Monday, August 24, 2009

Health Care Rationing

There will be rationing under a government health insurance system. That is just simple economics. If you give away a valuable thing for free, then demand will exceed available supply. The government will have to allocate health care resources according to some formula, and I guarantee you, this will be extremely controversial and morally agonizing.

Proponents of a government health plan point out that in a free market rationing is also done, but it is done by price rather than by bureaucrats and lawmakers. The price rises until demand and supply are matched, and those unwilling or unable to pay that market clearing price will receive less health care.

This is certainly true, but rationing by price is more efficient and morally sound. Those that value health care a lot will be more likely to obtain it than those who don't value it very much. It is important to remember that health is not something everybody values equally. And pretty much everybody makes tradeoffs between health and money. That is why some people are willing to be coal miners or firefighters or football players, or are willing to work overtime with little vacation or even rest. It is also why some people don't eat healthy foods or exercise or stop smoking.

Some people care a lot about having (painful) surgery so they can continue to play tennis. Others not so much.

When you have rigid rules divvying up resources, you inevitably wind up giving something the government bureaucrats say is worth X to somebody who values it at X/10. Meanwhile, a person who values that thing at 10X must go without.

Perhaps most important of all, rationing by price will lead to more production of the health care services that are the highest price and therefore in the most demand versus available resources. In the long term, a market-based system will produce vastly more health care resources for everybody.

It's amazing that some people (read Barack Obama, Nancy Pelosi, Harry Reid, and other Democratic leaders) so easily forget the lessons of the Soviet Union and Communist China. Government control of the market stifles economic growth. It has been shown empirically that government bureaucrats simply can't do as good a job as the free market at pricing goods and services, providing incentives, and stimulating increases in productivity.

Some people want to believe health care is or should be exempt from market forces, but it isn’t, and it shouldn’t be.

Friday, August 14, 2009

Health Care Fundamentals

Health care is fundamentally no different from any other area of the economy. We live in a world of limited resources. Therefore, we need a mechanism to allocate those resources efficiently and fairly. Every individual decision about allocating a resource comes with a cost and a benefit, and neither benefits nor costs are the same across all individuals. As with every other area of the economy, a free market, in which individual consumers can make their cost-benefit decisions freely, and individual employees, employers, and companies can make their cost-benefit decisions freely, will provide a more efficient allocation of resources than a government controlled market. But perhaps not a fairer allocation.

Liberals are being disingenuous when they claim that giving the government more control will make the system more efficient. It will not. It cannot. I will get into the weeds on this later, but for now I think that most liberals want more government control over health care for one reason and one reason alone -- "fairness."

They have accepted to a certain degree that free markets lead to unequal outcomes in general consumption, in housing, in leisure time, and even in education. But they think that health care should not be treated as just another commodity. Poor people should not get worse health care than rich people. A person should not have to die early because he is poor. A corollary of course is that a rich person should not get better health care than a poor person, and a rich person should not be allowed to live longer because he is rich.

I have brought up the point about "fairness" and redistribution of wealth/income/consumption before, and I have basically accepted that there is no right answer. I have put "fairness" in quotes because there are many people who don't believe that unequal outcomes are necessarily unfair. Be that as it may, people value equality of outcomes differently, with liberals tending to value equality of outcomes higher than conservatives. I lean towards the conservative side. I believe there should be a safety net providing a floor on poverty, but I certainly don't believe in taking more than we are currently taking from the rich to provide for it. I cannot say that I am right, and those who are more liberal are wrong (and vice versa). We are just starting from different axioms.

The two claims I can make with confidence, however, are these:

1) treating consumption of health care as fundamentally different from other types of consumption is simplistic and wrong; and

2) a free market in health care in the US will lead to unequal outcomes but will make far more health care resources available for consumption by all (including the rest of the world, not just Americans).
To back up my claim in (1), I'll make two points. First, being poor is bad for health, regardless of the level of health care received. Poor people eat less nutritious food, they live in unhealthier places, they are exposed to more violence in their neighborhoods, they drive less safe cars, and they have more stress due to lack of money. There is a recent UK study that showed that low job status, which presumably leads to more stress, was a significant contributor to poor health. So to consider health care as having special moral implications is naive.

