Sunday, August 29, 2010

It’s Technological Innovation, Damn It, so Let’s Go Back to the Stone Ages

In the widely read e-mail “Mish’s Global Economic Trend Analysis”, Mike is trying to decide: Who's to Blame for Rising Healthcare Costs?

He quotes a Therapist CEO who wrote:

"It’s a joke when patients come in and present their insurance card like that provides them any benefit at all."

This CEO is wrong. Why? The deductable may have been raised to $50, which matches the $50 charge for therapy, meaning the patient pays it all; however, what this therapist misses is:

“What does he charge if you do NOT have an insurance card... $100, $200?”

I have a high deductable insurance policy, and while it’s STILL expensive, I can’t really “self-insure the little expenses” because to obtain the “price schedule” available to insurance companies, I have to have an insurance card. Otherwise, a $50 charge to a person with insurance is a $100 to $200 charge to a person without insurance. In other words, let’s charge more to the person who can’t afford it!

How did we get “so out of whack”?

Mish is looking for “Who's to Blame…” but he doesn’t have Congress or "free market capitalism" on the list.

The “Blame for Rising Healthcare Costs” is most easily explained by comparing it to Social Security because our health care system is in a large part responsible for our Social Security crisis, albeit indirectly.

Life expectancy was around 65 when Social Security was created. Thus Social Security was, in essence, started as a "windows and orphan" fund. Few people actually lived to retirement age so few people collected retirement benefits. Thus it was NOT a retirement system.

Perhaps as an excuse to increase social security taxes over the years, Congress expanded the benefits until it became a "rob Peter to pay Paul" (pyramid) scheme. We’re robbing young workers to pay old ones.

As everyone knows, with the baby boomers reaching retirement age, the "42 16 workers for every 1 retiree" pyramid is “approaching inversion”; we're down to somewhere between 2-3 workers for every 1 retired person.

Why is this a "health care problem"?

If you look at health care, we don't actually have a "health care cost crisis" and we don't have "a bad system relative to other countries".

Too Much of a Good Thing

What we actually have is a "too much of a good thing" health care crisis.

The US produces the bulk of technological innovations in health care, and while it is expensive in the short run, like all technological innovation, it ultimately drives DOWN the cost.

Studies show the cost savings from technological innovations accrue not to the government or business bottom lines because competition arises to match the new innovation, driving down costs.

Who’s the ultimate beneficiary of these cost savings? You and me, the consumer.

The Downside to Too Much of a Good Thing

Regrettably, there is a "bad side effect" to this health care innovation. It creates significantly longer life spans: You can read this link to see Average life span has increased 19 years since 1900 and about 10 years since 1950. Or you can watch a comparable video here to see free market capitalism is the best path to wealth and health!

Simply put, people just use to die... earlier. Now they live significantly longer, consuming BOTH more Social Security AND medicare/medicaid benefits.

So our Social Security problem AND our Health Care problem are one in the same, it’s a “technological innovation” problem. Damn it, let’s go back to the stone ages!

Our Cost, Their Benefit

At this point, we should address the critics who contend that our health care spending is higher than other countries. Yes, it is.

While I have not found a good answer on why life expectancies are roughly the same in the advanced countries, throughout the rest of the world, the governments are "more Keynesian" (ie, socialistic / interventionist) than in the US (that is, until recently).

[ Jan 2014 addendum:
A few months ago I read a good piece that explained the "so-called" differences in life expectancies:

1) America is a nation of risk-takers. There are significantly greater "accidental" deaths (and the author somehow included suicides here) in the US versus other nations. Our life expectancy is skewed down by this factor.

2) Definition of "live birth": In many countries, a "live birth" ONLY occurs if the infant survives 36-48 hrs. So if an infant dies "too quickly", they don't count it as a live birth. To me, this equates to saying "we're only going to count those statistics that make us look good", aka we're ignoring infant deaths that occur too quickly. In the US, medical technology has pushed us to the other extreme, where we attempt to save infants even before they would normally be viable on their own.

The author stated that if you remove these two factors from official statistics, America's longevity is, in fact, the longest (ergo the best).

