Wow, that was fast!

The health care bill was just signed into law two days ago, and we already have this:

Caterpillar Takes Hit On Health Care

Caterpillar Inc. said Wednesday it will take a $100 million charge to earnings this quarter to reflect additional taxes stemming from newly enacted U.S. health-care legislation.

The world's largest construction equipment manufacturer by sales, warned last week that provisions in the legislation would subject the company to federal income taxes on the subsidies it receives for providing prescription drug benefits for its retirees and their spouses.

I wonder how many more of these stories we'll be seeing in the near future?

Was he lying then, or is he lying now?

"Every year, the problem gets worse. Every year, insurance companies deny more people coverage because they've got pre-existing conditions." -- Barack Obama, March 8, 2010

"You can't demand insurance companies... take somebody who's sick, who's got a pre-existing condition, if you don't have everybody covered, or at least almost everybody covered. And the reason, if you think about it, is simple. If you had a situation where not everybody was covered but an insurance company had to take you because you were sick, what everybody would do is they'd just wait till they get sick and then they'd go buy insurance. Right? And so the potential would be there to game the system." -- Barack Obama, Feb. 3, 2010

Obama clearly understands why insurance companies cannot afford to take on customers with pre-existing conditions, yet he still uses it to paint them as villains.

Is the health care bill a plot to destroy the insurance companies?

When I hear questions like the one above, I think someone has their tin-foil beanie screwed on too tight. But on the other hand, if one wanted to create a law that would destroy the insurance companies, he could hardly have done a better job.

It's a basic concept in economics that people act rationally in ways that serve their own best interest. Let's look at some of the incentives in the health care bill, and the rational response to them.

First, there is the individual mandate that requires everyone to have a minimum level of insurance, or pay a penalty. In the Senate bill, this penalty starts at $95 per year and increases to $750 per year by 2016. Since no one can buy health insurance for $95 per year, or even $750 per year, the incentive is actually to NOT buy insurance. Especially combined with:

Mandatory coverage for pre-existing conditions. Both the House and Senate bill prevent insurance companies from denying coverage for pre-existing conditions.

Imagine a young couple, just out of college. Money is tight. Both are healthy. They can pay a $750 penalty at tax time, or they can spend $1,000 per month for insurance. It's pretty easy to see what the rational choice is. Even if they are planning to start a family, why buy insurance now? They can wait until the wife is pregnant and then get insurance that will cover the pregnancy. If one of them becomes ill, they can buy insurance then, so why bother with it now?

And what about employers? They will face essentially the same choice: provide medical insurance for all employees, or pay a $750 per employee penalty. Guess which choice is cheaper? Guess which choice they are going to make?

The insurance companies will have a huge adverse selection problem. The only people who buy insurance will be those who are going to use a lot of expensive medical services, and the healthy will just pay the penalty.

NC Economic Forecast

Yesterday in Raleigh, Bank of America's new CEO Brian Moynihan delivered the keynote address at the North Carolina Economic Forecast Forum. Here's the video, courtesy of WRAL:

New BofA CEO, economists look to future

Quote of the day

"He's not a grinch, he's an economist." -- the FastDraw guys on CBS Sunday Morning.

Perverse Incentives

The unintended consequence of America's anti-poverty program is to penalize poor people for working. When you take into account the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income, the return to working is essentially zero for those in the lower two quintiles of the income distribution.

This chart (Source) shows income after taxes and transfers as a function of earned income. Below about $38,000, income after taxes and transfers is roughly flat. Indeed, it could even fall. The bottom line: If you are poor, the government is ensuring that you have little incentive to try to improve your condition.

Cheaper health care without higher taxes

The problem with the government trying to "fix" healthcare is that it's the government that broke it in the first place. And they are trying to fix it by doing more of what they did to break it.

It's true that many Americans can't find affordable health insurance. But it's largely because of government-imposed barriers that keep the cost of insurance so high.

Here are a few ways we can provide lower-cost insurance without raising taxes:

1) Allow the purchase of health insurance across state lines. According to the University of Minnesota, 12 million more Americans would be able to buy coverage if this simple solution was enacted. Excessive state regulations artificially increase the cost of health insurance by requiring companies to provide coverage for such things as fertility treatments and massage therapy. Let's allow people to shop for the coverage they really need!