Second, we live in a world where many hard-working, smart people go into fields other than medicine. When somebody decides to become a financial analyst rather than a doctor, that decision reduces our aggregate health care resources, and therefore has consequences (probably negative) for the health of other people in the future. To the extent that such a career decision is largely an economic one, and it usually is, there is an entanglement between the economics of health care and the economics of all other fields, so that it is kind of meaningless to treat health care as an isolated area of the economy where the free market should not apply.
I will have more to say about (2) in later posts.

Sunday, August 9, 2009

Cash for Clunkers -- The Final Phase

I've been obsessed with this topic because it is perhaps the most obviously and perfectly stupid government program I have ever seen. It's not all that important because it represents only a few billion dollars (as of this moment, $3B in total) of government waste and distortion in a $13T economy, but it does serve as a reminder that government can enact incredibly bad policy in a very short time. The forces of rationality and prudence take time to gather and gain critical mass, but by then it is often too late. Something to ponder as the Democrats try to ram health care reform through Congress without meaningful analysis and debate.

I predict that by the end of the year, you will see stories appear in the media which are highly critical of the results of the Cash for Clunkers program.

To wit:

1) the boost in GDP for the 3rd quarter was temporary -- this will be exacerbated by the way GDP is calculated; inventory drawdowns count towards GDP, but inventory builds do not [Update: Oops, I got this exactly backwards. Inventory builds count towards GDP and drawdowns do not. What I described would be correct for what is called the Final Sales number];

2) the boost to the auto industry was temporary; although domestic car sales had until recently been running at an unsustainably low level (9MM/yr, although there are over 200MM cars in the US), the Cash for Clunkers boost is unsustainable as well and has cannibalized future sales; in addition, Cash for Clunkers has induced many people to buy new cars who probably shouldn't have bought them, and those people will either be dumping them soon or going a good long time before buying another new car;

3) a detailed analysis shows the environmental/energy savings of the program (in terms of carbon emission or imported oil -- both questionable metrics in any case) was nil or negative because the mileage improvement was offset by the energy used to make new cars and destroy old ones, and the old cars weren't driven nearly as much on average as the new cars;

4) used car market prices rose making it harder for poor people to afford a car;

5) engine parts for older cars became scarce making it difficult for owners of clunkers to keep them running at an affordable price;

6) the lion's share of the government largesse actually went to car dealers rather than clunker owners because dealers raised prices on eligible new cars in the face of very high demand;

7) many clunker trade-in buyers ended up with buyer's remorse as they realized they traded in a $2,000 car for a $4,500 rebate but actually paid $2,500 more for a new car than they would have had to if the government hadn't distorted the market;

8) many clunker trade-in buyers were tricked into spending more than they could afford for a new car that they didn't really need or want;

9) new car buyers who didn't have a clunker to trade in had to pay far more than they would have had to just a couple of months before;

10) Cash for Clunkers was effectively a huge subsidy for car dealers as the program provided them with free cash, free advertising, and a huge distortion in customer preferences towards consuming new cars;

Keep in mind points (7) and (9) above as you read stories about auto inventories becoming depleted in the face of huge Cash for Clunkers demand. I suspect that clunker owners are getting no advantage out of the program at this point relative to the deals that existed in June. And yet they will keep buying anyway because human beings are susceptible to marketing schemes that make it look like a special deal is to be had. On top of that, they will be buying "eligible" new cars from depleted inventory, which means that they probably won't even be buying their first choice car (e.g. model, options, color).

Clunker trade-in buyers, regular car buyers, and taxpayers have become dupes of the auto industry.

