Philip Greenspun’s Weblog

I’m reviewing the transcript of Barack Obama’s health care speech to Congress yesterday. I’m confused by a couple of points.

Obama was careful to stress that there will be no health insurance for illegal immigrants. Why does this matter? If a very sick illegal immigrant shows up at a hospital, the hospital has to provide him with emergency care. If a very sick and very old illegal immigrant shows up at a hospital, he will have the same $250,000 death in the ICU as an American citizen. The current standard of care does not consider costs and does not consider citizenship. Why would people get excited over whether an illegal immigrant gets a free flu shot or not? As far as the expensive stuff goes, we’re already paying for it (where “we” includes the illegal immigrant, of course, since, as I pointed out in my own health care reform plan, illegal immigrants pay most of the taxes that citizens pay).

Another point that struck me as bizarre is “most of this [multi-trillion dollar] plan can be paid for by finding savings within the existing health care system, a system that is currently full of waste and abuse. … The only thing this plan would eliminate is the hundreds of billions of dollars in waste and fraud, as well as unwarranted subsidies in Medicare that go to insurance companies … Reducing the waste and inefficiency in Medicare and Medicaid will pay for most of this plan”.

The proposed changes to our health care system would start to be phased in during the year 2013, according to H.R. 3200. If we’re wasting hundreds of billions of dollars a year right now in Medicare and Medicaid, why aren’t we taking immediate steps to stop the waste? Why would we wait until 2013? Why would we say that we’re only going to stop this waste if we implement some unrelated changes to the U.S. health care system?

Speaking of immediate fixes, Obama says that the insurance market is not very competitive: “Unfortunately, in 34 states, 75 percent of the insurance market is controlled by five or fewer companies. In Alabama, almost 90 percent is controlled by just one company. And without competition, the price of insurance goes up and quality goes down.” The federal government pays for more than half the cost of health care in the U.S. The Feds regulate all sorts of other things whose connection to “interstate commerce” is more tenuous. If the 50 state insurance commissions and licensing procedures are reducing competition and raising pricings to consumers, why not get rid of them tomorrow? Why wait until 2013 and predicate the efficiency improvement on implementing unrelated new schemes?

The speech constantly equated health insurance with health care, as though it were not possible to have health care without insurance companies, despite the fact that a person’s routine health care is predictable and therefore classically would not be considered something to be insured at all (except against catastrophic accidents or rare disorders). Food is even more important than health care. Without food, an American would be dead within just a few months. Why don’t we have food insurance if it is so much more important than health care?

Nowhere did the speech mention the most obvious reason that our spending is so high: Medicare, Medicaid, and private insurers pay providers more if they do more and fancier procedures and tests. Nowhere did the speech mention any proposed change to this practice, only that the government would spend more money and hire more people to crack down on “fraud” and “abuse” by providers. Given that medicine is not a science and doctors often disagree on how to treat a patient, how is this ever going to work? Someone at a desk in Washington didn’t think the doctor in Texas should have ordered an MRI, perhaps done at a MRI clinic partially owned by that doctor? Did the desk jockey talk to the patient? Is the desk jockey an MD? If not, how is he going to be able to say with authority that the MRI wasn’t necessary? Some of the words in the speech are fine, but when one puts forward a specific example it is impossible to understand how it could work in practice.

“For some of Ted Kennedy‘s critics, his brand of liberalism represented an affront to American liberty.” Finally a part of the speech with which I can agree, as there is no doubt that Ted Kennedy’s brand of liberalism deprived Mary Jo Kopechne of her liberty.

Full post, including comments

One of our new neighbors here in the western suburbs of Boston is a recent refugee from Cambridge, home to some of the most expensively funded public schools in Massachusetts (and therefore among the most expensive in the world). Sadly for the taxpayers, they aren’t very effective schools and she had her son enrolled in a private school for 3rd grade. Now that the kid is in a high-scoring school district, she decided it would be okay to test the public school waters. I asked the kid how he liked the public school. “It is much better than private school,” he enthused. Were the teachers, inspired by Barack Obama’s address to the nation’s schoolchildren, encouraging him to stretch his intellect to its limits? “We get two recesses every day; in private school we only had one.”

More: New York Times story on the back-to-school scene.

