Categories
National politics

Federalist Nos. 11 – 12

Federalist Nos. 1112 follow the same overarching argument that many of their predecessors followed. It can be boiled down to the truths concerning economies of scale. A larger union has great advantages over a smaller nation in many aspects of government. Number 12, which deals with government revenue, reminded me of a few issues related to taxes that I had not remembered and a few that I had never considered.

One of the things that has always been a pet peeve of mine is the incessant focus on the necessity of an ever expanding economy. I was reminded of why that would be when I read:

The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity (speed) with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury.

Money is only valuable because of the fact that it acts as a lubricant in the mechanisms of commerce. Because of our ever expanding demands for government services and intervention the government has an ever increasing need to generate more and more revenue through taxation and that is best done by faster and faster monetary circulation – although they are not above inserting more otherwise worthless paper into the system to increase their revenue when they feel it is necessary.

What I had never considered was the following:

It is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation. Tax laws have in vain been multiplied; new methods to enforce the collection have in vain been tried; the public expectation has been uniformly disappointed, and the treasuries of the States have remained empty. . . . No person acquainted with what happens in other countries will be surprised at this circumstance. In so opulent a nation as that of Britain, where direct taxes from superior wealth must be much more tolerable, and, from the vigor of the government, much more practicable, than in America, far the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises.

It is that understanding about the difficulty of collecting direct taxes (such as income tax) that led our founders to codify in the constitution that the federal government should not have the power to levy an income tax. Indeed, reading that statement makes the FairTax proposal look all the more enticing since it rests on indirect taxation.

If anyone doubts the reality of the assertion that direct taxes are harder to collect consider the amount of money and time that Americans spend each year in tax preparation in an effort to pay as little income tax as they can and then combine that with the amount of money and time the IRS spends trying to ensure that nobody failed to pay their allotted share of income tax. Now compare that vast sum with the amount of time and money that people spend trying to avoid indirect taxes like a sales tax.

That explains why the only patriotic thing to do with our stimulus checks is to spend them the day we get them if not before.

Categories
National politics

Willing Suspension of Disbelief

Reports from the CBO that a Universal Health Coverage Bill would be budget neutral are obviously based on the third kind of lie (namely statistics). Commonhealth sums up the effects of the bill like so:

The legislation:

  1. gets rid of employer based insurance (employers that contribute to coverage would give employees that money at first, and eventually shift to a federal health coverage tax)
  2. requires all Americans to have health insurance
  3. offers subsidized coverage up to 400% FPL (Mass is up to 300%)
  4. sets up purchasing pools (like the Connector)

Could someone please point out to me where this plan gives health care providers an incentive to provide efficient, high-quality care? It seems to me that insuring all our uninsured citizens will never pay for itself in a system that thrives on inefficiency – as the current system does. Adding inefficiency couldn’t possibly pay for itself.

Ending employer based insurance is potentially a good thing. Requiring everyone to buy insurance looks like an incentive for more inefficiency and even price gouging. And one of my senators is sponsoring this. I think he should have his head examined.

Categories
politics State

A Novel Approach

As the clock starts in our efforts to reform out Utah health care system I was encouraged by this Op-Ed in the Salt Lake Tribune.

Making health insurance affordable – forcing carriers to offer so-called “affordable plans” – will not result in affordable health care. . . . our priority must be to restore the health-care provider/patient relationship by providing the patient with cost and performance information and making him responsible for his own care. The government does not tell its citizens what house, car or flat screen to buy, but there is an assumption that when it comes to choosing a health-care service, we are incapable of intelligent decision-making and need intermediaries.

Only when the patient is armed with relevant information regarding cost and a providers performance will that patient be able to make informed decisions. Armed with such information, a patient will shop quality and price, which will drive down costs. (emphasis added)

What I really love about this is that it comes from a completely unexpected source – this article was written by the executive director of the Utah Association of Health Underwriters. Along with her valuable diagnosis, Ms. Smith also offers this idea as a possible approach to explore:

For example, an insurance company might give the patient a benefit credit equivalent to the average price of a knee replacement surgery and the patient would shop around with the information given. Based on this data, he might choose a surgeon with a long record of solid outcomes and a lower price than the benefit credit his insurance has given him.

The insurance company could allow him to keep the change in his Health Savings Account for future health-care needs. This practice is already happening on a small scale in several areas where a hospital lists a global price for a heart bypass and gives a 90-day warranty. No extra charges for pain medication, Band Aids or physical therapy – all are included.

This does not require a mandate for our citizens, and might serve as an incentive to bring some people into the insurance pool. It also allows for comprehensive health insurance plans that keep the patient as the one making decisions about how the insurance money gets spent.

As if that was not enough, Cameron drew my attention to an Editorial in the Deseret News written by a doctor talking about how he improved his practice by dropping insurance plans. Though the article is not explicit on the point, it sounds like he eventually dropped all insurance plans and now only deals directly with patients.