2) Let people take the cash their employer uses to purchase health care and shop for a plan on their own. Currently, employer-provided health insurance is not taxed. But if you opt out of your employer-provided coverage and shop for your own, you pay for it with after-tax dollars. If people could shop for the best deals, insurance companies would be forced to innovate and control costs (or lose market share to companies that do).

Those two ideas are just a start. They wouldn't cost a dime and would allow lower costs for those who have health insurance, and would allow more people to afford insurance.

And the Nobel Prize in Economics goes to:

Elinor Ostrom of Indiana University and Oliver Williamson of Berkley.

Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes.

Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets.

Stimulus and Jobs

From the Wall Street Journal:

"Rarely in politics do we get such a clear and rapid illustration of a policy failure."

First-Year Grad Student Wins Nobel Prize in Economics!

No, not really. But this post on Greg Mankiw's blog made me snort coffee out of my nose!

"The surprise choice of first-year graduate student Quintus Pfuffnick for the Nobel Prize in Economics drew praise from much of the world Friday even as many pointed out the youthful economist has not yet published anything in scholarly journals."

Who knew that economists could do satire?

Clunkers in Practice

Today's Wall St. Journal points out that "cash for clunkers" hasn't been a great success, despite the administration's claims. New car sales for September are down 25% from a year earlier. Some 700,000 cars were sold in the summer under a program that gave buyers $4,500 to do what they would have done anyway. All the program did is steal those sales from the future, exactly as critics predicted.

The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing, productive assets. The journal quotes Henry Hazlitt's classic "Economics in One Lesson," but Hazlitt was borrowing from Frédéric Bastiat's "Parable of the Broken Window." You can't raise living standards by breaking windows so some people can get jobs repairing them.

If this is Washington's idea of a program that works, heaven help us when they get their hands on our health care.

Soaring Health Care Costs?

Hedge-fund manager Clifford Asness, writing at Stumblingontruth.com:

Myth #1 Health Care Costs are Soaring

No, they are not. The amount we spend on health care has indeed risen, in absolute terms, after inflation, and as a percentage of our incomes and GDP. That does not mean costs are soaring.

You cannot judge the “cost” of something by simply what you spend. You must also judge what you get. I’m reasonably certain the cost of 1950’s level health care has dropped in real terms over the last 60 years (and you can probably have a barber from the year 1500 bleed you for almost nothing nowadays). Of course, with 1950’s health care, lots of things will kill you that 2009 health care would prevent. Also, your quality of life, in many instances, would be far worse, but you will have a little bit more change in your pocket as the price will be lower. Want to take the deal? In fact, nobody in the US really wants 1950’s health care (or even 1990’s health care). They just want to pay 1950 prices for 2009 health care. They want the latest pills, techniques, therapies, general genius discoveries, and highly skilled labor that would make today’s health care seem like science fiction a few years ago. But alas, successful science fiction is expensive.

In the case of health care, the fact that we spend so much more on it now is largely a positive. The negative part is if some, or a lot, of that spending is wasteful. Of course, that is mostly the government’s fault and is not what advocates of government control want you to focus upon. We spend so much more on health care, even relative to other advances, mostly because it is worth so much more to us. Similarly, we spend so much more on computers, compact discs, HDTV, and those wonderful one shot espresso makers that make it like having a barista in your own home. Interestingly, we also spend a ton more on these other items now than we did in 1950 because none of these existed in 1950 (well, you could have hired a skilled Italian man to live with you and make you coffee twice a day, so I guess that existed and the price has in fact come down; my bad, analogy shot). OK, you get the point. Health care today is a combination of stuff that has existed for a while and a set of entirely new things that look like (and really are) miracles from the lens of even a few years ago. We spend more on health care because it’s better. Say it with me again, slowly – this is a good thing, not a bad thing.

By the way, I do not mean that the amount we spend on health care in this country isn’t higher than it needs to be. Myth #4 covers that.

In summary, if one more person cites soaring health care costs as an indictment of the free market, when it is in fact a staggering achievement of the free market, I’m going to rupture their appendix and send them to a queue in the UK to get it fixed. Last we’ll see of them.

Outraged over the AIG bonuses?

I was, too. Then I read this.

Mathematics for Economists