Other countries simply have more control over their economies, and in health care specifically, a lot of it is cost controls (but some of it is availability too).

Regrettably, this means other countries benefit from our technological innovation in health care without paying for it (drugs), or they “don’t pay for it” (medical equipment where they have, say, 1 MRI machine for a given population whereas the US might have 5, and “the cost” to their people is "waiting for access").

As much as a free trader I am, at times I get so mad that I think we ought to say that the drug companies can NOT sell their products outside the US for cheaper than in the US ("no pay, no play").

I think in time the life expectancy puzzle would be solved... or other countries health care spending would grow to meet ours, but putting controls on something, like medical salaries, is not the solution.

Why Up If Technology Drives Costs Down?

If technological innovation drives health care costs down, why are they going up? Largely, it is due to the increasing life expectancies I've discussed. However, there is also a “more sinister” answer.

Have you ever looked at WHEN the health care cost "explosion" began (if you must call it that)? To a large degree, it started in the 1970s.

Why is this important?

Medicare and Medicaid programs were started in the mid-60s. So government "got control" of a significant chuck of health care spending. And health care inflation started shortly thereafter? Hummmm!

Sounds like today. From the time Obamacare was “put on the table” through its becoming law, my high-deductable health insurance premium has doubled. But I have a high deductable policy and my family is healthy; there is NO cost to the insurance company… or is there?

So the government got involved in health care, and health care inflation accelerated. Then the high inflation of 1970s hit. Who was responsible for this? Do you truly need to ask?

President Kennedy advocated a "
War on Poverty", which President Johnson took to heart and announced (“as his”) during a State of The Union address. And both Presidents contributed to a significantly expanded presence in Vietnam.

These "war cost pressures" were significant, but let's not forget about the baby boomers. They were entering prime consumption age.

So there were huge social (ie, government) and demographic cost pressures creating the significant, widespread inflation of the 1970s.

Go to the Root!
The cost pressures of the 1970s were part of a larger cycle which is the main cause of our problems today, so let’s back up.

The post World War 2 economy was dominated by a long cycle and the long term cycle of credit expansion and contraction.

While mortgages existed prior to 1932, prior to 1916, national banks and many state banks were prohibited from making real estate loans. And those that did generally did so only at loan to value ratios of 50% or less “because the loans were illiquid”.

Nonetheless, like recently, 2nd and 3rd mortgages were available – at a high cost – and this was how many homeowners were able to purchase homes prior to the
Great Depression.

And guess what. “Home prices never went down” back then either! Until they did. And that happened when things crashed. Thus…
In 1932, however, President Hoover signed the Federal Home Loan Bank Act. I’ll let Hoover explain why:
"The purpose of the system is to both meet the present emergency and to build up homeownership on more favorable terms than exist today.”

“A considerable part of our unemployment is due to stagnation in residential construction. There has been overbuilding in certain localities in boom years…”

(MRH: so let’s build more!)

“In the long term we need at all times to encourage homeownership…”

Does all this sound familiar?

There actually were numerous governmental financing agencies created in the early 20th century but I highlight the “FHLB” because it sounds… “so today”.

Further back, the Panic of 1907 was the first US banking crisis to affect, in essence, the wealthy. It actually hurt Wall Street and the eastern establishment.

Thus out of this panic was laid the roots to the Federal Reserve Act of 1913. While created for many reasons, prominent among them was that “the people no longer trusted private bankers to shepherd the financial markets.” (I’m smiling!)

What the Federal Reserve Act did, primarily, was attempt to restore peoples faith in the banking system. It was to do this by avoiding the monetary panics that occur at the end of credit expansions (aka manias) as well as prevent or reducing the contraction of credit that inevitably occurred after these panics.

Remember how Greenspan “couldn’t control” the tech bubble, but Bernanke “can” for the housing bubble? Hey, aren’t they both “sort-of” associated with the Federal Reserve?

Why Back Up to the 1930s and before?
But aren’t we talking about health care? Yep! Nope! Both.

On the surface, it’s a complex issue. But in reality, it boils down to something simple. Bear with me and I’ll get there.