{Many physicians} feel that it’s their mission to serve as many patients as possible rather than to provide the best care possible. Most significant, today’s doctors are preoccupied with the bureaucracy of insurance companies. . .

To be sure, physicians are not entirely to blame. With insurance companies dictating how much doctors can charge for services as diverse as a routine checkup or an appendectomy, a doctor has only one route to more income: increase volume.

Does anyone else want to help ensure that these perspectives do not go unnoticed by our illustrious task force?

Categories
politics

Block Grants

When I read The Coming Crisis of Big Government I gained a measure of hope that there might be some possibility left for averting the crisis of our soon-to-balloon costs for social security and Medicare. One of the central examples in the article relate to the use of block grants to restructure some of the programs.

Ferrara emphasizes the shocking success of the 1996 reforms of the old Aid to Families with Dependent Children (AFDC) welfare program. Based on concepts developed by my long-time friend and Reagan welfare guru, the late Robert Carleson, AFDC was “block granted” back to the states. This means the share of Federal spending on the program was sent back to each state to be used for a new welfare program designed by each state based upon required work for the able bodied.

The key is that the Federal block grant for each state is finite and does not vary depending on how much the state spends. If the state welfare program costs more the state must pay for the extra expense. If the state welfare program costs less then the state keeps the savings.

The required work for the able bodied has been powerful in moving people off the welfare rolls. But even more powerful have been the new incentives for state bureaucrats resulting from the finite block grants. Under the old system, where Federal funds were increased to match whatever the state spent, signing up new welfare recipients at the state level meant bringing more Federal funds to the state. But with the state itself paying for any extra expenses, or keeping any savings, state bureaucrats moved aggressively to get welfare recipients into jobs.

I agree that matching funds methods of financing federal programs only encourages program growth – the states have great incentive to stretch their budgets by putting everything they can think of toward 2 for 1 programs (for every state dollar they spend they have two dollars to spend because of federal matching – at least for 1 to 1 matching programs). The block grant method was apparently useful for welfare, but states are naturally going to balk at the idea of having their budgets limited when their needs feel unlimited.

I also wonder how well block grants will work with other programs such as transportation funding? Here in the Wasatch front we are keenly aware of the need for more funding for roads and transit. Would block grants encourage the state to spend their money on the best solutions, or would they simply shortchange our burgeoning needs?

So here’s the question – do you think that block grants are a widely applicable tool to control the growth of government spending, or do we need to come up with more tools in order to close the lid again on this Pandora’s box?

Categories
National politics State

Buyers of Medical Services

Reach Upward nails it again when he talks about Serving Medical Customers.

One of the primary rules of economics is that suppliers do their best to supply what buyers actually demand. Who are the real buyers of medical services? Not you. Unless you pay for everything yourself or have only catastrophic insurance, you are not the buyer. . . The real buyers — the real power entities in purchasing medical services —are the government (via Medicare) and insurance companies.

Since suppliers provide what buyers demand, let’s ask ourselves what the real buyers of medical services demand. Do they demand the best possible medical outcome for each patient? Nope. It’s not possible for them to do that. So they design systems that aspire to that lofty goal. These systems seek to demand proof that proper procedures are being followed and tightly control what procedures will be covered.

Of course, to administer these systems, the government and insurers spawn massive bureaucracies of paper pushers. Medical practitioners actually serve their buyers quite well, supplying the desired paperwork. They report procedures that will bring payment. . .

Electronic Health Records (EHRs) have been touted as a way to improve the medical system. But it turns out that EHRs do not improve actual medical outcomes. This is because they are only a more efficient way of pushing paper around through the bureaucracy.

Every time I read anything about our health care system I come to the same conclusion – the best kind of insurance we could have would be catastrophic insurance that has incentives built in to reward consumers who avail themselves of preventive care. With the current push in Utah to provide universal coverage we cannot emphasize this issue too much. If we want to make the system better we must attack at the actual systemic problems (the shifting of the buyer role from individuals to corporations and government entities) rather than simply trying to massage the current system to assuage some acute and visible symptoms of systemic problems (the cost of health care and insurance).

Categories
culture

Imports and Jobs

I had asked whether our markets would be better served with a tit for tat approach to tariffs rather than a more dedicated insistence on free trade on imports. If I had any lingering doubts on the subject they were laid to rest after reading Why Politicians Are Wrong about Imports and Jobs. Unless the graph in that post is entirely fabricated the free markets are the beneficiaries if they import goods that have been subsidized by more closed markets at a lower price than they could produce themselves.

Admittedly the graph is a bit confusing with the vertical scale changing from the left side of the graph to the right, but the trend is that over the last 48 years imports have doubled while unemployment has been cut in half. While these imports might take specific jobs away from the country they do not reduce the total number of jobs. The turnover creates the added benefit of encouraging those in the workforce to keep improving themselves. The relative ease and complacency that would undoubtedly come from a static economy would guarantee that we would become less competitive in a global market.