Full post, including comments

… in tortured election rules. In 1812, our Governor Gerry redrew electoral district boundaries to ensure the reelection of incumbents and the term gerrymandering was born. Lately we’ve decided that we should change the rule on what happens what a Senator leaves office in the middle of his term. The rule was last changed in 2004 to prevent a Republican governor, Mitt Romney, from appointing a successor to John Kerry, whom we felt sure that the country would grow to love as its President. When Senator Kerry ascended to the White House, a special election would be held and the people of Massachusetts would pick a new senator. Now that Ted Kennedy has followed Mary Jo Kopechne into the grave (having outlived his victim by 40 years), folks want to change things back to the way they were five years ago. Our current governor, Deval Patrick, is apparently better qualified to choose a senator than was Romney.

More: New York Times story.

[You might wonder how Massachusetts legislators could possibly have the time and energy to rewrite laws every five years. According to the NCSL, we live in one of the few states where the legislature is in session “all year”. Given that the legislature has been controlled by the Democratic Party almost continuously since 1812 and that the Democrats have a supermajority, it is unclear to me why they need to be in session (and get paid by the taxpayers, approximately $200,000 per year including travel supplements, health care, and pension benefits) for more than one day. The party’s Web site contains a platform. They could have staff members come up with a full set of legislation for each year, circulate it around for discussion via email or Google Docs, and then come into the State House to approve it in 10 minutes. The only reason they should need to come back to the State House would be if there were some dramatic change in external conditions, e.g., a catastrophic fall in tax revenues.]

Full post, including comments

I’ve drafted an essay on health care reform. Comments would be appreciated.

Full post, including comments

In “Universities and Economic Growth”, I blamed the poor job that colleges do of educating for our sluggish economic growth. A story in today’s New York Times also blames colleges for our dim economic prospects, but says that the problem is that students don’t stick with the full program.

Full post, including comments

A friend of mine, let’s call him “Jim”, was recently in neighborhood park in a wealthy Midwestern suburb with his two boys, age 2-3. It was warm and there was a fountain so the kids do what they like to do in such weather, i.e., take off all of their clothes and splash around in the fountain. Jim pulled out his video camera to capture the charming frolicsome scene. Two police cars quickly converged on the scene and the cops held Jim for 45 minutes of questioning. Was he sexually exploiting his children? They never doubted that the kids were his, so their only real question was whether he had chosen to make his exploitative films in a public park, in full view of a bunch of houses, rather than in his own backyard (real criminals hate to do their work in private, apparently).

Fortunately, Jim had recently watched this helpful instructional video, and therefore things did not progress to the next step, which the cops helpfully explained: they would take the kids and put them into “protective custody” (i.e., farm them out to foster parents who would be paid thousands of dollars to keep them in their double-wide trailer with almost no supervision by the state). Jim and his wife could then hire a lawyer and attempt to get their children back.

The saddest thing about this incident is that everyone involved was white and nobody was a Harvard professor. Therefore there will be no beers at the White House.

[Tried to find some background on what could actually be illegal about making such a video. I found a 2000 article about still photos at Salon.com. The next relevant article was also on salon.com, a first-person account by a father accused by a drugstore photo clerk. It seems as though it is a “we [civil servants] know it when we see it” situation.]

Full post, including comments

The central portion of While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis covers the history of public employee unions, which turn out to be a surprisingly recent phenomenon. Politicians were traditionally opposed to public employees’ right to unionize, strike, or collectively bargain for wage and benefit increases. They saw their constituents as the taxpaying public and did not think that the government was such an abusive employer that unionization was necessary to protect workers. Calvin Coolidge, as governor of Massachhusetts, summarized the feeling of the average politician: “There is no right to strike against the public safety by anyone, anywhere, any time.”

The result was that public employees were generally paid less than private sector workers, but could not be fired for incompetence or unproductivity and had better benefits, including small pensions that typically started at age 65 or 70 or upon becoming totally disabled.

All of this was changed in 1958 when an aide to New York Mayor Robert F. Wagner, Jr. suggested that city workers could be a large enough voting bloc to ensure his reelection. Wager signed an executive order authorizing city workers, notably those of the transit system, to unionize and bargain collectively. As the percentage of Americans working for the government grew, other politicians began to see support for public employee unions as a way to get votes. State politicians around the country allowed public employees to unionize shortly after Wagner’s executive order. President John F. Kennedy allowed federal government workers to unionize starting in 1962.