So let’s review the present and “recent” past. The government helped “push” a post-WW2 credit cycle expansion (especially a booming home mortgage expansion) that ultimately “collapsed into” the inflation plagued 1970s.

This is also when government made its first big push into health care. And it’s also when health care costs really started rising.

This 1970s inflation period was part of the credit contraction:

It gets harder and harder to qualify for loans when the interest rates keep going up and up and up. At the Savings and Loan I worked at in 1981, we simply quite lending at 15% mortgage rates (that no one could afford anyway) because we could get 20% on short term deposits with the Fed (the Fed Funds peaked in June 1981).

Nonetheless, this post-WW2 credit cycle collapsed into the inflation plagued 1970s, and then we began a new period of long term credit expansion, as interest rates declined from their highs of the early 1980s to the lows of a couple of years ago.

This credit cycle expansion has technically ended a couple of times. In reality, it ended with the bursting of the “Technology/Internet bubble” of the late 1990s. But Greenspan, who thought he couldn’t control its growth, decided he could control its collapse. In doing so, Greenspan created “The Great Housing Bubble”. Bernanke had less of a roll in this bubble, but by damned, he (too) was going to control a bubble collapse.

Thus the end of the long credit expansion cycle has been “artificially” extended not once, but twice (by the Fed)… at least in theory… but it’s not really a credit expansion when banks won’t lend because they’re tightening credit standards and people and businesses are too afraid to borrow despite super low interest rates (aka the “Fed “pushing on a string”).


So what the heck are you saying?
Health Care.
Social Security.
Technological Innovation.
Remember under “Go to the Root” I talked about a larger cycle, a long cycle, and I inferred it was a long cycle of credit expansion and contraction.

I really did NOT infer, rather I was trying to “fool you”, as Washington and Keynesian economics has done for 100 years.

The LONG cycle I’m talking about is a cycle where people put “trust in their government”, a government to “solve all the problems”.

The Fed was to control, essentially, credit booms and busts. Job well done… NOT.

The FHLB board was to create conditions for a stable housing market and stable employment in the housing industry. Job well done… NOT.

Social Security was to create a program to improve, among other things, poverty, old age, disability and the unemployed. Job well done… MOSTLY not (but the old people sure benefited by the robbing of the young).

Kennedy and Johnson’s war on poverty, which beefed up Social Security AND created Medicare/Medicaid was to improve poverty and the health system. Job well done…. NOT.
BTW: Post WW2, we were NOT "1-1-1" (GulfWars-Korea-Vietnam), we were "1-1-2" because we lost the "War on Poverty".

[ Jan 2014 addendum:
According to a left-leaning organization, the govt official poverty stats do NOT include "WOP" benefits like Social Security, Medicaid, etc., and if these benefits are included, the US poverty rate drops from around 20% into the low teens. Given the unjustifiable ignoring of WOP benefits, it appears the War on Poverty is not quite the failure I understood it to be.

Conservative authors are quick to point out that when enacted, the program(s) promised much more than it delivered, such as eliminating poverty, and it is a failure relative to expectations.

I would thus have to say that we're "1-2-1" post-WW2 because the WOP was a stalemate.

Nonetheless, the real question to me is the cost-benefit of all this spending, especially when you include the fact that the costs keep escalating and there is a huge "off-balance-sheet, unfunded-liability". In other words, the WOP programs has produced some benefits, but the total bill has NOT yet come due.

And more importantly, if the govt did not spend these vast sums on the WOP, in economic theory, this investment would have been available elsewhere in the economy. How much better would the economy be with this investment? This question can't be answered, especially since the govt created much of this investment "out of thin air" - ie, borrowing it through money creation.

In the end, I am a firm believer in free markets, so I believe had the WOP programs been not so expansive, the markets would have provided a better solution, but we can not ever truly know the answer to this.

What’s the solution?
To solve the health care problem, maybe you should retire with great benefits at 65… but at 70, we kill you.

To solve the housing crisis, maybe we just tear down 20% of all housing and start new.

