of the appropriated money was spent, it boosted confidence in the government's determination to arrest the depression.

"But even by today's standards, $787 billion is a lot of money. It added appreciably to a national debt already swollen by the Bush Administration's profligate spending and tax-cutting, by the bailout programs, and by the dive in federal tax revenues caused by the fall in incomes. The greater the national debt, the greater the worry about an aftershock to the depression when the time comes to pay back, in one way or another, the additional debt incurred to fight the depression.

"I therefore thought it a mistake, as I have noted often in the blog, for the Administration to embark, without waiting for the recovery from the depression, on ambitious social programs that are likely to add substantially to the national debt. These programs, if enacted, will increase the likelihood of a severe aftershock.

"The most ambitious of the programs is the plan to require, by a combination of mandates and subsidies, that the vast majority of the 45 million or so Americans who do not have health insurance at present obtain it.

"Keynes warned President Roosevelt in an open letter of December 31, 1933, about trying to combine far-reaching reform with recovery from an economic depression.
"Initially the concern was with the macroeconomic implications of adding some $100 billion a year to the federal deficit (an underestimate, in my view, because it ignores the increase in demand for medical services by tens of millions of persons who will have health insurance for the first time, which will reduce the marginal cost of medical services to them). The concern became so acute that focus shifted to measures for financing the program so that it would not add to the deficit. But when this happened, businesses and individuals alike began asking: what part of the cost of the new program will I bear? And this question injects a new and very major source of uncertainty into the economic environment. Small businessmen are worrying about the added cost to them if they are required to insure their employees, and individuals are wondering whether their cost of health insurance will rise. Most people do have health insurance and most of those who do are more or less satisfied with it; anyway better the devil you know than the devil you don't know.

"Prudent businessmen and prudent individuals alike have thus been given an additional motive for hoarding cash rather than investing and consuming. No one knows how his financial situation will be affected by health reform, if it is is enacted. There is enormous and I think justified distrust of the government's ability to design and execute so ambitious a program as the Administration and the congressional leadership envisage.

"One might think that this would give a born-again Keynesian macroeconomist like Paul Krugman pause. But not only does he say nothing about the effect of the debate over health reform on uncertainty and through it on the economic situation, even though he is pessimistic about the situation; he provides no analysis of the likely costs of health reform, and the incidence of those costs on particular groups in the society. He does nothing to allay the uncertainty that the debate over health reform has engendered."

For his part, Arthur B. Laffer (of the Laffer curve) proposes "How to Fix the Health-Care 'Wedge'". As you can read in his article, "The health-care wedge is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays. When healthcare is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase." Posner suggests instead that

"Congress should implement a patient-centered approach to health-care reform. A patient-centered approach focuses on the patient-doctor relationship and empowers the patient and the doctor to make effective and economical choices.

"A patient-centered health-care reform begins with individual ownership of insurance policies and leverages Health Savings Accounts, a low-premium, high-deductible alternative to traditional insurance that includes a tax-advantaged savings account. It allows people to purchase insurance policies across state lines and reduces the number of mandated benefits insurers are required to cover. It reallocates the majority of Medicaid spending into a simple voucher for low-income individuals to purchase their own insurance. And it reduces the cost of medical procedures by reforming tort liability laws.

"By empowering patients and doctors to manage health-care decisions, a patient-centered health-care reform will control costs, improve health outcomes, and improve the overall efficiency of the health-care system.

"Congress needs to focus on reform that promotes what Americans want most: immediate, measurable ways to make health care more accessible and affordable without jeopardizing quality, individual choice, or personalized care."

You can read more at Mr. Laffer, the chairman of Laffer Associates, is also the co-author of “The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let It Happen” (Threshold, 2008).

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