According to the author of While America Aged, public employee unions should be able to win much higher wages and benefits than private company unions. The UAW could shut down GM or Ford with a strike, but they couldn’t vote the GM and Ford CEOs out of office. Once a sufficiently high percentage of voters are unionized public employees, there is essentially no limit to the obligations imposed on the state. Because it would cause too much backlash from non-union non-government employed voters, most of the money extracted from taxpayers will be taken in the form of long-term health care and pension promises. A voter working at Walmart gets upset hearing that a bus driver is earning $130,000 per year. If instead the bus driver is paid $70,000 per year and able to retire at age 41 (MBTA here in Boston), it is tougher for a voter to figure out how much is being spent. Pushing most of the spending out 10-50 years gives the politicians who agreed to the obligations at least 10 years in which to move to the next level of government before the true cost of the agreement becomes apparent.

Reading this book makes it clear that recovery from the Crash of 2008 is speculative. In the previous severe economic downturns, e.g., the 1980 Jimmy Carter malaise, U.S. workers did not face effective competition from workers in India and China. Government was a smaller percentage of GDP and public employees were not paid so much more than private sector workers. Most importantly, the pension obligations of governments were tiny compared to today because they’d only had a decade or two to develop. As all of the wealth and value that was in GM eventually had to be transferred to retirees (and then another $100 billion of taxpayer money, when the value of GM’s business was not sufficient), it may be the case that most of society’s wealth has to be transferred to the 41-year-old retired bus drivers of the MBTA here in Massachusetts, the 50-year-old retired fire department workers of California, et al.

Private companies have gotten out of this trap by wiping out their shareholders and shedding their obligations in bankruptcy. For governments, however, there is essentially only one way out of this trap: grow the tax base dramatically. That was essentially what the GM management and politicians who agreed to the pensions had relied on. The company or economy would expand forever at whatever rate it had in the best decade that anyone could remember. According to classical economics, however, wage growth is impossible without capital investment. If a company spends $1 billion to equip its factories with better machines, an hour of labor will have more value and the company will bid up wages until the factory is fully staffed. In our prostrate economic condition, however, business isn’t investing. So the tax base isn’t going to grow via wage increases. The alternative is to grow the population size until the U.S. is as densely populated as mainland China.

Full post, including comments

I have drafted an article on teaching helicopter students to hover. Comments would be appreciated.

Full post, including comments

In March 2009, I wrote “How Rich Countries Die”, a posting summarizing Mancur Olson’s The Rise and Decline of Nations. It looks as though Olson is being proved right. GM, Chrysler, and their present and retired employees tapped the taxpayers for $100 billion. Teenagers, on the other hand, are unemployed in record numbers (New York Times story today, reporting that 25 percent of teenagers who want a job can’t find one). Classical economics says that unemployment is impossible. If there are a lot of teenagers looking for work, the wage for a teenager will fall to a market-clearing level and every teenager who wants a job at the new (lower) wage will have one. Olson showed how entrenched workers can protect their above-market salaries at the expense of the young.

One disturbing fact from Olson’s book was a chart demonstrating the slow growth rate of U.S. per-capita GDP from 1950 through 1980. We underperformed France and Germany, for example. One wonders if this is because it took us so long to recover from the burden of paying back debt incurred during World War II, as well as the cost of the Vietnam War. Our government is currently borrowing, as a percentage of GDP, a comparable amount to what was borrowed to fight Germany and Japan. We’re spending, on Iraq and Afghanistan, a comparable percentage of GDP to what we spent on the Vietnam debacle. An economist might say that we can handle an extra $9 trillion in debt, but one has to wonder if it won’t come at the cost of economic stagnation from 2020 through 2050.

Full post, including comments

… just wait until the pension collapse hits. That’s the premise of While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis. The book was written, presumably, in 2007, and published in May 2008. The author has already been proved wrong as the U.S. managed to initiate a worldwide financial crisis without referring to pension debt. Nonetheless, the book is interesting for its demonstration of a dynamic in which managers, politicians and union leaders, pursuing their self-interest, manage to wreck enterprises, states, and ultimately countries.