To solve the Social Security crisis, maybe we open the borders to any immigrants that want to come but will do so legally and pay taxes. This would help "the Social Security pyramid" (by bringing in more suckers!), and even though this would ALSO help our housing crisis, I doubt anyone would want to go this route.

Obviously I jest, but what we need to kill is Keynesian economics. What we need to tear down is government, which does NOT solve problems but rather just makes them worse (maybe the pain is not as acute, BUT it is significantly prolonged and more widespread). What we need to open up is the free markets.

I hope The long cycle of trusting that government can control and improve the economy is coming to an end. I do hope this is the death of Keynesian economics, because he got it wrong.

Keynes main “economic opponent” was Friedrick Hayek, known for his belief in the free-market capitalism. Prior to the 20th century, the government intervened hardly at all. We had numerous depressions, which tended to last about 12-18 months as the excesses from whatever bubble-bursting caused the depression in the first place. But cleansed the system was.
( Murray Rothbard's "America's Great Depression" is a MUST READ for more information... one-quarter of the book is simply footnotes of Rothbard's sources).

Do you realize that, while we had depressions prior to the 20th century, we NEVER had one recession, not a single one?

The reason is, after the government activism that was born from the Panic of 1907 and matured in the Great Depression, well, it succeeded in doing one thing. Depressions did become shallower, so the politicians and Keynesians coined the phrase “recession” because it “sounded softer”.

What was the cost of “a recession” rather than “a depression.” As I said, the pre-20th century depressions lasted, on average, 12-18 months because the excesses were cleaned up quickly.

On the other hand, the Great Depression lasted, what, 15 years or so and it took a world war to create a recovery (it was actually a Depression that became a Great Recession, but that phrase wasn’t coined yet).

The “inflation recession” of the 1970s (or stagflation) took only a decade or so to recover.

And our current “roller-coaster recession”, well I count its start at the year 2000. With all the governmental intervention going on, I’ll be thankful if it’s shorter than “interventionalistic” Japan’s “two lost decades”.

Hopefully we’ll see this Great Recessions demise soon as the Tea Party wakes up the rest of America to the realities of out of control government and out of control spending.

Creative Destruction

One final thought. The problem with Keysians and the people that believe in big government is they just don’t understand Joseph Schumpeter, whom I consider the greatest disciple of Hayek.

Schumpeter studied business cycles, and quite opposite to Keynes, he concluded that the boom/bust cycles the Keynesians wanted to eliminate (or at least moderate) were actually good for the economy in the long run.

Simply put, you can’t have creation without destruction. But out of destruction, new technological innovations (creations) arise.

Keynes (and Obama) would have supported the horse and carriage industry, given unemployment benefits to those put out of work by the invention of the automobile, and paid for it by taxing the productive growing industries to support the unproductive dying industries.

I pray to God when my time comes, I won’t experience a lingering death; I pray that I won’t have some Obama/Keynesian Doctor that insists on keeping me on life support. God please, when I die, let it be a quick heart attack, the sooner to be reborn.

So the root of most if not all of our problems (ie, problems of Capitalism) are precisely as Schumpeter foresaw. The root is that Capitalism has been enourmously successful. But also as Scumpeter foresaw, the success of the creative side of Capitalism has breed a system dominated by bureaucrats and intelligensia (of which lawyers are perhaps the foremost group), a system that as such becomes so corrupt as to drive a capitalistic society into socialism (ie, destruction!).

Obama is the perfect figurehead, nes pa?

You may wonder why we're not "all Schumpeterians" rather than Keynesians, but Schumpeter agreed with Marx: Capitalism would fail. Schumpeter, however, didn't think Capitalism was a flawed system like Marx (and thus doomed to failure); rather, he thought it would fail through it's own success. Back then, people we're looking for answers and they certainly weren't looking for answers from someone who agreed with Marx. Besides, Schumpeter always thought asking the right questions was more important than having the right answers. Again, back then people were looking for answers... and Keynes had answers...

even if they've ultimately been proven wrong.

addendum 6/17/11: this started as a comment on health care, and I'm glad to learn there are increasing amounts of data that confirm my belief. See how "Unfree" the Medical Marketplace is.

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