Update 2/27/08: Thanks to the persistent questions of mackenzie I went back to look at the graph to see if I had missed anything. A more accurate reading of the graph (remember the confusion I talked about with the different vertical scales) shows that imports went from 4% to 16% of GDP (a four-fold increase, not double) and unemployment fell from 9% to 6% (it fell by one third rather than by one half). While the actual statistics have changed I think the conclusion remains that imports do not appear to adversely affect employment rates.

Categories
politics

Free Marketer’s Dilemma

I’m a proponent of the value of free markets and their ability to enrich people. The problem is that the free market only works in a closed system, in other words a free market is not favored when intersecting with markets which are being manipulated. The issue of how to compensate for intersecting our supposedly free market with other markets which impose duties and protective tariffs on imported good led me to think of the Prisoner’s dilemma from game theory.

Briefly, the prisoner’s dilemma is a situation where the results of your actions will vary depending on the actions of others over whom you have no control. If one market imposes tariffs and the other does not the market with tariffs benefits at the expense of the other market. If both markets impose tariffs then the playing field is level, but both are worse off than if neither of them impose tariffs.

Thankfully there may be a solution to the problem by studying the prisoners dilemma. Our economic interactions specifically resemble a specific form of the prisoner’s dilemma called The iterated prisoner’s dilemma. Under this specific variation the interactions are repeated so that the participants have a history of interactions. In a competition of computerized players the winning algorithm was one called “tit for tat” (later improved versions have been classed as “tit for tat with forgiveness”). This kind of a strategy encourages others to play nice without simply being a doormat for those who wish to use tariffs.

Does this sound like it would work in international economics?

Categories
culture National politics

Income vs Consumption

I found it fascinating to read You Are What You Spend to see how different the economic picture is depending on the way we measure economic position.

. . . renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being.

It’s true that the share of national income going to the richest 20 percent of households rose . . . while, families in the lowest fifth saw their piece of the pie fall . . .

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

Comparing the richest 1/5 of society with the poorest 1/5 using different metrics leads to widely different conclusions on the gap between those two groups.

  • Income ratio – 15 : 1
  • Income per person – 8.2 : 1
  • Consumption ratio – 3.8 : 1
  • Consumption per person – 2.1 : 1

Simply adding in the per person statistic cuts the gap in half and moving from an income base to a consumption base (which largely indicates standard of living) makes the gap 1/4 of what it might appear on the surface.

I’d love to see how this has changed over time. We know that the income gap has increased, but I’ll bet that the statistics would show that the consumption gap has decreased between the top and bottom income groups over time. If I’m right, the reason for this is that we have taught the poorest 1/5 to spend what they don’t earn and we have ingrained the expectation that they should be able to do that into our government which has adopted the same policy for itself.

Categories
National politics

Feeling Bloated

As if the Republican party (thanks largely to the current administration) had not long ago lost any credibility to apply the “tax and spend” label to the Democrats, the American Enterprise Institute has now published a report on just how fat our favorite Elephant is. (hat tip Cato @ Liberty)

Allowing for our military expenditures, making the Bush tax cuts permanent, adding prescription drug coverage to Medicare, removing the alternative minimum tax, and this years stimulus package we would still be spending hundreds of billions less this year than we are and we would have a balanced budget through 2017 if Bush had otherwise maintained the discretionary spending levels that Bill Clinton left to him.

Before the Democrats and our current Clinton get too puffed up over this fact we should all be reminded that the budgets left by President Clinton were the result of 6 years of struggle between a Republican Congress and a Democratic President. The excesses of President Bush are the result of 6 years of cooperation between a Congress and a President from the same party. One year of a Democratic Congress and our spendthrift Republican administration does not seem to have brought us noticeably toward the relative fiscal restraint we had achieved by the end of the Clinton presidency.

That struggle between the different ideals of the two parties looks like a good thing in practice, not just in campaigning. It almost makes me hope that we never again have a President and a Congress who essentially agree on most issues.

Categories
National politics

Nobody Seems Impressed

I chuckled as I returned to an article from early December by Paul Krugman about how:

In past financial crises — the stock market crash of 1987, the aftermath of Russia’s default in 1998 — the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working.

I thought he was right about that in December and I thought that the same could be said of our new stimulus package. It’s funny how this urgent bipartisan action has not made anyone very happy. The liberal Paul Krugman asks Who gets stimulated? while conservative Frank Staheli says:

A $150 billion “stimulus package” is to America’s economy nothing but a light snack. It will stomp this “stimulus package” dead in a couple of weeks and then move on, undaunted, toward oblivion, its $53 trillion of unfunded expenditures gallantly in tow.

I have heard arguments that the money is less important than the boost in consumer confidence – from the sound of things it’s not likely to be much of a boost.