I’m working my way through the first part of the book, which concentrates on General Motors. The management of GM gets a heavy whipping by the author. The leaders of GM were accustomed to a growing car market. The U.S. had 4 cars for every 10 Americans in 1950. By the 1970s there were 10 cars for every 10 Americans and growth slowed to 1 percent per year. The leaders of GM were accustomed to an oligopoly in which any costs could be passed on to consumers through price increases. As long as Ford and Chrysler were also subject to similar union agreements, there was no problem with agreeing to higher wages, benefits, and retirement benefits. They could not see a day in which Japanese, Korean, or Chinese manufacturers would be able to sell significant numbers of cars in the U.S.

What did the GM managers agree to? Workers could retire at age 48, assuming that they started with the company at age 18. GM would pay for all of their health care costs and health care for their dependents, regardless of what advances in medical technology or increases in health care prices transpired. Workers would be paid when not working (the “jobs bank”, initially limited to less than one year but eventually extended to infinity). By agreeing to these long-term obligations, GM bought short-term freedom from strikes and therefore higher short-term profits. If a liability 30 years in the future ended up bankrupting the company, that would be some other manager’s problem.

What did union leaders agree to? Underfunded pension plans. At non-union companies, pension plans tended to be pretty well funded. If the company promised to pay money in the future, it put aside cash now. In collusion with management, union leaders allowed companies to skimp on present cash outlays. The union leader was able to claim a big victory to his members, though he knew if the company went into bankruptcy 20 or 40 years hence the promises would never be fulfilled (though perhaps the UAW leaders were prescient; after sucking all of the value out of GM they were able to top up their pension plans with $100 billion of taxpayer money (extracting taxes from 65-year-old workers at Walmart to pay 50-year-old GM retirees)).

Politicians running cities and states behave more or less the same as GM’s managers. In order to win electoral support from public employee unions they agree to crushing burdens to be paid by taxpayers 20 or 30 years from now.

Social Security is not the nation’s biggest problem, according to the author. Congress can, and probably will, keep raising the age of eligibility for benefits. A person retiring in 2015 might have to be 75 years old in order to draw Social Security, for example. That would instantly solve any problems with the system. A pension obligation, however, cannot be revoked except in bankruptcy.

The lunacy of pension commitments is presented fairly clearly. When GM would agree to give fat pensions to all of its workers, that included someone who was 47 years old, for example. The guy was one year away from retirement and GM was promising to pay him a lot of money for each of his remaining years of life (maybe more than 60 years; one GM retiree was drawing a pension at age 111, plus supplemental health care). That might have worked if GM had been putting aside cash for the years that this guy had been working at the company, but as the pension commitment was new there was no way that they had been. The UAW had its retirees as voting members and they would often negotiate higher pensions for workers who had already retired. GM management agreed to pay people for whom there was no possibility of putting aside pension funding as they worked (because they were no longer working).

In 2008, GM was promising to pay an 18-year-old employee a pension when he retired in 2038. They were also promising to pay for the guy’s health care during his retirement, regardless of what procedures, tests, and drugs were available starting in 2038 and continuing through perhaps the year 2100 (anything that Medicare didn’t pay, GM was promising to pay). A company that promised a defined pension benefit was betting its life on interest rates. If the pension plan was set up when interest rates were 10 percent per year and interest rates subsequently fell to 5 percent per year, the company could easily go bankrupt, wiping out shareholders. If the War on Cancer that President Nixon declared in 1971 had been won, the company would certainly have gone bankrupt.

The author of this book paints GM as truly the dumbest company on the planet, though presumably municipalities will end up looking just as bad pretty soon (esp. if low interest rates continue to prevail). The GM managers set things up so that they needed to continue growing in output, health care costs per person had to stop inflating, interest rates needed to remain high, and foreign competitors needed to be excluded from the U.S. market. If any of those conditions failed, the company would go bankrupt.

What can we learn from this book? If you’re a shareholder in a company that allows people to retire at age 50, sell immediately. If you’re a taxpayer in a city or state that allows people to retire at age 41 (MBTA here in the Boston area, for example), move. Eventually the government will have to confiscate your house and all of the rest of your assets in order to pay its pension obligations.

More: read the book.

Full post, including comments