Wednesday, August 5, 2009

More Cash for Clunkers

I admit it. I have a bug up my butt about this Cash For Clunkers program. I have a bug up my butt about health care reform too (at least all of the proposals currently on the table), but health care reform is ridiculously complex, and I don't feel I have my act together enough to opine (yet). Cash For Clunkers, however, is straightforward enough that it can perhaps be a teachable moment, as certain moral preeners like to say.

Positive news stories about Cash for Clunkers have dominated media coverage in the last week as the Senate ponders whether to join the House in adding $2B to the program. I see web video interviews with happy car buyers who just traded in their 15 year-old pickup truck to buy a hybrid SUV. I see Wall Street research papers about the positive effect on GDP -- upwards of 0.40% boost this quarter, and I see administration flacks talking up how good the program is for the economy and the environment. Most people believe that this government program is a smashing success (no pun intended).

I was gratified therefore to see Jonah Goldberg's article today. Jonah gets to the nub of the issue, which is Frederic Bastiat's main theme in his 1850 essay That Which is Seen and That Which is Unseen.

In this case, the government is managing to juice GDP this quarter by encouraging new car sales, but it will come at the expense of GDP in future quarters. What is unseen here is that many people made the decision to buy a new car only because the government was essentially giving them several thousand dollars off of the dealer price. Those who were planning to buy a new car anyway have done so earlier than they were planning but won't need another for quite a while. Those who weren't planning on buying a new car now have a lot less spending power to use for a new refrigerator or a new computer or for remodeling a bathroom. That is an unseen loss to GDP.

Then there is the unseen effect of removing cheap cars from the market. Perhaps a landscaper was getting ready to start a business, but he can only afford to purchase a clunker pickup for $3,000 to get started. Alas, they are not available anymore. The lowest price he can pay now is $5,000 because of the diminished supply.

The simplest analysis though focuses on what was destroyed. The government is paying people to destroy something of economic value. That something could have been used for recreation, or it could have been used to contribute to GDP. To make matters worse, resources were used to destroy those things (the car demolition and towing operators' resources), and even more resources (the car manufacturers' resources) were used to create expensive replacements for the things that were destroyed.

I hope Jonah's article is the beginning of some pushback from people who actually understand economics.

There is one other idiocy in the program. As my friend DJ pointed out with respect to the (admittedly stupid) CAFE standards, the government at least gets the math correct for CAFE by calculating the arithmetic average of the gallons per mile that cars get rather than miles per gallon. The reason is that all other things being equal, a 10mpg car uses twice as much gas as a 20mpg car, but a 20mpg car only uses 50% more gas than a 30mpg car.

The Cash for Clunkers program, of course, only looks to the arithmetic improvement (in the case of a new SUV/minivan/pickup truck, 2mpg-4mpg for the $3,500 rebate and 5+mpg for the $4,500 rebate). The improvement is 50% when you go from a 10 mpg SUV to a 15mpg SUV, but it is half as much in going from an 18mpg SUV to a 23mpg SUV. True to form, the government has a floor mpg on new SUVs of 18mpg, thereby ensuring that you are in the un-sweet part of the non-linear gas mileage improvement curve.

This brings me to yet another point in my rambling screed. The theory behind laws based on gas mileage (like CAFE and CARS) is that gas mileage is a good measure of how efficient a vehicle is. But it really isn't because gas mileage scales inversely with the weight and size of a car. Extra size and weight usually means extra passenger safety and extra carrying capacity. I have seen plenty of discussion about the tradeoff between passenger safety and higher CAFE standards, but I haven't seen much about the tradeoff between carrying capacity and higher CAFE standards.

The government obviously recognizes this tradeoff to some extent because it exempts larger trucks and buses from the CAFE standards, but I wonder why it doesn't distinguish between an 8-passenger minivan and a 4-passenger Ford Focus. A family with 3 kids in car seats isn't going to fit into most sedans, yet it fits comfortably into any minivan, with plenty of room for storage. Would the government rather the family drive two "fuel efficient" cars to its holiday destination or one gas-guzzling minivan?